Chartering: Meaning of “charter”
The correct VAT treatment of supplies of ships and aircraft under charter can cause difficulties for several reasons. Firstly, the term “charter” is used loosely to describe several different types of supply including freight or passenger transport, and is also used in slightly different ways in respect of ships and aircraft. Secondly, there is a complex interaction between the rules on both place of supply and liability, of charter, hire, passenger transport and freight transport services. In determining the place of supply and liability of a “charter” of a ship or aircraft it is therefore particularly important to look behind this term to what is actually being supplied, and to analyse the problem so that place of supply is determined first, and liability is then considered for supplies which take place within the UK.
Because of the interaction between the various principles involved, VTRANS110310 deals with both place of supply and liability.
Charter or transportation?:- rule of thumb
The following is intended as a guide to illustrate the distinctions between chartering and transportation.
A bus trip is transportation where you have no control over where it goes and when.
A taxi is a charter party or wet charter where you instruct a driver what to do but he is in control.
Self-drive hire is a bareboat or dry charter where you are fully in control.
Charter of part of a ship or aircraft
ECJ case of Navicon C-97/06 held that
Art 15(5) [of VAT 6th Directive] should be interpreted as covering both full chartering and partial chartering of vessels used for navigation on the high seas.
In other words it is possible to charter part of a ship (or aircraft), quite how that would work in practice is unclear and any examples should be forwarded to Supply Policy Team.
Meaning of “Charter” - Ships
- The supply of a ship with crew under a written charter (normally referred to in the trade as a “charter party” contract) is treated as a charter for place of supply and liability purposes.
- The supply of a ship without crew under a written charter - often referred to as a “bareboat” charter - is treated as a hire of that ship for place of supply and liability purposes.
The nature and conditions set by charter party contracts can vary significantly but the essence of them is that rights and responsibilities over the operation of the ship are passed by the owner to the charterer. These exceed mere booking conditions or conditions of carriage (confirmation of journey, loss or injury, deposits, cancellation etc).
The ECJ case of Navicon C-97/06 held that
A chartering contract within the meaning of Article 15(5) of the Sixth Directive 77/388 on the harmonisation of the laws of the Member States relating to turnover taxes, as amended by Directive 92/111, differs from a contract for the carriage of goods in that it requires one party, the ship-owner, to make available to the other party, the charterer, all or part of the vessel, whereas, in the case of a contract for the carriage of goods, within the meaning of Article 15(13) of the Sixth Directive, the undertaking which the carrier assumes towards the customer relates only to the transport of those goods.
Further details of the charter party contracts most commonly used in the shipping industry can be found in VTRANS110320. In practice, a written charter party contract may not have been signed and exchanged due to factors such as distance and timing. However, the existence of such contracts is identified by reference to a Baltic & International Maritime Conference (BIMCO) code in commercial documentation, such as a telex charter fixture (known as “recaptelex”). A list of these codes can be found at VTRANS110350 and a specimen telex charter fixture at VTRANS110360.
It is important to distinguish between the supply made by the owner or operator and any subsequent supply by the charterer. A charterer can be entitled to sub-charter, and can supply a ship with or without crew under a written charter party contract in his own right.
Meaning of “Charter” - Aircraft
- The same VAT legal principles apply to charters of aircraft as to ships, but because the trade is of more recent origin, and is extremely fast-moving, it operates somewhat differently. It does not, for instance, use the specific types of contract used in the shipping world and described in VTRANS110350. Types of aircraft charter are as follows (the “charterer” is the person to whom the aircraft is chartered)
- “Dry” charters, also known as dry lease, or bare hull lease
This is analogous to “bareboat” charters for ships, effectively hire of aircraft without crew, by the owner to the charterer, with the crew provided by the charterer.
- “Wet” charters, also known as wet leases
With this type of charter, the charterer obtains the use of the aircraft, but the crew, and sometimes other operating requirements such as fuel, are provided by the owner. They can be either “flight” charters for specifically identified flights, or “time” charters, for specified periods of time. They are often supplied under terms known as “ACMI”, where the owner provides an “aircraft, crew, maintenance and insurance” and the charterer pays other costs.
The following factors are indicative of a true charter
- The transaction is usually covered by a written agreement headed Air (or Aircraft) Charter Agreement, which is supported by a separate document setting out conditions of carriage.
- The transaction will consist of a non-timetabled, non-scheduled, tailor-made supply to fit the requirements of a particular customer.
- The charter agreement will contain a schedule specifying date, time and airport of arrival and departure, even if only for one flight.
- The various elements of the agreement are open to negotiation between supplier and customer.
- The contract will provide for cancellation charges to be paid by the charterer, generally on a rising scale the closer cancellation is to proposed time of take off.
However, other examples we accept can amount to chartering are contracts making an aircraft available on stand-by where there may never actually be a flight in the end.
When not a charter
The supply of a ship or aircraft with crew but not under a written charter is usually treated under the normal rules and exclusions for passenger or freight transport.
The main area of difficulty is the borderline between the supply of a ship or aircraft under a “wet” (with crew) charter and the supply of transport services. HMRC will also accept that supplies that are technically charters of ships and aircraft with a crew may, at the option of the contracting parties, be treated as supplies of transportation as long as transportation takes place (see VTRANS110340).
Transactions which do not show the characteristics of Charter are likely to be transport services. In particular, freight transport is generally carried out under non-negotiable terms derived from the Warsaw Convention, is not subject to cancellation charges, and is generally carried out on terms which undertake delivery within a “reasonable time” rather than the specified times and dates seen in charters.