We have commented previously on the impending change in the VAT regime applicable to the supply of aircraft. While the original intention was to introduce the change with effect from 1 September 2010, the commencement date has now been put back to 1 January 2011 (the rate of VAT being increased to 20% on 4 January 2011).
HM Revenue & Customs have issued a draft notice about the change which gives some useful guidance about the new provisions. However, it is not clear precisely how they will apply to the UK's business and corporate aircraft operators and we understand there are ongoing discussions with HMRC about their interpretation.
The only change in the VAT Rules is to the definition of a "qualifying" aircraft for zero-rating purposes. Until 31 December 2010 a "qualifying" aircraft is one with an authorised maximum take-off weight of not less than 8000 kgs. From 1 January 2011 a "qualifying" aircraft will not be determined by reference to its weight but by whether it is "used by an airline operating for reward chiefly on international routes". It should be noted that this definition does not require the aircraft itself to be used on international routes. It could be used exclusively on domestic routes provided that the airline itself operates chiefly on international routes. (There is a different definition for aircraft used by State Institutions such as Government Departments and local authorities.)
An "airline" is defined as an undertaking which provides services for the carriage by air of passengers or cargo. An airline need not be a single entity so that corporate groups can be an airline. It is immaterial whether the airline owns or leases its aircraft.
"Operating for reward" means the airline must be receiving a consideration for the carriage by air of passengers or cargo on scheduled or unscheduled flights.
An "international route" is one which is not a domestic route within UK air space, which covers the UK and its territorial waters which extend for 12 nautical miles from the coast. Routes from the UK to the Channel Islands, the Isle of Man and oil rigs outside UK territorial waters are international ones.
"Chiefly" means that airline's flights on non-UK domestic routes must exceed its UK domestic flights. There is no single test laid down for establishing this. A test can use turnover, the number of passengers, mileage or any other criteria that produce a fair and reasonable result capable of verification. Airlines must, however, be able to demonstrate that they do satisfy this condition by carrying out a test from time to time, although for most major carriers this will obviously be a formality. A test period can be a year or a shorter period but HMRC will expect the frequency of the test and the test itself to remain basically the same. The test can look forward and be based on business plans and projections if that is appropriate.
Other points to note:-
- Supply includes both dry and wet leasing as well as sale and import, although a wet lease of a qualifying aircraft may also be entitled to zero-rating as a supply of passenger transport.
- If an aircraft is supplied to a person such as a bank, which in turn then sells or leases it to an airline which operates chiefly on international routes, the supplier can look through the transaction to the end-user and zero rate its own supply accordingly.
- It is the responsibility of the supplier to check that the customer meets the conditions for zero-rating and obviously the simplest way of doing so is to obtain such confirmation from the customer itself.