On 29 March 2017, the United Kingdom delivered its letter to the President of the European Council invoking Article 50 and beginning the process of removal from the European Union. With Brexit discussions having kicked off last week, we are entering unprecedented times as the UK and the EU’s remaining 27 Member States negotiate with each other to strengthen their respective positions.
The process will likely be a painful one, especially with a hung parliament potentially weakening the UK’s hand around the bargaining table and shifting power back to the remaining Member States. With such uncertainty ahead of us, right now we can only take into consideration the current position – that the UK has begun the process to remove itself from the EU – and what this may mean for our clients.
Brexit means Brexit for VAT and Customs
For EU VAT and Customs purposes, the UK will for all intents and purposes be a non-European country and free movement of goods and people between the UK and the remaining members of the EU will no longer exist in the same manner. In likelihood, the UK, its citizens and companies will have to trade and move goods with the EU as Switzerland, Norway, China and the USA currently do. It remains to be seen what trade agreements will be negotiated during the Brexit process, but the UK’s separation from the EU is most likely to mean formal exportation and importation declarations going forward.
Through Protocol 3 of the UK’s Act of Accession to the European Community and Article 7(2) of Council Directive 2006/112/EC, the Isle of Man has a unique relationship with the UK and the EU for VAT and Customs purposes. Because of this relationship, whatever changes for the UK from a VAT and Customs perspective will certainly flow through and impact the Isle of Man as long as that relationship remains.
Impact on aircraft structures and importation
So, what does this mean for aircraft owners, operators and financiers using the UK or Isle of Man? Will existing structures or previous importations be impacted by Brexit?
The precise answer depends on the detail of original arrangements in each case, but generally speaking for clients that have a UK or Isle of Man structure in place for the use and operation of aircraft, or have imported aircraft into the UK or Isle of Man, then alterations will almost certainly be required in order to comply with the relevant EU law going forward.
Qualified, or not?
Up until 31 December 2010 a business aircraft could be imported into the UK or Isle of Man as a 0% VAT “qualifying” aircraft as long as it had a maximum take-off weight in excess of 8000kg. There was another specific condition, however, which most seemed to either ignore or be unaware of – that the aircraft could not be used or adapted for “recreation or pleasure”. With effect from 1 January 2011, this was replaced by the more recognised and widely applied definition of a qualifying aircraft, from Article 148 of the Council Regulation 2006/11/EC: “an aircraft used by airlines operating for reward chiefly on international routes”.
A significant percentage of pre-2011 qualifying aircraft imports will not have been accompanied by a valid and enduring VAT registration number to account for the qualifying activity that the aircraft was to undertake. Those aircraft owners, operators and financiers ideally should have reviewed their position following the changes in 2011, but now due to Brexit they will almost certainly find that their original qualifying importations and the continuing use of their aircraft do not meet the conditions being applied across the remaining EU Member States.
VAT registration is a must
There is a legal requirement for persons conducting taxable business within the EU to register for VAT in a relevant Member State. With the impending separation of the UK and Isle of Man from the EU, aircraft structures operated and/or imported by legal owners and endorsed by financiers or aircraft managers will have to be reviewed.
The parties involved will either have to be registered themselves, create a relevant subsidiary business or establish a suitable business relationship in a relevant EU Member State in order to continue providing services within the EU. The selected approach may be similar to scenarios which exist already, for example whereby a US-based owner or operator offers an aircraft to fare-paying customers to move into and within the EU.
It is important to note that affected aircraft are legally required to be formally imported and have the relevant party registered for VAT for the entire time that they conduct this activity.
Questions around claiming relief
Alternatively, owners determined to be properly “established” within the UK and IOM may be able to take advantage of the rules relating to Temporary Admission. In 2014 the International Business Aviation Council (IBAC) made an important approach to the European Commission ‘Customs Code Committee – Special Procedures’ Section with a variety of questions relating to the rules of Temporary Admission. The Committee’s answers dispelled certain myths that were being profited on by some service providers, but certain specific and vital questions were not asked; the answers to which would have shed a clearer light on the matter of qualification, or not, under Temporary Admission for a non-EU owner or operator.
Added to this, on 1 May 2016 the Union Customs Code became effective and the consequences for non-EU aircraft owners and importers have been considerable.
With Brexit and its resultant changes now looming, aircraft owners, operators and financiers who have utilised the UK and Isle of Man need to consider their situation very carefully and prepare alternative solutions in order to continue with minimal disruption.
Speak to First Names Group
Our specialist aviation team has the expertise required to plan for and navigate the changes Brexit will bring. To discuss your requirements with us, please don’t hesitate to get in touch with Grant Atchison or Chris Nicholls.
Grant Atchison is an associate director for First Names Group in the Isle of Man. He leads our specialist Private Client Yachting and Aviation team, focused on the provision of expert solutions to clients in respect of yacht and aircraft assets.
This article has been issued by First Names (Isle of Man) Limited which is licensed and regulated by the Isle of Man Financial Services Authority. The article has been prepared for general circulation to clients and intermediaries, and does not have regard to the particular circumstances or needs of any specific person who may read it. Nothing in this publication constitutes legal, accounting or tax advice or investment advice.
The information contained in this publication has been compiled by First Names (Isle of Man) Limited and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgements as of the date of publication, and are provided in good faith but without legal responsibility.