It has been common for taxpayers to seek to save VAT on the cost of acquisition of a yacht by ensuring that the yacht is acquired by a company in the Isle of Man. If the Isle of Man company could show that it intended to use the yacht for business purposes it would not incur any irrecoverable VAT on its acquisition of the yacht. In the past, it is understood that the VAT officials in the Isle of Man were prepared to accept that the Isle of Man company was registerable for VAT even if its business of letting the yacht was fairly flexible; it was not uncommon for an Isle of Man company to be registered for VAT where the yacht was to be let for part of the year but when not being let the yacht was available for the use of the owner of the company (“the Owner”).
However, it is understood Customs and Excise Officials in the Isle of Man have begun taking a harder line approach; requiring a business plan showing that the Isle of Man company intends to exploit the yacht on a commercial basis during the entirety of its ownership of the yacht; it would not be acceptable to hire the yacht on “soft” terms to the Owner or persons connected with him.
Where the Owner is domiciled outside of the UK in the past this would not have presented a problem. The Owner could simply have paid an arms length rate to the Isle of Man company to use the yacht. However, if the proposed changes to the non-domiciliary rules are brought in this arrangement would be much less attractive. The hire paid to the Isle of Man company may, under the proposed new rules, be assessed as income of the Owner if he is resident in the UK and the income has a UK source or it is remitted in the UK. It should be noted that the meaning of remittance has been substantially extended by the proposed changes for this purpose. If the Owner is not resident, but subsequently becomes resident in the UK the same problem will arise.
If individuals find themselves in this position they will need to consider how best to minimise any tax exposure in connection with the yacht.
For example, it may be appropriate to cease to carry on trading for VAT purposes in the Isle of Man and transfer the yacht to the Owner before the new rules on non-domiciliaries take effect. This may result in a VAT charge, but if the yacht has declined in value since it was originally purchased the VAT charge will have correspondingly reduced.
Persons acquiring yachts in the future will need to consider appropriate structures for holding the yacht to: (i) enable them to recover VAT; (ii) avoid being taxable on any benefits in respect of use of the yacht otherwise on arms length terms; and (iii) avoid any income tax on hire paid to the Isle of Man. At present, an Isle of Man trading partnership may provide a solution to these problems.