Exploring the impact of Brexit on yachting VAT
Friday 10 March 2017
Ayuk Ntuiabane, Director - VAT, Equiom Solutions explores the impact of the UK leaving the EU single market on the maritime sector.
The United Kingdom voted to leave the European Union on 23 June 2016 and since then the UK Government has outlined its objectives for negotiations. However, nothing has changed yet in terms of the trading relationship and the movement of people and goods between the EU and the UK. The laws which apply to maritime businesses and their contractual arrangements have not changed either. That standstill will continue during the coming period of negotiation.
The process for withdrawal is expected to begin this month with the triggering of Article 50 of the Treaty on European Union - the legal mechanism by which the UK will leave the EU. The process is likely to take around two years, during which time there will be negotiations about what sort of relationship the UK and the EU will have in the future and how individual policy areas will be affected. Until that process has advanced somewhat it is impossible to say with any certainty what the effects of Brexit on yachting and other maritime transport services will be.
No panic but…
For sure there are pertinent issues which will emerge in the direction of travel. First is what to expect of access to the European single market and in the general policy areas which impact directly on the maritime transport sector, such as employment law, immigration, border controls and contract law. The main concern here is potentially losing the benefits of free trade and customs harmonisation with the EU single market. Are we about to see with Brexit a return to tariffs for UK merchandise exports and imports?
In legal terms, transport is a ‘shared’ competency between EU institutions and the Member States. This means that either the EU or the Member States may act, but the Member States may be prevented from acting once the EU has done so. There have been many examples of the tension between the EU and some Member States in the exercise of this competency but the EU’s drive for consistency and harmonisation has largely prevailed. The EU, through its institutions, has used its competency to create a single market in transport services that facilitates the free movement of goods, services and people. Social and environmental concerns have led to the promotion of common safety standards, including reducing the impact of noise, pollution, harmful emissions and greenhouse gases. These standards are evident in most yachting operations in the industry, and it is widely accepted that access to the European single market for yachts from all Flag States has greatly benefited the yachting sector.
In one sense this concern about loss of free trade and common standards may be misplaced in that it is the wider international collaboration and the participation of Flag and Port States in international forums such as the International Maritime Organization (IMO), the International Labour Organization (ILO), the Organisation for Economic Cooperation and Development (OECD) and the United Nations core legal body for international trade law (UNCITRAL) that has helped to deliver the consistency enjoyed in yachting in particular and shipping as a whole. It is hard to contemplate that rules developed over decades of such international collaboration could be unilaterally swept aside by either the EU or the UK on account of Brexit. If anything, the nature and source of the rules should preclude any change insofar as vessels being able to call at an EU or UK port to load and unload cargo or passengers regardless of their flag and regardless of the nationality of their owner.
That said, the EU does have a track record of using its large competency to adopt unilateral approaches to maritime policy. Within that context, it is recognised that while several Mediterranean Member States have used their national competence to push flag-based restrictions, the UK with its wealth of maritime heritage and enormous Red Ensign following, has promoted the contrary - single market access by all Flag States. The concern about loss of benefits of free trade and customs harmonisation is tied to the fear that without the UK it may be harder for the EU to hold that balance. If the balance in a post-Brexit EU tilts in favour of national restrictions then British flag ships could lose their right to operate in the domestic trades of those EU Member States who are minded to maintain flag-based cabotage restrictions.
Such an outcome may actually have less overall impact on the British merchant fleet, since they operate more internationally. But it would have a greater effect on the yachting sector because yachts and other pleasure craft already have a peculiar vulnerability in the framework of EU legislation. Council Regulation (EEC) No 3577/92 of 7 December 1992, applying the principle of freedom to provide services of maritime transport within Member States, currently applies only to EU ship owners who have their ships registered in, and flying the flag of, a Member State. This ability to cabotage is a significant freedom which in principle is not available to non-EU flagged vessels.
Yachts Pleasure and Commercial
Indeed, pleasure yachts are excluded completely from the cabotage law. This means that pleasure yacht access to a Member State’s domestic waters is wholly subject to the national law of the country in which they sail. By contrast, commercial yachts are entitled to cabotage access under the EU mechanism, but as with all trading vessels, that is technically on the proviso that they comply with the condition that they are registered in, and fly the flag of, a Member State. The condition has, however, tended to be downplayed in the slipstream of EU single market practice with its emphasis on freedoms. If Brexit results in stricter enforcement of the cabotage rules then in order to charter in the EU within the terms of the cabotage freedoms, commercial yachts would have to be registered in an EU Member State.
By all accounts the continuing EU Member States that would support stricter enforcement are precisely those Member States located in the picnic grounds of the Mediterranean where charter yachts frequent. Their position has already been tested and strengthened in the European Court of Justice (ECJ) case law, most recently in the Court’s judgment in Alpina and Nicko Tours [C‑17/13]. The Swiss company Alpina River Cruises GmbH and the German company Nicko Tours GmbH were, respectively, the vessel owner and user of the Swiss tourist vessel ‘Bellissima’. They wished to organise a cruise departing from Venice. They had intended to cross the Venetian lagoon to Chioggia, then cross territorial sea between Chioggia and Porto Levante before travelling up the river Po and returning to Venice following the reverse itinerary. The application for authorisation to cross the stretch of sea was rejected by the port authority of Chioggia on the grounds that, under Italian law, maritime cabotage was reserved for ships flying the flag of a Member State of the EU. Alpina and Nicko Tours contested the refusal through the Italian court system to the ECJ. But in its judgment the Court ruled in favour of the port authority of Chioggia, stating that all cruise services provided for remuneration in the maritime waters of a Member State are subject to the cabotage regulation which specifies that they must be registered in, and fly the flag of, an EU Member State.
The pressure on non-EU flags has emerged on another front. Most charter transactions currently use the Mediterranean Yacht Brokers Association (MYBA) contract which is based on English law. This follows a long tradition by which English law has become the favoured legal regime for documenting international contracts and transactions in the maritime industry. This tradition is underpinned by long-established legal precedent and a court system which predates and operates beyond the UK’s membership of the EU. However, Brexit will certainly test that tradition further, and may well be a ‘disrupter’. The continuing applicability of MYBA contract terms cannot be taken for granted.
Brexit comes amid growing recognition that the current MYBA charter contract is at odds with the desire in some quarters for continuing VAT exemption for commercial yacht operation. Already there is talk of a MYBA passenger transportation contract, which came after the French revenue authorities met with yachting industry representatives in 2016. To the extent that such a contract has to be drafted in a way that presumes EU law and services terms for trading in the EU without the UK, there may well be a convention shift away from English law in EU yachting.
Are we, therefore, about to witness at last the waning of the famed admiralty grip on EU yachting? Or could one contemplate a situation where UK courts no longer bound by EU Regulations would continue to determine jurisdiction over disputes arising between parties operating within the continuing EU?
Perhaps, but Brexit will make such competitive co-existence highly questionable. At the very least, the lack of certainty of regime may make specifying an exclusive English law and jurisdiction clause in yachting contracts trickier. The same uncertainty will very likely prevail in employment of crew, in insurance arrangements and in situations where current ‘passporting’ contracts presume English law based on EU rules.
Plus ça change
Yet there is much that Brexit is likely to change without effect, or not change at all. Yacht managers and brokers can take comfort from the fact that there are no ownership and control or common operating licensing regimes in the EU similar to the ones applicable to air operators in the business aviation sector. Restructuring of yacht management businesses with a UK base in terms of their continuing EU Member States, in which they also operate, may therefore not be on the cards – although for obvious reasons their tax affairs may come under a stronger spotlight.
In a wider context the position for yachting after Brexit, like for other goods and service sectors, is largely predictable. Brexit will affect the incidence of tax. For example, UK goods will be exports to the EU rather than despatches and vice versa – probably meaning more clearance procedures. UK services would be ‘exported’ rather than provided intra-Community and vice versa. Appropriate adjustments would need to be made to the cross-border regimes for the refund of VAT. And there is the small matter of UK travellers in the remaining EU being able to use duty-free allowances when returning with goods purchased in the remaining EU Member States.
Brexit potentially involves some fundamental issues for yachting and the marine industry. The UK is currently so legally and practically intertwined into the EU that adjustments are inevitable. The concerns which the prospect and process throw up may of course be swept aside by a comprehensive bilateral agreement between the UK and the EU once the UK ceases to be an EU Member State. But the task itself of achieving such an agreement is so huge that some regard it as a moon-shot. Come what may, the boxed waters of the Mediterranean Sea will still be open to yachting, and the VAT issues that will go and come as a result.
For further information about the impacts of Brexit on yachting VAT or to learn how Equiom can help you, please contact Ayuk Ntuiabane. To read other articles in our Brexit and VAT series please click here.