Why VAT claim on leased-in imports of aircraft has become a vexing issue

It’s been a slow burner but the denial of the right to deduct VAT on leased-in goods imported into the UK or the EU is looming large – and is spreading alarm among the ranks of business aircraft owners and operators who rely on non-owner models of aircraft operation.

Non-owner models come in two scenarios. First is the “leased” (or “hired”) in, where the aircraft is imported from outside for use by the person leasing it but remains in the ownership of the lessor. Second is the more subtle “owner trustee” model, where the receiving importer in the UK or EU has created a US trust and contributed the aircraft to it to ensure its eligibility for United States registration with the FAA.

The owner-trustee model has obvious appeal, as is evident from the number of business aircraft registered in the USA which operate charters in Europe. The model is relatively simple and transparent from a tax perspective, since the trustor has beneficial ownership of the assets despite the trustee holding registered title to them.

Even so, the absence of explicit direct ownership by the importer is proving to be an issue. This is because the VAT context specifically defines ownership in terms of ‘the right to dispose of goods as owner’. The ability of a taxable business to deduct any import VAT incurred is directly linked to their ownership of the goods.

Where an aircraft remains in the ownership of the foreign lessor, it can be presumed that it will be returned to the lessor at the end of the lease term. Moreover, the leasing relationship implies that the value of the aircraft being imported (in contrast to the leasing fees payable) is not included in the price of the importer’s supplies to its customers. The aircraft value is a distinct cost component borne by the foreign lessor and, as such, only the foreign lessor may be entitled to deduct the import VAT on the aircraft.

This explains the policy turn that if a leasing arrangement entails restrictions or conditions against the lessee taking ownership of the aircraft to use and dispose of it as they see fit, the lessee must be denied the right to claim import VAT on the value of the aircraft when it is imported from abroad.

When the European Commission’s Value Added Tax Committee first pronounced this interpretation in their Working Paper in 2013, hardly anyone knew what to make of it. After all, most EU Member states had for decades been allowing import VAT claims based simply on the requirement that a taxpayer incurs the VAT for its taxable activities. Over ten years later, that’s no longer the case. The Court of Justice of the European Union has nailed in the case law that ownership of the imported goods is a necessary condition. The role of ownership in import VAT deduction has taken centre stage in Europe in a way that now threatens to confound a popular business aircraft leasing model.

As for post-Brexit UK, still awkwardly bound by EU case law, they are already proclaiming the HMRC mantra that: “Import VAT may only be claimed by the owner of the goods” and import VAT deduction by non-owners of goods is “incorrect” and no longer acceptable.

Information in our blogs is very general in nature and should not be acted upon without first consulting with a tax advisor. Please feel free to contact Y & A Group, LP to schedule a complimentary consultation.