The first test to apply is whether the ship or aircraft in question is a qualifying craft within the meaning of the VAT Act 1994, Schedule 8, Group 8- see VTRANS110100.
Qualifying craft with crew
The supply in the UK of a qualifying ship or aircraft with a crew under a written charter is normally zero rated under Group 8, items 1 and 2 and Note A1.
This test is subject to the proviso of legal note (1)
…except where the services supplied under such a charter consist wholly of any one or more of the following:
- passenger transport;
- entertainment; or
being services wholly performed in the United Kingdom.
These exclusions were introduced by the VAT (Transport) Order 1990, SI 1990/752 primarily to prevent domestic cruises comprising elements of passenger transport, accommodation, entertainment etc being wholly zero rated by effectively restricting relief to the domestic passenger transport element under Group 8, items 4(a)-(d). This has been largely superseded by the Tribunal’s decision in P&O, where it was found that holiday cruises were a single supply of passenger transport (see VTRANS021360).
A UK shipowner allows a charterer the use of a qualifying ship to carry cargo from Hull to Southampton. The charter is under a written charter party contract, therefore the supply is zero-rated under Group 8, item 1. The charterer then contracts to use a part of the ship to carry cargo for his own customer from London to Southampton. The supply by the charterer to his customer is not under a written charter party contract, so it is not a supply of a ship under charter, but a supply of freight transport. Its place of supply and liability must be considered under the rules applicable to freight transport.
Qualifying craft without crew
The supply of a qualifying ship or aircraft without crew, whether under a written charter or not, is zero rated by virtue of Group 8, note 2, as the letting on hire of the ship or aircraft.
Yachts and other non-qualifying craft
The following will normally apply to yachts and is written with that view; but it can apply to other ships and aircraft and freight transportation.
Where a supply of a yacht with crew under a written charter is excluded from zero rating by Group 8 note 1, it may qualify for zero rating as passenger transport under Group 8 items 4(a)- (d), subject to the normal conditions and exclusions (see VTRANS020000 and VTRANS030000). Where the service is not one of passenger transport, liability is determined according to the nature of the service supplied.
- Yachts are frequently let out under formal written charters, either by owners to operating companies (without crew), or by owners or operating companies to holidaymakers, but their VAT position is crucially different from that of ships which are qualifying for the purposes of Group 8, item 1. We do not consider yachts to be qualifying ships for the purposes of Group 8 in any circumstances, since they are designed for recreation and pleasure, and therefore excluded from the definition of qualifying ships by Group 8, Note (A1). Neither formal written charters for yachts with crew, informal charters without a written agreement, or hire of a yacht without crew can therefore qualify for zero-rating under item 1.
However, where a yacht is chartered with crew for the transport of passengers (for instance, a supply on charter by a yacht owner or operator to a holiday maker for a holiday cruise), we accept that the supply amounts to a supply of passenger transport services. This means that the supply of a yacht under charter in these circumstances falls under the place of supply and liability rules for passenger transport services, and can qualify for relief. Options applicable to yachts are therefore as follows.
|### Crew||### Further conditions||### Liability|
|Yacht supplied with crew, for the transport of passengers, whether on formal charter contract or not.|
|Yacht is designed or adapted to carry ten or more passengers, including crew.||Zero-rated under Group 8, item 4(a).|
|Transporting passengers from a place within to a place outside the UK or vice-versa.||Zero-rated under Group 8, item 4(d), irrespective of the carrying capacity of the yacht.|
|Yacht supplied without crew.||Standard-rated.|
Though problems concerning the chartering of non-qualifying ships or aircraft other than yachts are less common, the same principles will apply if such cases arise. Their supply on charter will not be zero-rated under Group 8, item 1 or 2, and the place of supply and liability will depend on the nature of the services supplied.
The hire of a non-qualifying ship with crew to perform a towage service may be zero-rated as a ship’s handling service under Group 8 item 6(b), subject to the normal conditions: see VTRANS140000.