July 2013

TAX – VAT and Customs Duty

Aoife O'Sullivan, Kennedys Aviation LLP

Importation into the EU

Basic Principles

Customs duty is payable on the import of goods by the importer by reference to the

Common Customs Tariff of the EU.

VAT is due on the import of goods into the EU – the VAT is payable by the importer who

is liable to pay the customs debt under the Community Customs Code and at the same

time as the Customs Debt is due.

The declarant is liable, but if the declaration is made on behalf of another person, that

other person is also liable.

Where the introduction into the EU is "unlawful" liability can spread wider to other persons

involved in the unlawful introduction and who acquire an interest in the goods.

Civil aircraft are normally imported with end use relief for free circulation within the EU – an

alternative is temporary admission, to which strict limitations apply.

Declaration required on Single Administrative Document ("SAD") - UK form is the "C88"

July 2013

Customs Duty – End Use Relief

Civil aircraft with a UK, EU or non-EU civil registration – the commodity code in Box 33 of the

C88 will normally be 88 02 30 00 10 (unladen weight exceeding 2,000 Kg, but not more than

15,000 Kg) or 88 02 40 00 10 (unladen weight exceeding 15,000 Kg).

Import is under the end use authorisation of the importer, who must be established in the EU

– simplified procedures (that otherwise apply only to occasional importations of other goods)

apply to registered civil aircraft.

The procedure code is entered in Box 37 of the C88 and the end-use authorisation number

in box 44.

Production of a valid civil registration certificate is required at the time of import – it is the

existence of the registration of the aircraft that "completes" end use relief.

Agents should not identify themselves as consignee on the C88, but clearly indicate the

importer – both agent and importer are liable.

End use relief can also apply to parts, but an alternative certification for parts is import with

an airworthiness certificate.

July 2013

Temporary Admission

Aircraft registered and owned or at least owned outside the EU .

Period of use under TA where it is used by a non-EU person is:

private personal use – six months;

commercial use - time taken to load/unload or pick up/set down for maximum of 24 months.

Period of use under TA where use is by an EU person:

Private transport:

hired outside the EU to return home to EU or to leave the EU – 8 days;

occasional private use permitted by non-EU owner/employer – six months;

preparing to emigrate outside EU – three months.

Commercial – if commercial use arranged by non-EU person and has given written authority

to EU person to use it on their behalf – time taken to transport goods or persons to or from

the EU (also certain other limited categories 5 or 8 days).

July 2013

Importation – General Aviation Report

Prior to arrival in the UK a General Aviation Report ("GAR") must be completed detailing the

intended use of the aircraft.

The GAR must be sent by fax or e-mail to the National Co-Ordination Unit ("NCU") by the

following deadlines prior to arrival:

From elsewhere in the EU – four hours;

From the Channel Islands – twelve hours;

From elsewhere outside the EU – 24 hours.

The airport has to be a designated airport or "certificate of agreement" (COA) airport

approved for import entry.

July 2013

VAT – General

Goods - subject to VAT in the member state of the EU where supplied.

Supply of goods occurs where:

there is a "transfer of the whole property in goods";

possession is transferred under "agreements which expressly contemplate that the

property will also pass at some time in the future" – e.g. hire purchase/conditional sale

No supply for VAT where aircraft sold by a mortgagee after repossession under an aircraft

mortgage where owner is private owner subject to certain conditions.

Goods also treated as supplied in the UK:

When imported into the UK from outside the EU;

On "acquisition" (import) by business in the UK from another EU member state;

aircraft is "new" means of transport (> 1550Kg MTOW and not more than three months

since first entered into service and note more than 40 flying hours).

July 2013

"Qualifying Aircraft" 1

Article 148(e) of Directive 2006/112/EC – "aircraft used by airlines operating for reward

chiefly on international routes".

UK before 1 January 2011: "weight not less than 8,000 Kg" and " neither designed nor

adapted for use for recreation or pleasure".

UK with effect for supplies, acquisitions or importations from 1 January 2011: "used by an

airline operating for reward chiefly on international routes"; an airline "means an undertaking

which provides services for carriage by air of passengers or cargo or both".

Transactions affected:

Supply, import or acquisition of the aircraft itself – whether sale, lease or otherwise

Repair, maintenance, conversion

Supply of "parts and equipment of a kind ordinarily installed or incorporated in, and to be

installed or incorporated in (a) the propulsion, navigation or communication systems or

(b) the general structure" and supply of certain safety equipment.

July 2013

Qualifying Aircraft 2

What is "use by an airline?"

Commercial registration for passenger

charter – aircraft is used by the owner

(normally a non-resident special purpose

vehicle owned by high net worth

individuals), but chartered to third parties

when not so used.

Aircraft Management or Flight Services

Agreement – "Operator" provides the

services – it or a group member is an

AOC holder in possession of an aircraft.

There is an "undertaking", but is it an

airline?

July 2013

Owner

Operator

Services

Charter

Qualifying Aircraft 3 – HMRC views

HMRC Interpretation – revised Notice 744C.

"undertaking" can take any legal form and may include a group of companies in some cases.

absence of an AOC "is an indicator that it is unlikely to allowed to operate as an airline".

supply of aircraft or of transport?

Notice 744C "formal charter/ hire contract…treated as the supply of a means of transport"

Notice 744A "passenger transport services" supplied where an "aircraft is provided

together with a driver or crew"

Aircraft managers may be an "airline" when using private aircraft for transportation services

but " it will not normally allow an aircraft to be 'qualifying'. This is because aircraft that are

used wholly or partly for purposes other than the supply of ..transportation can't be

considered qualifying aircraft" – i.e. use has to be exclusively for transport.

July 2013

Qualifying Aircraft 4

Easier questions!

"operating for reward" – the airline can provide passenger or freight transportation on

scheduled and/or unscheduled flights in return for consideration – there is no need for it

to operate at a profit, but " it must be a business operation in nature.

"international routes" - routes that start or finish outside UK airspace, but not flights that

are domestic flights that merely pass through international airspace.

"chiefly" – "the international route operations of an airline must exceed its UK domestic

route operations" (follows ECJ decision in Cimber Air).

In summary there are two principal outstanding problems with HMRC's position:

insistence on exclusive "use" by the airline as an airline;

view that ZR depends on identity of the recipient of the supply (with only limited "look

through").

July 2013

Qualifying Aircraft 5

The "use" question

No exclusive use implied Brutus v Cozens [1973] AC 854

Volker Oil [1991] STC 640 and Emelka (Cases C-181/04 to c-183/04) – supports HMRC

by analogy with qualifying ship test

contrast Navicon SA (Case C-97/06) – "partial charter" (provision of space on a ship)

exempt

Re A Oy (Case C-33/11) – AG Opinion in favour of qualifying status where partial use for

third party charter

The "direction of supply question"

the EU and UK legislation only requires the aircraft to be qualifying for the supply to

benefit from ZR – Société International de Télécommunications Aéronautiques –v- CCE

[2004] STC 950 – what matters is "the nature of the service rather than its recipient".

July 2013

Qualifying Aircraft 6

Re A Oy:

Company A was owned by an individual, X

A imported two aircraft from France and

leased them to Company B

B charged A for passenger flights for X

A re-charged X for the same flights

AG view:

B was an airline

A was entitled to exemption, even though

B was the airline

Exemption applied, even though ultimate

owner was recipient of the supply

July 2013

X

A

B

C

Import

Lease

100

25

78

Qualifying Aircraft 7 – Case Study

Alternative Structures

Owner leases to Lessorco (IoM)

Lessorco leases to AOC holder ("Op")

AOC holder provides passenger charter

to Owner and to Third Parties

Effect

AOC Holder has formal lease of aircraft

AOC Holder is always acting as an

"airline"

Important that charters to Owner and

Third Parties represent "Carriage by air of

passengers or cargo"

July 2013

Lessorco

Owner

Op

Third

Parties

Charter Lease

Lease

Qualifying Aircraft 8 - Conclusions

How bad for operators and owners is HMRC's interpretation?

Suppliers of parts and maintenance will look for customers to certify that the aircraft is

qualifying – HMRC challenges will take time to work through as control visits tend to occur

every three or four years.

If the aircraft is not "qualifying" then:

services of operator potentially split – "multiple supply" not "composite supply";

fuel for flight whose eventual destination is outside the UK – ZR under s. 30(6)(b) VATA;

supply of pilots and crew – ZR as "handling services" under Item 6 Group 5 Sch 8 VATA

HMRC potential challenges to structures in use!?

THANK YOU!

July 2013