So you have decided to buy a jet. Maybe because it makes perfect business sense or maybe simply because you can. In either case you should obtain advice at the outset from a specialist solicitor or accountant in order to ensure a tax efficient way of purchasing such an asset.
The starting point
You will probably want to use the jet for both business and personal purposes. In order to offset the costs of acquiring, maintaining and operating an aircraft and to recover VAT on these costs, the aircraft will have to be acquired for business use, i.e. for the purposes of a trade. If you want to offset against UK taxes, then the trading activity will have to be carried on in the UK so as to be liable to UK tax.
Acquiring the aircraft for business use will not prevent you to use the aircraft for private purposes. However, if you wish to make personal use of your aircraft as well it will be difficult to argue that a trade is being carried on unless the aircraft is owned by a company. In most cases, this will be a specially formed corporate vehicle (“SPV”) which will also enable you to ring fence liability. The trade to be undertaken will be an aircraft leasing trade. Alternatively, you could use an already existing general trading company to acquire the aircraft but this is not recommended for reasons of liability. The aircraft leasing trade should be kept separate from any other activities.
As long as the SPV undertakes genuine third party leasing activity, it will normally be able to:-
- claim capital allowances
- recover VAT
- offset expenses against income
- claim losses for group relief if a member of a UK group
Capital allowances
An aircraft leasing company will generally qualify for capital allowances and will be able to claim allowances for the acquisition costs of the aircraft as long as it is the company that owns the aircraft. In most cases this requirement will be met as banks are reluctant to finance lease aircraft.
At the point of writing, the normal rate of writing down allowance is 25% on a reducing balance basis. From April 2008, the rate will be cut to 20% a year. However, if an asset has a useful economic life of more than 25 years, it is a regarded as a long-life asset and capital allowances are restricted to a mere 6% a year on a straight line basis.
Most executive jet aircraft will have a life expectancy of over 25 years and the lower 6% rate will accordingly apply. Indeed, it is possible for part of the capital allowance to be disallowed if the jet is only partially used for the leasing trade and partially used privately.
Where, for example through shared or fractional ownership or chartering of the aircraft, the annual usage will exceed 600 hours the practice of the Revenue is to treat the aircraft as a 50:50 asset, i.e. 50% long-life asset, 50% normal-life asset (attracting allowances at the normal rate for plant and machinery). In many cases, the aircraft engines (which need substantial overhauls at regular intervals) may be treated as separate assets from the airframe. However, before you start chartering out your jet in order to claim higher capital allowances, you should consider how use over 600 hours per annum will affect the resale value of the jet.
On the sale of the jet a balancing charge might arise which could result in the tax relief which has been given being clawed back if the jet is sold for more than its tax written down value.
It is of course necessary for there to be taxable profits against which any capital allowances can be offset. There may be little or no profit in the SPV which may therefore need to be part of a group structure. Any thought of using capital allowances has to be balanced against competing issues such as the requirement to avoid benefit in kind charges.
VAT
VAT on import
The purchase or import into the UK of a new aircraft exceeding 1,550 kilograms take-off weight or any aircraft exceeding 8 tonnes is zero rated for VAT purposes. If the aircraft is being imported there is customs duty to pay.
VAT on running of the aircraft
Zero-rating in respect of passenger transport that takes place both inside and outside the UK is available where your jet is supplied with a pilot and a crew and as long as the aircraft actually lands in another country. It may be necessary to register for VAT in the country of departure or arrival and account for VAT there.
For flights solely within the UK the aircraft must be capable of seating 10 or more passengers for zero-rating to apply. Otherwise, VAT at the standard rate will be chargeable.
Offset expenses against income
The SPV might itself be able to offset expenses against income. However, often the SPV will seek to pass on as much of the net costs to any connected trading company to whom it is chartering the aircraft so that this other trading company may obtain a deduction against trading profit. This may well be possible but needs to be thought through in each case.
Group relief
Losses arising to a leasing subsidiary company can be surrendered within a group. This requires you to have other corporate activity in the UK which is grouped with the SPV.
Benefit in kind
This is by far the most important issue to consider.
If the aircraft is used for genuine business purposes only, the problem of personal benefits will not arise. Commercial charter agreements should be in place between the SPV and any connected trading company.
However, if the aircraft is also at your disposal for personal use a tax liability could arise, regardless of whether or not you actually use the jet privately. Under the Income Tax (Earnings and Pensions) Act 2003 there is a charge on any employment-related benefit in kind by reference to the cash equivalent of the benefit.
The value of the benefit to be charged is:
- the annual value of the use of the asset (usually taken to be 20% of the market value of the asset), or, if greater, the hire charge or rent paid for it, plus
- any expenditure on the asset incurred by making the asset available for the purpose of providing the benefit, such as running costs. This could also include expenditure on alterations or improvements, repairs, maintenance etc. depending on whether or not it was incurred for the purpose of providing the benefit. It would not include interest paid on a loan to acquire the asset.
It must be stressed that a tax charge may arise simply if the asset is available for your use. Whether or not you are actually using it is immaterial. In practice, whether the tax charge is calculated on the basis of availability of the aircraft or of actual use will depend on the facts of each case even though the legislation allows for either approach, regardless of the facts. As a broad rule of thumb, if you use the aircraft solely or largely for private purposes and the aircraft is at your disposal most or all of the time, a charge based on availability is reasonable. If the aircraft has a more mixed use, the Revenue is more likely to be persuaded to calculate the benefit based on actual use.
To avoid - or at least to mitigate - any benefit in kind charges your director’s contract of employment should exclude any private use of the aircraft except under normal third party arrangements so that you will have to pay a commercial hire rate if you wish to use the aircraft for private purposes. Also, you should carefully document both business and private use in the aircraft’s log book.
A more elaborate way to avoid the benefit in kind problem is by forming the SPV as a LLP rather than a limited company. Unlike directors, LLP members are not employees of the LLP and consequently are not caught by the benefit in kind rules. Using the jet in your capacity as a member of the LLP should not be subject to benefit in kind charges even on private use. However, the LLP structure may not be so effective for other tax planning issues, so there may need to be a trade off depending on your circumstances.
Unfortunately, the success of these measures to avoid benefit in kind charges cannot be guaranteed and the Revenue is likely to challenge them fiercely. An obvious point of attack would be to argue that you are using the jet in your capacity as director of the parent company of the LLP rather than as member of the LLP.
Summary
With some advance planning you might be able to save a considerable amount of tax on the purchase and running of your jet. Different tax considerations will apply in every case but benefit in kind charges are likely to create the biggest problem in most cases. Clearly other issues arise if you are non UK tax resident or the SPV is based offshore but then it is also more difficult to get any tax benefits in the UK.
Please note that this area of the law is a complex subject and you should not take or refrain from taking any step without full legal advice on your particular circumstances. The content of this article is of a general nature only and no liability is accepted in connection with it or if any reliance is placed on it.
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