January 10, 2011

The Issue

On January 1, 2011, the United Kingdom changed its rating policy for Value Added Tax (VAT). Prior to the change, aircraft over 8,000 kilograms (17,635 pounds) maximum takeoff weight were applied a zero rating. One benefit of this zero rating was that aircraft could be fully imported into the UK, which allowed for “free circulation” within the 27 EU member states.

As part of this policy change, the standard VAT rate in the UK was increased from 17.5% to 20%. Although this is a major policy change, operators still have a number of options to manage VAT issues and avoid facing an assessment of VAT on the value of the aircraft

Temporary Admission

Under the World Customs Organization’s Istanbul Convention on Temporary Admission, a third country or non-EU registered aircraft is eligible for “conditional” relief of duties and taxes. This option was available prior to the policy changes, and even with the changes, many operators can still qualify for temporary admission.

To qualify for temporary admission and be eligible for conditional relief of duties and taxes, the aircraft must not remain in the EU for more than six months in a twelve month period. Also, the aircraft must be owned outside of the EU and not made available for use within its boundaries by EU residents.

Customs regulations typically provide that transport of EU residents within the EU territory is not subject to duty and tax so long as the travelers are employed by the aircraft owner or otherwise authorized to be on board. If the EU passengers are not employed by the aircraft owner, it is recommend that the aircraft owner prepare a letter stating that the EU passengers are authorized to be on board. If the aircraft is leased, the letter can be prepared by the lessee.

In addition to EU residents that are carried on board for a business purpose, it is possible to carry EU residents for non-business purposes. Again, the aircraft owner must prepare a letter stating that the EU residents are authorized to be on board.

Temporary Admission Process

Once an aircraft arrives in the EU, it is automatically granted temporary admission so long as the conditions stated above are met. Approval for the admission is normally verbal, but it is recommended that operators obtain evidence of their temporary admission status. This can be helpful in the event that inquires are made by Customs officials.

While the process is voluntary, operators should request that Customs officials stamp a European Community Temporary Importation form upon arrival. Operators must remember to have the form stamped again upon their departure from the EU. If the form is not stamped on departure, it could appear that the aircraft was in the EU continuously which would violate the temporary admission conditions.

Aircraft Importation Process

For aircraft not meeting the temporary admission criteria, importation into the EU may still be available under a new set of rules. Aircraft of any weight may now qualify for importation and a zero VAT rating so long as they meet the new definition of a “qualifying aircraft”.

Customs Notice 744C defines qualifying aircraft as: “any aircraft which is used by an airline operating for reward chiefly on international routes”. Although the term airline is used, the aircraft does not need to be operated by a certificated air carrier.

If the aircraft is being operated for business purposes, it could be a qualifying aircraft. The key is that there must be a charge made for the flights. Based on current interpretations of the regulations, the charge could be one that a division of the company pays to the aircraft operating entity or division for flights. The aircraft operating entity does not need to make a profit, meaning that there seems to be flexibility in the amount the can be charged.

The challenge for U.S. operators is that many Part 91 flight departments are not structured in a way that would make these charges possible without violating FAA regulations. For example, if a business owns its own aircraft and the pilots are employees of this same business, there would be no way to make these charges.

A possible structure would be one in which a company leased its aircraft from a leasing company and also had a separate agreement with a pilot services or management company to obtain flight crew. Creating a structure where the aircraft is owned by a special purpose entity that also employs the flight crew would likely not be effective as it could be viewed as an illegal “Flight Department Company” by the FAA.

As the importation rules are new, the ownership structures above have not been formally approved by regulators in the UK. Operators should consult with qualified legal and tax counsel prior to completing the importation process.

Aircraft Previously Imported

If the aircraft has already been correctly imported prior to 2011, it will retain the zero VAT rating until it is disposed of by the current owner. When the aircraft is disposed of, it is possible that there may be VAT considerations. At this time, a question has been posed to UK regulators regarding the importation status of an aircraft once it is sold.

Owners that correctly imported their aircraft prior to 2011 will no longer be eligible for a zero VAT rating on services obtained in the EU (i.e. handling and hangar fees). Only aircraft that qualify for a zero rating under the new rules will be eligible for a zero rating on services.

For More Information

NBAA Members with questions about U.K. VAT, or other international tax issues, should contact NBAA’s Operations Service Group at info@nbaa.org.