Lessons from Amadea

It was the Isle of Man, but it could have been anywhere else when VAT registration is done with intent to operate a business with a yacht but that original intention is not fulfilled. On 15 August 2023, the Isle of Man VAT and Duties Tribunal ordered £36m of VAT to be paid on superyacht AMADEA.

The owner of the yacht, Nereo Management Limited, a Cayman Islands incorporated company, registered for VAT in the Isle of Man in 2017 with the intention of carrying on “Yacht charter – worldwide”. Nereo imported the yacht into the Isle of Man and accounted for import VAT of some £36.8 million. It reclaimed input VAT in the same amount on its first VAT return. The yacht was outside the EU in Montenegro on 24 November 2017 at which stage Nereo applied to deregister for VAT and ceased to be a business.

Using the common rules which deem that a supply takes place when a business ceases but the business asset on which VAT has been reclaimed is retained, Isle of Man Customs and Excise (IOMCE) assessed Nereo VAT at the yacht’s market value plus interest and penalty. Nereo appealed against this assessment and this culminated in the Tribunal proceedings.

There were four issues arising on this appeal. Whether the Isle of Man was the place of taxation when Nereo ceased to trade, given that the yacht was outside the Isle of Man in Montenegro. Whether IOMCE made the assessment in time. What was the value of the deemed supply of the yacht. And if there was a deemed supply in the Isle of Man but the assessment was out of time can a penalty still be imposed.

The penalty was imposed based on an alleged “careless inaccuracy” in Nereo’s final VAT return which did not account for output tax on the deemed supply of the yacht. Nereo argued that there was no inaccuracy in the return because there was no supply in the Isle of Man.

On all counts except for the market value of the yacht claimed, the Tribunal ruled in favour of IOMCE. That the deemed supply of the yacht took place in the Isle of Man on 24 November 2017 – not in Montenegro. That Nereo was bound to account for output tax on the market value of the yacht at that date. That the assessment was made in time. That the value of the yacht was €217m and the assessment should be reduced accordingly. And that the penalty should be reduced to reflect the reduced amount of the assessment.

The lessons from this case may now seem obvious and trite. Applying VAT registration and accounting processes correctly helps, but lack of understanding of the consequences of those actions can bring costly errors and risks. Take relevant professional advice in advance of VAT registration. Do not register for VAT if there is no intention to operate a business with your yacht. If you do register for VAT, know what records to keep and keep them accurately. If after registering for VAT your intentions change for any reason, plan your way out of the VAT system – don’t jump out in the hope the standard VAT rules will provide succour. Most VAT provisions have “anti-avoidance” rules which can cancel them out in certain situations – for example, just because VAT does not apply outside a territory does not mean that your actions outside do not count inside the territory. VAT regulations change anyway – being vigilant about changes in the places where you operate is crucial to avoiding tax issues. Best practice counts more than “good relations” with tax authorities – an investigation or court process is adversarial and where weaknesses appear the authorities will use even the wider bits of the law to tackle you. If a tax investigation or court process begins, summon assistance early to ensure a fair outcome. Use specialised professional VAT expertise alongside your defence lawyer.

The content of this article is provided for general information only. It is not intended to amount to advice on which you should rely. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content herein.