PrIVATe jeT oWnERSHIP Do yoU UnDERSTAnD THE TAX CoSTS? kpmg.co.uk 1 PRIVATE jET oWnERSHIP SIT bACK. RELAX. AnD LET US EXPLAIn. The costs of owning a private jet extend beyond capital outlay and maintenance: unexpected tax costs can arise from unsuitable ownership structures. The UK rules on the VAT zero-rating of aircraft changed with effect from 1 january 2011. If you already own an aircraft or are thinking of buying one, have you considered how the current rules affect you? © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. PRIVATE jET oWnERSHIP 2 SOme key queSTIOnS yOu ShOuld be Able TO AnSwer: VAT How do the current rules for aircraft affect me – on purchase, during ownership and on sale? VAT Will HM Revenue & Customs (“HMRC”) register my aircraft structure for VAT or should I consider registering for VAT in the Isle of Man? Ownership structure What are my options? Intentions for use Personal, for my own business, for third party charter? Protection Can I ring-fence my personal wealth from this asset? Funding How should I fund the purchase and running costs? © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. 3 PRIVATE jET oWnERSHIP bEFoRE yoU TAKE FLIGHT, READ THE FoLLoWInG. “KPMG have advised me on my various interests in the aviation sector and helped me to structure them tax efficiently. They are well versed in the relevant tax issues and keep me informed of any tax changes that could impact on my aviation businesses. I appreciate having a single point of contact who co-ordinates the advice and has an awareness of the wider tax and commercial issues.“ David Hood, Multiflight © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. PRIVATE jET oWnERSHIP 4 hOw hAVe The uk ruleS On The VAT zerO-rATIng OF AIrcrAFT chAnged? whAT IS The ImPAcT OF The currenT ruleS? Prior to 1 january 2011, in the UK all supplies of aircraft with a maximum takeoff weight of not less than 8,000kg were subject to VAT at the zero-rate. This meant that most aircraft purchased by high net worth individuals, such as Falcon, Lear jet, Gulfstream, Citation models could be purchased/imported and sold in the UK free of VAT and customs duties. As well as the VAT on the purchase of an aircraft, the changes may also affect the VAT treatment of fuel, maintenance and operating costs from 1 january 2011 (whether the aircraft was purchased before or after that date) and on the future sale of the aircraft. However, following infraction proceedings by the EU Commission, the UK was required to amend its aircraft zero-rating provisions to bring UK VAT law in line with the EU VAT Directive. As a result, from 1 january 2011 aircraft will only qualify for the zero-rating where the aircraft is “used by an airline operating for reward chiefly on international routes.” If your aircraft no longer qualifies for zero-rating, VAT at 20% will be due on the recurring fuel, maintenance and operating costs associated with the aircraft which can be substantial. In addition, any charter fees generated by the aircraft could potentially also be subject to VAT at 20%. HMRC’s view as to what constitutes an “airline” is very restrictive and as a result, the UK has moved from being the most favourable EU country to transact private aircraft into one of the toughest. PURCHASES UP To 31 DECEMbER 2010 PURCHASES FRoM 1 jAnUARy 2011 The standard rate of 20% VAT will apply unless the aircraft is to be used by an airline operating for reward chiefly on international routes. This will also have an impact on any associated recurring costs as mentioned above. © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. SALES FRoM 1 jAnUARy 2011 If you are planning on selling an aircraft which is located in the UK then you will need to establish the future use of the aircraft from the purchaser in order to determine whether the sale is subject to VAT at the zero-rate. other factors, such as whether the sale is made in the course and furtherance of a business, will also have an impact on the VAT liability of the sale, but it is important to remember that it is the responsibility of the vendor to determine the correct VAT liability of his supply. whAT cAn yOu dO? Regardless of the ownership structure of an aircraft, the owner will only be entitled to recover the UK VAT incurred on the purchase and associated maintenance costs if they are registered for VAT in the UK and make taxable supplies of the aircraft. This will in turn have an impact on any future sale of the aircraft. 5 PRIVATE jET oWnERSHIP hOw ShOuld I Own my PrIVATe jeT? hOw cAn I PrOTecT my PerSOnAl weAlTh? hOw cAn I Fund The PurchASe OF my jeT? A common misconception is that owning a private jet via a limited company will always be a suitable structure. Although a company can offer personal liability protection, HMRC will seek to tax the directors /employees on a benefit in kind charge based on the asset being available for their personal use, rather than when they actually use it personally. For example, based on a jet costing £5 million, the annual tax liability could be as much as £500,000 (£5m @ 20% @ 50%). Running costs borne by the company will also increase this benefit in kind charge. The tax charge can be reduced by demonstrating when the jet is not available and by any amounts paid by the directors /employees for their use. However, the remaining annual tax charge can still be significant given the value of private jets. Insurance protection only goes so far therefore you should have an ownership structure that gives you the protection of limited liability – particularly if you charter the jet to third parties. This could be through a limited company, Limited Liability Partnership (“LLP”) or Limited Partnership (“LP”). The answer will depend on whether you use the jet solely for personal use or operate as a charter business. Personal cash, bank borrowing or asset financing can be used. If you are operating a trade by chartering your jet to third parties, it can be possible to obtain income tax relief on interest paid on bank borrowings or asset financing. The intentions for the use of the jet and your objectives, such as protecting your other wealth, should guide any tax advice. The questions that existing and prospective private jet owners should consider include: dO I InTend TO chArTer The jeT? no – Personal ownership rather than through a company is preferable from a tax perspective because of the benefit in kind rules. yes – An LLP or LP are more attractive options if you want the protection of limited liability without benefit in kind charges. why and when an llP or lP? – They are tax transparent and therefore avoid the benefit in kind charge. both an LLP and LP need to carry on a business with a view to a profit. Any trading profit will be taxable and trading losses can be allowable for tax purposes. Consideration also needs to be given to the potential availability of capital allowances and the various administration and filing requirements. © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. If you provide all the funding personally (either out of your own cash or cash that you borrow) your potential liability is the amount you invest but income tax relief may be obtained on interest costs. A company, LLP or LP can borrow as a distinct legal entity in its own right. PRIVATE jET oWnERSHIP 6 WITH US, yoU’RE In SAFE HAnDS. KPMG have a specialist Luxury Asset Group with the direct and indirect tax expertise to advise clients on private jet ownership. This Group also has considerable experience in resolving existing disputes with HMRC. © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. If you would like further information please contact one of our Luxury Asset Group listed below, or your usual KPMG contact: PrIVATe clIenT IndIrecT TAx mike walker – Partner catherine meotti – Director T: +44 (0)207 311 8620 T: +44 (0)207 311 3967 E: [email protected] E: [email protected] david kilshaw – Partner Olivier Sorgniard – Manager T: +44 (0)207 311 2841 T: +44 (0)207 311 3969 E: [email protected] E: [email protected] Pete Saunders – Director T: +44 (0)115 936 3661 E: [email protected] dermot callinan – Partner Paul Stewart – Director T: +44 (0)113 231 3358 T: +44 (0)161 246 4917 E: [email protected] E: [email protected] heather bews – Senior Manager T: +44 (0)161 246 4767 E: [email protected] The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. no one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. www.kpmg.co.uk The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. RR Donnelley I RRD-263946 I February 2012