With the likelihood of the UK's transitional arrangement with the EU not being extended beyond 31 December 2020 or any other deal being agreed between now and then, it is necessary, as a matter of urgency, to consider how a 'no deal' exit will affect individuals and their assets. In this article we look at how taxes on moving yachts and private aircraft between different jurisdictions may arise from January 2021.
Since the UK has been a part of the EU for nearly half a century, it has often been possible to ignore many of the potential tax implications of sailing one's own yacht from the UK to the Mediterranean or flying one's own plane from London to Paris, Copenhagen or Dublin and back again. This is because such trips would not have involved any import or export of the yacht or aircraft in EU tax terms. Similarly, a private trip from London to Zurich, New York or Cairo in one's own private means of transport would typically be untaxed. Although the return journey would involve a formal import of the yacht or aircraft in question, returned goods relief would usually be available on the return to London meaning that a person is not taxed on reimported goods into the EU, provided the conditions for that relief are met.
Now all this could be about to change. One of the delayed effects of Brexit, once the transitional period ends in December 2020, is that travel between the UK and France or the UK and Spain (and so on) will involve the crossing of an external EU frontier. The UK will become a customs zone in its own right. Therefore, a yacht sailing from Southampton to Cherbourg and back will be formally exported from the UK's isolated customs zone, then formally imported into the EU's separate customs zone and later formally re-imported back into the UK's own customs zone.
The UK will operate its own border policies and apply its own import taxes on the movement of goods into the UK Customs Zone. This means that any import tax reliefs that are either unnecessary at present (in intra-EU scenarios) or that currently seem familiar (because they are based upon well-established EU legal principles) might need to be considered afresh. Further, some of the relevant reliefs that are often relied on at present may not exist in the future, as the scope of the rules that will be in play, at least from a UK perspective, is not entirely clear at this time. In practice, a combination of time pressures and political or economic constraints is likely to mean that in the short term the UK adopts an import tax system that closely resembles that of the EU. However, the formal position remains unclear even though the implementation of the new system is now only a matter of weeks away.
Indeed, some examples of potential issues that do not appear to have been clearly addressed as yet are set out below.
- If an aircraft flies from the UK to the USA in November 2020 and returns in March 2021, is it eligible for the traditional form of returned goods relief or could it be said that the aircraft is not strictly "returning" because when re-entering UK airspace it is entering a customs zone that did not exist when it previously departed?
- If an aircraft flies from the UK to France in December 2020 and returns in February 2021, is it eligible for returned goods relief because it is not strictly being re-imported if the original outbound movement did not amount to an export (given that the UK was still notionally part of the Single Market when the aircraft flew from the UK to France)?
- If a yacht was originally imported into Portugal from the Caribbean and VAT was paid on that import process in September 2019 but the yacht then sails to the UK in April 2021, will it be recognised as having a "VAT paid" status in the UK by virtue of the fact that a payment of import taxes on the yacht in any EU country at the date when the yacht was in fact imported would have enabled that yacht to enter the UK on a tax-free basis as at the date that it first entered Portugal?
Some of these issues can perhaps be sidestepped by ensuring that a yacht or aircraft is located either inside or outside UK territory as at 11pm on 31 December 2020. However, if there is any realistic prospect of a particular asset needing to be in various locations in the near future it is clearly not satisfactory to rely upon a tax planning strategy that involves a mere absence of movement from place to place.
The UK tax authorities recently made a somewhat mysterious pronouncement (the legal nature and status of which currently remain unclear), which seems to suggest that a fairly stringent position will be adopted as regards the need to ensure that assets currently held outside the UK on a temporary basis are returned to the UK within strict time limits if an import charge being incurred on their return is to be avoided. This is even where import taxes might already have been incurred on the occasion of some earlier entry into the UK. This could result in a yacht that has been outside of the UK for more than the three years as at 11pm on 31 December 2020 not being able to benefit from the returned goods relief as and when it returns to the UK. This pronouncement seems to have been aimed solely at the yachting sector and even in that context it is not clear exactly what it was supposed to mean. Whatever the original intent the statement was rapidly modified, with an informal statement from HMRC that a further 12 month extension would be offered. Quite how this is to be applied in practice is not entirely clear and there are two possible interpretations. On the one hand, it may mean that the period for returned goods relief is temporarily extended to four years, which is unhelpful with regard to yachts that have been outside the UK for more than four years and as a consequence will be looking at a UK VAT charge when the yacht is brought back into UK waters. Alternatively, it could be interpreted as meaning there will be a 12 month period in which any yacht can be brought back into the UK without incurring a UK VAT charge.
All of this is clearly unsatisfactory and it appears to be necessary for individuals owning a yacht or private aircraft to give very careful consideration to the possible tax implications of any proposed cross-border movements of assets either to or from the UK, and where best to locate those assets at New Year's Eve. This is not only to take into account the UK VAT position and risk of a further charge when those assets are ultimately brought back into the UK from 1 January 2021. Clearly all decisions as to where to try to locate any asset will also potentially be hampered by limitations on travel being imposed by Covid-19. Mistakes or omissions in relation to the handling of tax issues of this kind could potentially be catastrophic in some situations, not only in financial terms but also because the tax authorities have very broad confiscatory powers in relation to breaches of any tax laws relating to import and export matters. To put the matter bluntly, a person who fails to take appropriate steps to consider whether or not he has a tax liability in relation to an import or export of his own private assets could potentially be treated in essentially the same way as a smuggler; he might not only be required to pay a large unexpected tax bill but possibly also have his assets confiscated. This will often fall to the discretion of the tax authorities who may sometimes act rather capriciously in this respect. Rights of appeal to the courts in relation to such issues are also somewhat limited when compared to the rights of appeal available in relation to matters such as income tax or capital gains tax disputes. Therefore tread, or at least sail or fly, carefully.