VAT / Customs – Sailing in Calm or Troubled Waters

By the PKF Francis Clark, Indirect Tax Marine Team

The indirect tax rules of acquiring and operating a yacht in the UK or EU are better understood but not necessarily easier to navigate. The varying interpretations of the rules by tax authorities could disrupt an otherwise peaceful and enjoyable sailing experience to deal with potential liabilities.

EU Temporary Admission (TA)

TA allows foreign registered yachts to enter the EU without incurring import taxes. Specific conditions apply, including the so called 18-month rule which, under certain circumstances, can be extended up to 10 years. Different interpretations are being applied to this time limit.

For example, the 10-year extension pertains to the cumulative duration a foreign registered yacht can stay in EU waters without incurring import taxes, some EU countries interpret this as the maximum cumulative period a yacht can remain under TA. This means that even if a yacht exits and re-enters EU waters, the time spent under TA is aggregated towards the 10-year limit. Other EU countries consider that the 10-year period resets each time the yacht leaves and re-enters the EU which means the clock starts anew with each entry under TA, subject to the yacht fulfilling the necessary exit requirements.

Refit works, which are prohibited under TA, are usually undertaken through the Inward Processing (IP) procedure. Italy’s view is that the 18-month period is cumulative for a yacht under TA that is moved into IP then returned to TA meaning that the time spent under both TA and IP counts towards the 18-month limit. Other EU countries do not apparently share this view.

EU VAT paid status (VPS)

Unless TA applies, using a yacht in the EU requires it to have VPS. Certain EU countries are incorrectly challenging the EU VPS of yachts that are UK flagged and registered. The country of registration has no relevance to a yacht’s VPS as confirmed by the EU commission, but owners must retain documentary evidence to prove the VPS of their yachts if challenged.

Transfer of Residence (TOR)

Where a yacht owner’s normal place of residence has been outside of the UK for 12 consecutive months and the individual is moving their residence to the UK, a claim for TOR could be possible when importing the yacht into the UK.

HMRC approval, via a formal application, is required prior to importing the vessel, and utilising this potentially valuable relief. TOR can provide substantial VAT savings if considered at the earliest outset, so should be explored.

Place of Supply (POS) and the Deemed Supply rules

The POS rule determines where a supply is subject to VAT and therefore, the country in which VAT must be charged and accounted for. For goods, the POS is generally based on their physical location at the time of supply.

A deemed supply occurs when a business changes the use of business goods in a manner that trigger a VAT liability if they had supplied the goods to a third party. For example, there is a deemed supply where a VAT registered person deregisters for VAT although no liability arises if the total VAT due on the assets is £1,000 or less.

But how does the POS rule interact with the deemed supply provisions?

This was clarified in the VAT case of Nereo Management Limited (Nereo).

In 2017, Nereo imported a superyacht into the Isle of Man for intended business purposes and accordingly claimed import VAT. It later that year deregistered for VAT while the yacht was outside the EU due to a change from commercial to private use. The deregistration triggered the deemed supply provisions, and the IoM demanded VAT of £50 million circa. Nereo contested the VAT demanded given the location of the vessel at the time of deregistration but was unable to persuade the Tribunal in 2023 to decide in its favour. However, on the appeal, the court agreed with Nereo that the location of the goods at the time of the deemed supply is relevant.

The Nereo case is yet another reminder of the different interpretations that tax authorities can apply to the tax rules that could land a yacht owner with a substantial liability if not successfully challenged.

UK Capital Goods Scheme (CGS)

A complex part of VAT law is the application of the CGS provisions on business vessels worth £50,000 (NET) or more.

Under CGS, the VAT initially claimed on the purchase or import of a vessel for taxable use is subject to adjustments over 5 annual intervals based on actual taxable use in the business. If the taxable use of the vessel reduces, an adjustment to the VAT initially claimed is required.

This can be a significant risk for vessel owners as HMRC would determine use of a vessel in the EU under TA as evidence of non-taxable use thus triggering an adjustment under CGS.

There is further complexity on the interaction between deemed supplies at deregistration and the CGS, so professional advice is highly recommended to avoid unexpected VAT liabilities.

Northern Ireland (NI)

The indirect tax implications of a NI resident acquiring a new yacht from a UK dealer for use within the EU should be carefully considered. NI remains part of the UK customs territory but is treated as part of the EU customs territory for goods to avoid a hard border on the island of Ireland. This dual status, which is legislated for, means that a NI resident cannot meet the UK and EU TA conditions which means VAT is payable on the purchase of the yacht. Importing the yacht into the EU (say France) would secure EU VPS. But if following import into France the yacht enters GB waters directly, UK import VAT becomes due. That may seem odd as NI residents should not incur UK VAT on the movements of personal assets to GB under the so-called unfettered access rule. However, the unfettered access rule only applies where the goods move directly from NI to GB, or indirectly from NI to GB having merely passed through Ireland.

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