VAT / Customs – It’s a New Dawn, It’s a New Day…

By Simon Anslow of PKF Francis Clark

The Brexit clouds have lifted, the Pandemic is now, for most, a horrible, but hopefully fading memory and for those of us who live and work in the marine world with the daily delights of VAT & Customs we are now settling down to the new normal.

So, what does that look like and what have we learnt over the last year? That the world does not revolve around the UK, that if you are a resident in Northern Ireland owning a boat is still very confusing, old established principles are now being challenged and that there are signs of cracks and dis-unity between the EU27 member states when it comes to the VAT/Customs treatment of pleasurecraft.

Allow us to share some of what we learnt these past few months…

Returned Goods Relief (RGR)

The mechanism that allows boats that have left a territory to return without the requirement to pay further VAT (and, where applicable, Duty); both the UK and the EU27 operate the relief and have very similar rules, primarily:

• The owner/declarant re-entering must be the same as that when the boat left
• The boat must have been in free circulation (VAT Paid) in that territory when she departed
• No substantive changes (improvements, or major refits) must have been made whilst away
• Return must be within 3-years of the date of departure

The UK have relaxed their rules as regards the 3-year limit and will allow RGR for privately owned pleasurecraft where the 3yrs has been exceeded, providing HMRC are notified prior to return and all the other conditions have been met.

Both the UK and the EU27 Customs authorities will also allow RGR where the 3-year time limit is exceeded, where it can be demonstrated the delay was due to exceptional circumstances. However, what is becoming apparent, particularly with certain EU member states, is that there are a number of (very high) hurdles that have to be jumped:

• Notification to the relevant Customs authority should be made at the earliest possible opportunity, preferably in advance of expiration of the 3-year limit where it is foreseen and certainly before returning.
• Proper documentation indicating dates of departure from the EU are increasingly being insisted upon – given that most departures are under own sail and do not require any great formality, this is not always considered at the time, but is now a ‘must’.
• There must be a very good case around the reason for the delay in returning – again, as much documentation and supporting evidence should be obtained as possible.
• More scrutiny is being applied to the pre-existing VAT Paid Status; whereas in the past this has been pretty much a given, full documentation, provenance and transaction trails are increasingly being sought. This includes having confirmation of where the boat was at the time of Brexit, vessels that have been involved in lease schemes and also for pre-1985 / deemed VAT-Paid boats (more on these later…).

Pre-1985 Boats & Deemed VAT Paid Status

With the introduction of the Single Market in January 1985, a transitionary measure granted ‘deemed’ VAT Paid Status (VPS) for pre-1985 built boats that were within the EU as at midnight 31 December 1992. Since that time, it has pretty much been a given that such vessels had deemed VAT status, but more recently this position has come under much closer scrutiny and indeed, challenged. Worth noting:

• Although a boat may in the first instance be eligible (pre-1985 / EU @ 31/12/1992), that does not give her life-long enduring VPS – like any other vessel that has VPS, it is only valid to the extent that there has been no subsequent ‘chargeable event’ that could give rise to that VPS being ‘lost’ – for example a change of ownership whilst outside of the relevant territory or significant works undertaken outside the territory that change her condition
• We have seen an increasing number of cases in the EU27 where returning pleasurecraft with 1985-deemed VPS, seeking RGR, have been required to provide documentary or substantive secondary evidence of the vessel’s whereabout as at midnight 31 December 1992; given that over 30 years have now elapsed (and quite possible a number of ownership changes in the meantime) such evidence may now be long gone and difficult to obtain.
• Rumblings have been heard from a number of Member States that they may no longer accept the deemed VPS for pre-1985 boats. Indeed, there are substantive reports that Germany has declared outright that they consider the measure no longer applicable, as it is not possible for any such vessel to still be in the same condition; therefore VPS will need to be demonstrated by other means, such as original VAT invoices or import entries.

Northern Ireland

We’ve had the NI Protocol, then The Windsor Agreement and now the DUP have returned to Stormont, but we are still none the wiser as to where NI resident boat owners stand as far as VAT & Customs treatment are concerned.

UK HMRC still refer to ‘unfettered access’ but cannot clarify or confirm whether that simply means that NI resident boat owners can come and go to and from the mainland without having to observe Customs formalities (and be liable for VAT/Duty) or whether that extends to having the right to dispose of that vessel in the UK as if she were UK VAT Paid. A further complication is where a NI resident may acquire an EU27 VPS boat, which they then bring back to NI – does she retain its EU27 VPS? Does she assume UK VPS? What are the restrictions on UK use or sale? These matters are now sitting with higher tiers of government…

An equally worrying issue came to the fore during the year – that of the right of NI residents to enjoy TA status within the EU27. A disturbing story emerged last Summer, which now appears to have occurred on a number of occasions.

An NI resident had arranged for the purchase of a new yacht to be supplied as a zero-rated export from the UK into the EU under TA – an entirely legitimate and accepted arrangement for UK residents (usual terms and conditions apply!). So far, so good; however, following a trip to a third country, on return to the EU27 (Greece in this instance), they were denied TA on the grounds that as NI is technically part of the Union Customs territory for goods (falling within the scope of the Union Customs Code), residents are ineligible. As a consequence, VAT on the full value became payable (along with a penalty!).

Lease Schemes

Over the years there have been a number of lease based VAT mitigation and deferment schemes that have been employed to assist boat owners; some have been outright VAT driven, exploiting the rules, regulations and circumstances, and engineered for gain (the long departed and not in the least lamented Cross Border Lease), with others being perhaps a by-product of arrangements and local legislation (French Lease, for example), with many somewhere in between; being more opportunistic and taking advantage of Member States’ domestic legislation framed to ease the application of certain Primary VAT Directive rules regarding ‘use and enjoyment’.

With the exception of the earlier Cross Border Scheme, the attitude taken by those EU Member States that did not operate or have domestic legislation that allowed for the operation of these later mechanisms tended to be grudging acceptance. The view taken being that provided the owner or operator undertook the activity in accordance with the respective ‘home’ State’s legislation, the VPS would generally be accepted.

Following the Mercedes Benz CJEU case decision in 2017 the EC Commission took out infraction proceedings against the Member States that were operating lease arrangements, where a reduced rate of VAT was chargeable on a sliding scale dependant on the size of the vessel – those targeted were primarily arrangements where there was a commercial lease operator financed (or at least partially so) by the ultimate beneficial owner, with the structure effectively being engineered. As a consequence, these lease schemes were brought to a close across 2018-19, but with a tacit understanding that any that had been concluded or were in progress would have the VPS honoured.

The exception to this action was the French Lease Scheme – this was thought to be by way of distinction from the other arrangements, in that the lease operators were French banks, providing legitimate third party funding. However, they did not escape for much longer and following further infraction proceedings, the reduced-VAT value French mechanism was also brought to a close at the end of 2020.

So far, so good; no harm/no foul and good whilst they lasted. Wind forward to a post-Brexit environment where local Customs authorities have become a lot more sensitive and aware of private pleasurecraft, VAT, imports and Customs mechanisms and we start to see a breaking of ranks, discontent and outright challenge.

Over this last year there have been a number of reported incidents (indeed, we have been instructed on at least three), where some Member States – in particular the Netherlands and Germany (notably neither of which operated or sanctioned these type of lease mechanisms) have, when sought their opinion, declined to accept that a vessel that has been acquired through one of these arrangements (and the VAT has been paid on a reduced rate) has valid VPS.

There are a number of technical points, but long story- short, the issue is not necessarily when the boat is actually within the EU, but should she leave and then return, seeking RGR to resume its Union Status, these Customs authorities are stating that without their acceptance of its prior VPS, she fails the conditions and VAT is then due on her reimportation. Rather graciously(!) and by concession, we have seen examples where that import VAT has been reduced by the amount of VAT previously paid at the reduced rate on the original lease.

This is a worry and concern for anyone that has a boat that has been through one of these arrangements and whilst we would expect that they should not encounter any issue when dealing with those Member States that previously operated these types of arrangements, clearly it puts a question mark over the ‘free and unencumbered’ use throughout the whole of the EU. Technically the respective opposing Member States should have a grown-up conversation to sort this out, but as this seems unlikely any time soon, it is suggested that owners (current and potential) that find themselves in this position should revert to the original provider and relevant Member State that was responsible for the VAT on that boat under the arrangement and seek formal confirmation as to the enduring validity of the VPS.

GANNON & BENJAMIN 75′ SCHOONER, REBECCA OF VINEYARD HAVEN

Classic Boats

And a nice one to finish on; whilst we are all aware (or should be now) that importing a boat into the UK will render her liable to payment of VAT on her full value (unless eligible for one of the reliefs such as TA or RGR), there is potential news for owners of older boats.

UK VAT legislation allows for VAT to be payable on a reduced value – 25%, therefore an effective current VAT rate of 5% – on certain goods imported into the UK that are either:

An antique that is more than 100yrs old; or
A collection or collector’s piece that is of… historical interest

We have been successful in having HMRC accept a number of ‘classic’ boats within these categories, including an early 20th century America’s Cup yacht to a more recent late 1960’s motorboat.

With the 1970’s now well over 50 years in the past, it is always worth applying the ‘Don’t ask/ Don’t get’ principle!

What Next?

It is a brave person who consults the crystal ball, but a safe bet would be that the EU will continue its infighting, NI position will remain unresolved for some time, but there is a bit of light at the end of the tunnel in so much as there are indications that some Members States are starting to introduce a much more accessible, streamlined electronic TA mechanism, that will allow remote, immediate and verifiable notification.

– Welcome to the 21st Century!

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