Specific issues: letting on hire of boats and aircraft
This part of the manual identifies the more common ways in which canal boats, cabin cruisers, yachts, and other vessels are hired out. It discusses whether the activity has sufficient substance to be treated as a business for VAT purposes.
By their nature most small vessels are not only suitable for business use but also for private use. It is also possible for people to buy a boat as an investment.
You may find it helpful to also refer to VIT VAT Input Tax VIT25000. Please note that ships, boats and other vessels and aircraft are covered by the Capital Goods Scheme (CGS). For more on the CGS see PE VAT Partial Exemption Guidance.
Someone carrying out yacht chartering or leasing is entitled to VAT registration (and the related entitlement to deduct input VAT) where the chartering or leasing is carried out in the course of an economic activity. HMRC may ask for evidence to show that an economic activity is being pursued, either before registration is allowed or during subsequent verification.
The case of Enkler (VBNB74600) shows that, where an asset is suitable for both business and for private purposes, the tax authority has to consider all the circumstances in which it is used to determine whether it is actually used in the course of a business.
The actual length of the period for which the vessel is hired, the number of customers and the amount of earnings are factors which, forming part of the circumstances of the case as a whole, may be taken into account, together with others. In addition the actual use should be compared with the circumstances in which the corresponding economic activity is usually carried out.
During any verification of entitlement to VAT registration HMRC will look for evidence that a chartering or leasing activity has sufficient substance and continuity to meet the criteria set in Enkler. We will also consider the evidence in relation to the business test (VBNB22000).
The full circumstances in which the vessel is used will be considered. The registered person (or the applicant) should provide sufficient evidence to show that the vessel is used in an economic activity.
The role of boat hire companies
Boat hire companies hire out their own and other people’s boats to the public. They are normally in business on their own account. There are various types of agreement between boat owners and these companies.
In one type of agreement a boat is leased to the company and taken into its fleet. The company then becomes totally responsible for all aspects of the boat’s management whilst the owner takes no part at all.
In another type of agreement the owner may retain control and management of the boat. They may see the boat hire company as their agent for some customers.
There can also be arrangements that fall between these two examples.
One of the most important factors when deciding if boat owners with no other activities are in business is to determine the extent of their active participation in the hiring out of their vessels.
The individual business tests and considerations explained in this part of the manual apply only where boat owners enter into a formal agreement with a boat hire company under which the hire company has day to day control of the vessel.
In other cases, where boat owners have no such agreement and pursue the activity of letting their boats to the public quite independently, the question of whether or not they are (or will be) in business is to be considered in conjunction with the basic business test (VBNB22000).
Owners hiring to a boat company
Where an owner lets a boat on hire to a boat company, which in turn hires the boat to the public as principal, the long term supply of the boat by the owner is a single supply of the letting on hire of the boat for the period of the agreement.
The isolated supply of the hire of a boat is not normally regarded as a business activity. This follows the decision in Coleman (KG) (VBNB74600).
See also Berwick (M&C) (VBNB74600). This decision applies equally to any person who lets outs two boats on hire. Those who do not satisfy any of the business tests are not considered to be in business for VAT purposes.
An owner can satisfy the business test. This could be because of the scale of the activity. It could also be because in addition to the letting of the boat to a hire company, the owner:
- lets it out directly to the public for part of the year; or
- is actively involved in the business run by the boat hire company.
See Longbow (VBNB74600).
Some agreements not provide for:
- the letting on hire of one or two boats to the boat hire company; and
- direct lettings to be made by the owner to the public, possibly for only part of the year.
The letting on hire of a boat directly to the public is business if it is of an active and continuing nature. So, when you think about the business status of an activity consisting of one or two boats you should consider whether there is any documentary evidence to show that the owner is actively pursuing a business of direct lettings
Evidence might include:
- adoption of a trading name;
- setting up a business-like system of accounts including a proper invoice series;
- opening a business bank account.
As well as letting one or two boats to a boat hire company you should think about the extent to which the owner has made lettings directly to the public. Where there is minimal activity in terms of direct lettings, for example where no more than 3 weeks lettings in a 12 month period have been made, HMRC will normally consider that this activity is not being seriously pursued; and
Where three or more boats are let on hire to a boat hire company the scale of the activity is more likely to be considered sufficient to allow the owner to be regarded as carrying on a business.
It is important, however, that decisions as to whether boat owners are carrying on a business are not based simply on the number of boats involved. Decisions should be based on the extent to which the boats are used to make taxable supplies.
Boats purchased for use by associated businesses
Boats are a popular means of providing business entertainment or corporate hospitality. Where goods are purchased for the purpose of providing business entertainment the input tax is not recoverable (see VIT VAT Input Tax VIT43000).
The supply of goods or services to be used for business entertainment is a business activity that carries the right to deduct input tax. It is therefore possible that associated parties may arrange for one party to:
- buy a boat and recover the associated input tax; and
- hire the boat out to the associated party for their use in business entertainment.
The VAT charged on the hire fee would not be recoverable. This arrangement would make it possible for input tax to be recovered on the purchase and upkeep of a boat which may be used mainly for business entertainment.
In view of the non-recoverable VAT that would be incurred on the hire fees it is important to consider whether the hire fee is realistic in relation to factors such as:
- the value of the boat; and
- the period of hire.
Owners with more than two boats
An activity involving one or two boats which is not of itself business may amount to a business where it forms part of the overall business activities of a sole proprietor, partnership or limited company. When this happens the following points should be taken into account:
- has the boat (which must be let on hire to a boat hire company) been bought by the sole proprietor, or out of the business funds of the same partnership members or the same limited company?
- do the proceeds from the boating activity accrue to the business? and
- are the accounts relating to the boating activity entered into the accounts of the business or, if kept separately, are they aggregated at the end of each tax period for the purposes of furnishing a single VAT return?
This is because the aggregate of one taxable supply of a long term letting on hire and the taxpayer’s other VAT business activities constitutes the activities of a taxable person.
Possible indicators of an abusive practice
The existence of one or more of the following features might indicate an abusive structure (the list is not exhaustive - the indicators are illustrative of the points that HMRC might take into account, together with others):
- 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 (directly or indirectly).
- The person who funded the purchase of a pleasure craft (directly or indirectly) uses the vessel for prolonged periods in the peak chartering season.
- The chartering of a pleasure craft to third parties would not, alone, be of sufficient continuity and substance to comprise an economic activity.
- The chartering or leasing entity shows significant ongoing losses in its financial statements.
- Charter fees or lease instalments due from the main user of a pleasure craft are paper transactions only (for example being offset against loans).
- Charter fees or lease instalments are below open market value.
The terms of a lease differ significantly from normal commercial practice (for example, the duration of the lease is unusually long).
If HMRC concludes that a structure meets the tests for an abusive practice then we will consider appropriate action to restore the situation that would have existed in the absence of the abusive transactions.
This might include issuing assessments to disallow input tax and/or deregistration of the entity concerned. Such assessments might also give rise to interest charges and penalties.
Hiring out light aircraft
For aircraft the same questions in working out whether or not an activity amounts to a business for VAT purposes need to be thought about. The guidance on the hire of boats is also to be used as a basis for decisions involving the hire of light aircraft.
The simple letting on hire of a single light aircraft to an aircraft operator, who in turn hires the aircraft on for private hire to suitable qualified pilots, or uses it in supplying tuition in flying, does not amount to a business activity for VAT purposes. A useful case to refer to is Three H Aircraft Hire (VBNB74600).