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A taxpayer carrying out yacht chartering or leasing is entitled to VAT registration only where the chartering or leasing is carried out in the course of an economic activity, say HMRC.
The department adds that it may need evidence of this either before registration is allowed or during subsequent verification.
When an individual has legal ownership of the vessel in his own name and uses it wholly for his own private use then there is no economic activity and he is not entitled to register for VAT.
If he charters the vessel to others with sufficient continuity and substance to comprise an economic activity as well as using it himself, the vessel will be used partly for business and partly for private use.
In cases where the individual arranges the vessel to be legally owned by a company (or other entity), this does not, in itself, affect the VAT treatment of the vessel.
However, in some instances, the individual who has bought a pleasure craft arranges for legal ownership of that vessel to be held by a company which registers for VAT as a chartering or leasing business and recovers VAT incurred on the purchase and operation of the vessel.
HMRC are particularly interested where the individual’s own use of the vessel is covered by charter or lease agreements issued to him in the name of the company. It is often then claimed that there is no private use of the vessel.
The Revenue says it will consider the entitlement of such a company (or other entity) to VAT registration by looking at whether the chartering or leasing comprises an ‘economic activity’.
The connection between the company and the user of the vessel does not in itself prevent the chartering or leasing being an economic activity. On the other hand, the issuing charter agreements to the individual in the name of the company is not, alone, sufficient to create an economic activity. The full circumstances in which the vessel is used will be considered.
HMRC may also consider this to be an ‘abusive practice’. Possible indicators of an abusive practice include:
- The main user of a pleasure craft is the ultimate owner of the chartering or leasing entity.
- The main user of a pleasure craft funded the purchase of the vessel.
- The person who funded the purchase of a pleasure craft uses it for prolonged periods in the peak chartering season.
- The chartering of a vessel to third parties would not, alone, be of sufficient continuity and substance to comprise an economic activity.
- The chartering or leasing entity shows significant losses in its financial statements.
- Charter fees or lease instalments due from the main user of a pleasure craft are paper transactions only.
- Charter fees or lease instalments are below open market value.
- The terms of a lease differ significantly from normal commercial practice.
For further information, see Revenue & Customs Brief 56/09.
