EU takes ac­tion against Isle of Man over ‘il­le­gal’ pri­vate jet tax loop­hole

The Guardian - - NATIONAL - Juli­ette Gar­side

The Eu­ro­pean com­mis­sion has launched in­fringe­ment pro­ceed­ings against the Isle of Man and Italy over what it calls il­le­gal tax breaks to some of the world’s wealth­i­est peo­ple over pur­chases of pri­vate jets and yachts.

The Guardian and the BBC re­vealed last Novem­ber how the Isle of Man, a crown de­pen­dency that is an­swer­able to the British gov­ern­ment, had al­lowed bil­lion­aires and multi­na­tional com­pa­nies to avoid £790m of VAT on more than 200 air­craft im­ported into Eu­rope since 2011.

The avoid­ance came to light thanks to the Par­adise Pa­pers, a leak of data from the off­shore law firm Ap­pleby, ob­tained by the Ger­man news­pa­per Süd­deutsche Zeitung and shared by the Wash­ing­ton-based In­ter­na­tional Con­sor­tium of In­ves­tiga­tive Jour­nal­ists with me­dia around the world.

The For­mula One star Lewis Hamil­ton was among those who avoided tax un­der schemes the com­mis­sion has now deemed con­trary to EU tax law. Hamil­ton, who paid no VAT when im­port­ing his £16.5m Bom­bardier jet, said at the time that he had in­structed a se­nior lawyer to check his ar­range­ments and was told they were law­ful.

A num­ber of Rus­sian oli­garchs sub­se­quently black­listed un­der US or Eu­ro­pean sanc­tions regimes also avoided tax us­ing the schemes. They in­clude Vladimir Putin’s fam­ily friends Arkady and Boris Roten­berg, and the alu­minium mag­nate Oleg Deri­paska.

The move is a blow for the ac­coun­tancy firm Ernst & Young, whose of­fice in Dou­glas ad­vised on many pri­vate jet re­funds ap­proved by Isle of Man cus­toms. EY de­clined to com­ment.

The com­mis­sion has writ­ten to the UK gov­ern­ment high­light­ing what it called “abu­sive VAT prac­tices”. The de­ci­sion to close the loop­hole was an­nounced in a press re­lease on Thurs­day, cit­ing the Guardian’s re­port­ing.

“The Par­adise Pa­pers re­vealed wide­spread VAT eva­sion in the yacht and avi­a­tion sec­tors, fa­cil­i­tated by na­tional rules which do not com­ply with EU law,” the com­mis­sion stated.

Pierre Moscovici, com­mis­sioner for eco­nomic and fi­nan­cial af­fairs, said: “It’s sim­ply not fair that some in­di­vid­u­als and com­pa­nies can get away with not pay­ing the cor­rect amount of VAT on prod­ucts like yachts and air­craft.”

The Isle of Man is in a cus­toms union with the UK, which means air­craft and boats im­ported to the is­land can travel freely through­out the Eu­ro­pean Eco­nomic Area with­out cus­toms checks.

The Ap­pleby files re­vealed how EY clients ben­e­fited from com­pli­cated ar­range­ments for their jets that made it ap­pear the air­craft were used as part of a leas­ing busi­ness. In fact, they were only ever used by their own­ers.

The Isle of Man al­lowed tax to be avoided by agree­ing the jets were part of a leas­ing busi­ness. VAT is only levied on air­craft des­tined for pri­vate use. It can be re­claimed if the air­craft are used for busi­ness.

In the UK and the Isle of Man, VAT is 20% of the pur­chase price. With some jets cost­ing $60m (£46m), the tax bills can run into sev­eral mil­lions. Thanks to the leas­ing schemes, own­ers paid zero VAT, mean­ing a po­ten­tial loss to the pub­lic purse run­ning into hun­dreds of mil­lions of pounds.

In its press re­lease, the com­mis­sion said: “VAT is only de­ductible for busi­ness use. Sup­plies of air­craft, in­clud­ing leas­ing ser­vices, meant ex­pressly for pri­vate use should not be VAT-ex­empt. The com­mis­sion be­lieves that the UK has not taken suf­fi­cient ac­tion against abu­sive VAT prac­tices in the Isle of Man with re­gard to the sup­plies and leas­ing of air­craft.”

Bri­tain has two months to re­spond to the ar­gu­ments put for­ward by the com­mis­sion. Brexit means Bri­tain will not face court ac­tion, and can there­fore de­cide whether it wishes to fol­low Eu­rope’s lead or re­tain the loop­hole.

A Trea­sury spokesper­son con­firmed re­ceipt of a let­ter of for­mal no­tice from the com­mis­sion and promised a re­sponse in due course.

The Isle of Man is self-gov­ern­ing and makes its own de­ci­sions about how to fol­low VAT rules, but the Trea­sury has been in­vited to re­view its pro­ce­dures. “This is a com­plex area of VAT law and it is im­por­tant that we take our time to get this right,” the spokesper­son said.

In a state­ment, the Isle of Man said it ap­plied the same poli­cies and pro­ce­dures as the UK on the im­por­ta­tion and leas­ing of air­craft. “We un­der­stand that this [Trea­sury] re­view is now near­ing com­ple­tion and will en­able HM Trea­sury to fully re­spond to the EU com­mis­sion’s re­quest.”

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