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