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HMRC internal manual

VAT Transport

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HM Revenue & Customs
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The supply of ships and aircraft: law

The law relating to the zero-rating for the supply of ships and aircraft is in the VAT Act 1994, Schedule 8, Group 8, items 1 and 2. Items 2A and 2B dealing with the supplies of parts are covered in VTRANS130000.

  1. The supply, repair or maintenance of a qualifying ship or the modification or conversion of any such ship provided that when so modified or converted it will remain a qualifying ship.
  2. The supply, repair or maintenance of a qualifying aircraft or the modification or conversion of any such aircraft provided that when so modified or converted it will remain a qualifying aircraft.

Notes:

(A1) In this Group -

  1. a “qualifying ship” is any ship of a gross tonnage of not less than 15 tons which is neither designed nor adapted for use for recreation or pleasure; and
  2. a “qualifying aircraft” is any aircraft which

(i) is used by an airline operating for reward chiefly on international routes, or

(ii) is used by a State institution and meets the condition in Note (B1).

(B1) The condition is that the aircraft.

(a) is of a weight of not less than 8,000 kilograms, and

(b) is neither designed nor adapted for use for recreation or pleasure.

(B2) In Note (A1)(b).

“airline”. means an undertaking which provides services for the carriage by air of passengers or cargo;

“State institution”. has the same meaning as in Part B of Annex X to the Council Directive of 28 November 2006 on the common system of value added tax (2006/112/EC) (transactions which member States may continue to exempt).

(1) In items 1 and 2 the supply of a qualifying ship or, as the case may be, aircraft includes the supply of services under a charter of that ship or aircraft except where the services supplied under such a charter consist wholly of any one or more of the following:

  1. transport of passengers;
  2. accommodation;
  3. entertainment;
  4. education;

being services wholly performed in the United Kingdom.

(2) Items 1, 2, 2A, 2B and 3 include the letting on hire of the goods specified in the items.

Comments

1 January 2011

The wording of legal note (A1) (b), defining an qualifying aircraft was amended with effect from 1 January 2011. The previous wording was:

a “qualifying aircraft” is any aircraft of a weight of not less than 8,000 kilogrammes which is neither designed nor adapted for use for recreation or pleasure. 

Guidance on the policy following the change is in VTRANS110600 

1 January 1996

The wording of items 1 and 2 were varied to their current form, and Note A1 was introduced, by the Value Added Tax (Ships and Aircraft) Order 1995, SI 1995/3039, with effect from 1 January 1996, following the implementation of the Second Simplification Directive (EC 95/7). The Directive introduced new rules on work on goods which meant that all such supplies became supplies of services, where some work on goods had previously been deemed to be supplies of goods. The order had the effect of extending the wording of UK law to include modification and conversion of qualifying ships in the relief. This did not represent a change of liability, since we had previously seen such supplies as the zero-rated supply of a ship.

However, it was found by the High Court in HMRC -v- Lt Cmdr Colin Stone “The Kei” [2008] EWHC 1249 (Ch) that where the VAT Act wording in this area predated the EC 6th Directive 77/388 Article 15 (now Directive 2006/112, Article 148) it cannot be read as implementing the Directive’s provisions and is infact to be read as UK legislation permitted under the Directive’s ‘stand-still‘ provisions, Directive 2006/112, Article 110.

VAT directive

Group 8, Items 1 and 2 are based on Principal VAT Directive (Directive 2006/112) Article 148:

148 Member States shall exempt the following transactions:

  1. the supply of goods for the fuelling and provisioning of vessels used for navigation on the high seas and carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities, or for rescue or assistance at sea, or for inshore fishing, with the exception, in the case of vessels used for inshore fishing, of ships’ provisions;
  2. the supply of goods for the fuelling and provisioning of fighting ships, falling within the combined nomenclature (CN) code 8906 10 00, leaving their territory and bound for ports or anchorages outside the Member State concerned;
  3. the supply, modification, repair, maintenance, chartering and hiring of the vessels referred to in point (a), and the supply, hiring, repair and maintenance of equipment, including fishing equipment, incorporated or used therein;
  4. the supply of services other than those referred to in point (c), to meet the direct needs of the vessels referred to in point (a) or of their cargoes;
  5. the supply of goods for the fuelling and provisioning of aircraft used by airlines operating for reward chiefly on international routes;
  6. the supply, modification, repair, maintenance, chartering and hiring of the aircraft referred to in point (e), and the supply, hiring, repair and maintenance of equipment incorporated or used therein;
  7. the supply of services, other that those referred to in point (f), to meet the direct needs of the aircraft referred to in point (e) or their cargoes.