As we all know, selling an aircraft is a complex transaction! To help provide clarity to anyone involved in this process our tax team have created a short series of articles explaining the VAT and Customs implications. Drawing upon their experiences from many years in practice they have created a guide to the most common do and don’ts for selling an aircraft.

In the second of the series, we move on to discuss the VAT liability of both the buyer and seller in an aircraft sale.

It is common for an Asset Purchase Agreement (APA) to specify that the vendor is only liable for tax implications associated with the use of the aircraft up to the time of sale.  The purchaser on the other hand is liable for any tax (including VAT) due as a result of the sale itself and all taxes thereafter.

However, from the perspective of the UK and the EU tax authorities, the seller is always liable for ensuring that the correct VAT treatment is applied to the sale. Consequently – regardless of the terms of the APA – the tax authorities will almost always look to the seller for any VAT they deem payable, together with penalties and interest if applicable, not the purchaser.

That being said, despite the purchaser being made liable for any VAT issues according to the APA, it may not always be possible for the seller to pursue the purchaser for this tax after the sale, depending on the circumstances of the transaction. For example, one situation where this may occur could be where the sale is treated as VAT “zero rated” (or VAT “exempt with recovery”), for a VAT export sale.

Put simply, a VAT export sale is normally treated as effectively VAT free on the basis that such export sales are good for the economy and the local balance of trade. The basis of this favourable VAT treatment is therefore to encourage such sales. In order to be entitled to this VAT treatment, the sale must comply with certain rules created to ensure the goods do actually leave the jurisdiction and are not diverted to home use. Evidence of the export of the goods must be provided within a specific timeframe, and must comply with certain evidential and additional requirements related to who the customer can be and where the customer can receive the goods.

Any failure to comply with these rules will result in local VAT at the local standard rate being applied to the sale by default by the Tax authorities. In the UK, the current standard rate is 20% of the value of the asset and in the EU such rates vary from 17 – 27%.

Popular options worth considering for closing VAT free include: Guernsey, a UK Customs warehouse, or in a Swiss Inward Processing regime – where there are works or at least registration changes involved.

In conclusion it is in both parties’ best interests to ensure that the VAT export rules of the chosen closing jurisdiction are fully understood. The steps required to meet VAT the export rules should be clearly agreed and preferably clarified in the APA.  Details agreeing the approach required from both parties in the event of any challenge to the VAT treatment applied to the sale should also be documented.

Author: Greta Kemper, Tax Director at Martyn Fiddler

In the second of the series, we move on to discuss the VAT liability of both the buyer and seller in an aircraft sale.