Steve Cain, VAT Director, Equiom Tax Services discusses the fiscal element of a client’s journey to superyacht ownership.
Value Added Tax, or VAT, is a broadly-based consumption tax which applies more or less to all goods and services that are bought and sold for use or consumption in the European Union (EU). In other words, goods which are sold for export, or services to customers abroad, are normally not subject to VAT. Conversely, imports are taxed to keep the system fair for EU producers so that they can compete on equal terms in the European market with suppliers situated outside the Union.
So, if your superyacht is to be built, bought, sold or used in the EU then you will have to consider the demands of the VAT system. Together with the Customs Union, the EU VAT system is the fiscal frontier to cross.
Think before you sign
About to buy a large yacht? Think before you act. If you wish your yacht to circulate freely in the EU without incurring a large VAT bill, it is essential to seek good advice before you begin the transaction. The ownership structure should be correct and the newbuilding or purchase transaction should be properly thought through. If this has been done, then VAT can be minimised or in some cases eliminated. But once you have begun a transaction it is very difficult to go back and unpick and you can end up with a large and unnecessary VAT bill the first time you move the boat across a border or buy items for it in the EU.
Most high-net-worth individuals who buy superyachts want to own them through companies and they want to be free to operate them anywhere in the EU. There is sometimes pressure to do deals quickly and order yachts to capture delivery slots. But it is important to get the VAT right from the outset, wherever you are resident and wherever the yacht will be built or bought from. If not, then once it enters the EU, there will be complications.
There are a number of jurisdictions you can structure a company to own the asset. Some of them have high-quality commercial yacht registries. But not all of them will achieve your fiscal objective. The main thing is to get the purchase contract right before anything is signed.
What’s in a flag?
Yes, the quality of the ‘Flag State’ and its reputation, its attractiveness to insurance underwriters, lenders and charterers, the security and ranking of mortgages, service levels, flexibility, costs and port state control intervention are all vital. Often there is a need to strike a good balance between these factors in order to make the right choice of flag.
A vessel's registration is, after all, its passport to sail international waters and a good choice is critical. But if that choice is made without prior thought for the VAT consequences of transactions and operational structure of the yacht then it may need to be undone. Yacht owners who qualify to use their yachts tax free in the EU under the Temporary Admission regime are often surprised when told they must change to a non-EU Flag State in order to benefit from that relief.
So even the ordinary act of flagging a yacht that is to be used in the EU can go wrong if the VAT impact has not been analysed.
Call it VAT planning
VAT planning in the context of yachting embraces all sorts of things. It may simply involve an adviser, with no particular specialism in VAT, advising a client setting up a new yachting structure that it may be necessary to register for VAT. Or it may take a VAT specialist looking at a particular business scenario, identifying the detail of the relevant legislation and devising special structures to get a particularly advantageous VAT result. Either way, it has nothing to do with making raids on the revenue of EU Member States.
VAT planning’s essential characteristic is that it requires a pro-active attitude - avoiding problems before they arise or else grasping opportunities that exist. It is much to do with ensuring that contractual arrangements between counterparties are satisfactory for all concerned, and that VAT consequences are properly factored into yachting decisions before they are made.
Six of the key objectives
VAT planning for yacht owners has a number of key objectives.
- Compliance: Compliance with VAT legislation is a statutory obligation and does not just happen on its own. It requires planning and forethought.
- Business planning: In the sense of analysing the VAT consequences of transactions and structures so as to be able to forecast their impact on the overall position of the yacht.
- Management of unnecessary VAT costs: This does not involve trying to get out of liabilities that ought to arise. The objective is to prevent the artificial generation of liabilities.
- Management of penalty and interest costs: The existence of VAT penalties and interest provide further reasons for planning to achieve proper compliance.
- Improving cash flow: Within the EU VAT system, there are ultimately payments to be made or repayments to be received. The timing of these payments and repayments can be important because of the sheer size of the sums involved.
- Minimising administration: For a fully taxable yachting business, the administration involved in complying with the basic VAT system should not be underestimated. It involves recording each transaction, preserving evidence, generating VAT-related documents, etc. Careful planning combined with specific agreements of easements with Customs and VAT authorities can help to reduce this burden.
It’s yachting season in the picnic grounds of the Mediterranean and the harbours are filled with luxurious superyachts. With proper VAT planning EU VAT need not spoil the picnic.