The supply of ships and aircraft: aircraft: airline operating for reward chiefly on international routes
The terms and meaning of VAT Directive 2006/112 on which the UK legislation is based are quite vague and where an officer considers an airline is wrongly treated as fulfilling the conditions they must first contact VAT Advisory team with the full facts of their concern included an assessment of the overall loss of VAT (sticking tax) and of any material mischief that has occurred, if any, as a result.
The terms of the post 1 January 2011 legislation mean that aircraft can no longer be regarded as having qualifying aircraft status for life as might previously been the case (by default of the design) and the status of any aircraft before 1 January 2011 does not automatically carry forward. Instead each supply has the potential to have a different liability to the previous as it now depends on the status of the customer to that supply at the time of supply.
Direction of supply
The Advocate General in the Danish ECJ case Cimber Air C-382/2 made it clear that the zero-rating was premised on the supply being made to and consumed by the airline.
The connecting factor for deciding whether the tax exemption should be applied in respect of [aircraft] is the company providing the transport, so that, if it operates for reward ‘chiefly‘ on international routes, the tax advantage takes effect, whether the aircraft are used for domestic flights or for flights outside the country. There is no disagreement on this point in these proceedings.
So the first principle of the zero-rating is that the supply is to be consumed by an airline (or a State institution).
For practical purposes HMRC intend to permit, in very narrow circumstances, suppliers to ‘look through‘ the supply to an immediate customer that is not an airline and on to the ultimate consumer of the supply. The critical point being that the ultimate consumer of the supply of either goods or services must be an airline (or a State institution) operating qualifying aircraft and that the entities in the supply chain are fully taxable for the purposes of the transaction so that no input tax restriction would occur anywhere in the chain were the zero-rating not to be permitted. Details of the specific arrangements can be found in VTRANS110700 for subcontractors’ services, VTRANS110800 for supply chains of parts and of aircraft themselves and VTRANS120200 dealing with repairs to aircraft owned by leasing companies.
An airline is defined as an undertaking which provides services for the carriage by air of passengers or cargo. The undertaking can be a single legal entity or several such entities operating together where there is a degree of mutual control, for example VAT and Corporate groups. In most cases VAT groups and companies within a Corporate group will be easy to define but other, looser, relationships may be considered by HMRC as a single airline on a case by case basis.
Aircraft operators for insurance and limited liability purposes as well as operational purposes will often limit the number of aircraft any single legal entity owns. HMRC will normally accept these arrangements as creating a single airline for the purposes of this legislation.
It is important that in considering the creation of a multi-entity airline that all the entities that wish to be brought under that single airline umbrella are ‘airlines‘ (as defined) in their own right. The purpose is simply to determine whether any particular aircraft is qualifying or not and does not affect the normal inter-entity supply and liability provisions; nor does it affect the normal operation of VAT Grouping and the application of the ‘special status‘ provisions of VATA 94, Section 43(1AA) - see VGROUPS - VAT:Groups.
Claims that two or more separate legal entities (outside of a VAT or Corporate Group) should be considered a single airline for the ‘operating‘ test should be referred to VAT Advisory Team.
Businesses owning aircraft used for the transport of its staff will not normally be considered airlines. However if that aircraft is operated by an associated company, separate from the main business and otherwise fulfils the conditions set out in the rest of this guidance HMRC will normally accept that associate is an airline.
Air Operator Certificate (AOC)
The Civil Aviation Authority’s (CAA) web site makes the following commentary.
In order to carry passengers, cargo or mail for payment, air operators based in the European Economic Area (EEA) must hold an Operating Licence granted by the Member State in which they have their principal place of business. For UK airlines, licensing is undertaken by the CAA.
If the airline in question does not have an AOC, then further enquires will need to be made as to how the business expects to fulfil the criteria for VAT purposes.
The CAA have confirmed to HMRC that an AOC is only needed for commercial flying as principle to the supply of transportation. An AOC is not required (though maybe held) for private operations and aircraft management purposes; this is discussed further in VTRANS110650 and aircraft management.
Operating for reward
The airline must be providing passenger or freight transport services to a second party in return for a consideration whether or not the operation is run for profit - see guidance in VATSC30500. As above, an associated company can provide a business with transport services as long as the principle is adhered to.
The ECJ in A-Oy (C-33/11) confirmed that the wording ‘operating for reward on international routes’ within the meaning of Article 148(f) of the EU VAT Directive, must be interpreted as encompassing also international charter flights to meet demand from undertakings and private persons.
As the supply of passenger transport is generally zero-rated, the scope for VAT avoidance and mischief is minimal. Freight transport services, on the other hand, can be taxed at standard rate and careful consideration will need to be made as to the values applied where the recipient is an associate entity and might not be entitled to recover the input tax in full: see guidance in VAT Valuation.
The ECJ in A-Oy (C-33/11) confirmed that the wording ‘international routes’ is not defined and is not supplemented by any further clarification indicating that flights concerned must be ‘regular’ in nature. In those circumstances, such wording may be construed as referring to flights made on an aircraft between two geographical points which make the transport concerned more international in nature than domestic.
For the purposes of this legislation HMRC takes the view that any route that is not a wholly domestic route within the UK is an international route.
A domestic route is one that is between any two places within the UK, Isle of Man or between the UK and the Isle of Man and includes routes with a flight path that may not be wholly within UK airspace.
The UK and Manx airspace is that over England, Scotland, Wales Northern Ireland and Isle of Man and up to 12 nautical miles from the coast.
The Isle of Man is to be included within the UK domestic definition because for VAT purposes the UK and Isle of Man are within the same Fiscal Territory within the meaning of the Principal VAT Directive (Directive 2006/112) Article 7(2). HMRC initially and erroneously advised that routes between the UK and Isle of Man were “international” for this purpose. Where airlines are treating these routes as international HMRC will accept this until 1 August 2011.
Flights which do not physically land at that destination for example helicopters delivering/collecting goods /passengers by means of a hoist or drops by parachute can be considered operating on a route provided that was the aim of the flight plan.
Flights that are diverted from the original flight plan should normally be considered as having flown under the original plan. For example an international flight that develops technical difficulties and has to land within the UK will still be considered as an international flight.
The legislation requires the airline to operate chiefly on international routes. HMRC interpret the word chiefly to mean that the international flight operations exceed the UK domestic flight operations of that airline.
The ECJ case of Cimber Air (C382/02) found that this measure could primarily be determined by the turnover of the respective operations but did not rule out other tests. These can be either applied in conjunction with or separate from the turnover and with each other.
Examples of other tests can include:
- Number of flights
- Number of seats
- Number of passengers
- Volume of freight
including also as a function of the distances travelled.
The important point is that the test and the result is fair and reasonable and are readily verifiable from the records and that it relates to the flying operations.