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HMRC internal manual

VAT Transport

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Repair, maintenance, modification and conversion of ships and aircraft and their parts: Litigation

In Cholerton Ltd (VTD 13387), the Tribunal considered whether design work for the modification of a qualifying ship was zero rated under Group 8 item 1 as integral to the supply of the modification of a qualifying ship. The modification services were carried out by a supplier other than the supplier of the design services. The design services included an on board inspection of the ship. Among other reasons, this was essential to:

  • check the original builder’s work faithfully reflected the designer’s drawings;
  • ensure no unauthorised or unrecorded works of repair etc had been carried out which might affect the ship’s stability or seaworthiness;
  • confirm that the structure of the ship met statutory requirements; and to
  • ascertain whether any faults or design flaws had emerged.

The Tribunal held that such services were integral to the modification of a ship because of the on-going nature of the survey work, the fact that areas not subject to modification were surveyed, that the results of the survey were kept on board as part of the ship’s papers following completion of the modification, and that they were essential for the safety of the ship, its passengers and cargo and continued seaworthiness.

We originally accepted this decision on its facts. However, we now consider that the Tribunal failed to take into account that Cholerton was contracted to supply only design services and therefore made no supply of modification services to which the design services could be integral. With effect from 1 July 1999, design services supplied in the UK are integral to the supply, modification or conversion of a qualifying ship, and therefore zero-rated, only where a supplier specifically contracts with a customer to design and supply, modify or convert a qualifying ship. In other circumstances, design services are standard rated. Business Brief 5/99 refers - see VTRANS120600. Services of designing non-qualifying ships have always been standard rated.