The supply of ships and aircraft: Supply of parts and equipment
Supply of parts and equipment in the course of construction of a qualifying ship or aircraft.
The supply of certain parts and equipment to be installed or incorporated in qualifying ships and aircraft is zero-rated.
In 2005, in the case of QED Marine, LON/01/05, VTD 17336, the VAT & Duties Tribunal decided that a ship did not become a qualifying one until it became seaworthy and that the supply of parts up to that time were therefore standard-rated. This decision was reflected in paragraph 4.5 of the September 2005 edition of Notice 744C.
In the light of this decision, HMRC considered withdrawing the zero-rating of supplies of parts to ships and aircraft under construction, although they would be qualifying ships and aircraft at a later date. However, it has become clear that this would lead to confusion and administrative difficulties for both businesses and HMRC. It would also lead to the standard rate being applied in all cases where the supplier was uncertain about the status of the ship or aircraft. And, any change would be unlikely to affect the revenue collected overall.
HMRC therefore consider that zero-rating for the supply of parts and equipment falling under Item 2A of Group 8 to Schedule 8 VAT Act 1994 should apply to both existing qualifying ships and aircraft and those under construction that will qualify when they become seaworthy or airworthy. HMRC expect businesses to have contractual or other evidence that the completed ship or aircraft will be qualifying, otherwise all supplies of parts and equipment must be standard-rated.
HMRC consider that a qualifying ship or aircraft that loses its seaworthy or airworthy status temporarily can continue to be classed as a qualifying ship or aircraft, provided there is clear and evidenced intention to return the ship or aircraft to a seaworthy or airworthy condition. A qualifying ship or aircraft that loses its seaworthy or airworthy status permanently cannot be classed as a qualifying ship or aircraft. Suppliers who have any doubt about whether a qualifying ship or aircraft has lost its qualifying status should contact the VAT: general enquiries or their Client Relationship Manager.
Supplies in the course of repair, maintenance, modification or conversion of a qualifying ship or aircraft and supplies of parts and equipment.
HMRC has become aware that the law relating to supplies in the course of modification and conversion of ships and aircraft has been widely misinterpreted where such supplies have been made to Government departments, including those of overseas Governments or States.
Items 1 and 2 of Group 8 to Schedule 8 VAT Act 1994 provide zero-rating for the repair, maintenance, modification or conversion of a qualifying ship or aircraft. Item 2A allows zero-rating of supplies of certain parts and equipment, but Note 2A excludes from zero-rating supplies of such parts and equipment to Government departments, except in certain limited circumstances set out in that Note. Although the misinterpretation has occurred in relation to modifications, the law applies equally to repairs and maintenance provided to a Government department.
This means that for such supplies made to persons other than Government departments the VAT treatment of the supply of goods and the supply of services is the same, ie zero-rated. However, for supplies made to a Government department the VAT treatment of the supply of goods and the supply of services is different and, therefore, it is necessary to distinguish between them. Nothing in this guidance affects tax reliefs for overseas Governments or States which are provided for elsewhere in VAT law or other legal provisions.
The VAT treatment of such supplies to Government departments will depend on the precise details of the supply. Detailed guidance on this is in Section 16 of VAT Supply and consideration.
If the contract is for a single supply, suppliers should determine whether it is a supply of goods (standard-rated) or services (zero-rated). If the contract is for multiple supplies, suppliers need to determine the VAT treatment for each of those separate supplies.
- if a part or piece of equipment is to be removed and disposed of and replaced by a new part, although there may be an associated amount of service, that is a supply of goods and it is standard-rated
- if an unserviceable part or piece of equipment is replaced by a reconditioned part or piece of equipment, this is a service and it is zero-rated
- if there is extensive and wide-ranging work to the whole ship or aircraft and, although there may be an associated supply of goods, the overall supply is likely to be of services and is zero-rate
There will be more complex contracts where it will be more difficult to determine the VAT liability of the supplies. Where in doubt suppliers should contact the VAT: general enquiries or their Client Relationship Manager with the full details of the supplies involved, together with the contractual detail. HMRC are also happy to provide VAT advice to the Ministry of Defence and suppliers at the pre-contract stage.
Because of the particular and exceptional circumstances around this issue, HMRC have decided that no action will be taken to assess any tax that may have been due on past supplies made under such contracts, except in cases where we have already given clear rulings, guidance or instructions that the supplies in question should be standard-rated.
Suppliers must examine existing contracts in order to determine the correct VAT liability and account for VAT on any supplies made on or after 1 January 2008 which should be standard-rated.
HMRC are still considering with industry representatives practical ways of dealing with long term contracts that can change or be amended over time and ‘Power by the Hour‘ contracts. Further guidance on this will be issued in due course.
4. Who can I contact for further information?
If you have a query for which you have been unable to find the answer within this guidance please contact VAT: general enquires or your Client Relationship manager