If the recent developments on yachting VAT have seemed confusing it is partly because the object at their centre has been infused with tendentious meanings seeking to detract from what has always been the defining essence of the ‘yacht’ as a watercraft – its leisure purpose that distinguishes it from a working ship. Leisure, pleasure, sport, recreation – these make the collective soul of the yacht. Any appraisal of current VAT law ignoring this vital premise could end up a garden path.
The subject is pertinent because of the contrasting treatment of the yacht and the working ship in current VAT law. As it happens, the word ‘yacht’ does not actually feature in EU VAT and related indirect tax legislation. Instead the collective term ‘private pleasure craft’ is used to cover a category of vessels with private pleasure (the P-word) as a common purpose – yachts, powerboats, motor cruisers and the like. ‘Private pleasure craft’ is defined as “any craft used by its owner or the natural or legal person who enjoys its use either through hire or through any other means, for other than commercial purposes and in particular other than for the carriage of passengers or goods or for the supply of services for consideration or for the purposes of public authorities.” ‘Yacht’ features only in national interpretive contexts, where individual EU Member States and their revenue authorities seek to define the scope of application of EU legislation.
So it is that a yacht, along with other ‘pleasure craft’, is ordinarily excluded from the VAT exemption available for all vessels used for the purpose of commercial activities. What this means is that a yacht cannot claim automatic exemption from the tax. However if the yacht is to be exploited for supplies by way of business in the EU then its owner can register for VAT and reclaim the tax suffered in buying and operating it. Where the intention is to exploit the yacht for non-business or private use then there is no entitlement for the owner to register for VAT, and no right to reclaim the VAT suffered on its purchase or use. By denying yachts automatic exemption and requiring commercially operated yachts to exercise a right to recover VAT only within the controlled environment of a VAT registration, the law enforcers are able to separate those who use their yachts for a business activity from those who don’t.
By contrast the class of working ships, which for the purposes of the existing law is defined to include ones with the ability to convey large numbers of passengers (such as cruise ships) and all other utilitarian vessels, is treated as automatically exempt from VAT. These ships must however meet two conditions cumulatively. First, they must be “used for navigation on the high seas”; and second, they must be used for “carrying passengers for reward or used for the purpose of commercial, industrial or fishing activities”. If a ship meets these conditions then the original supply of the ship itself and its exploitation for services are not subject to VAT. The exemption applies automatically and as such there is no requirement for the owner to register for VAT.
The key basis of this difference in VAT treatment between the yacht and the working ship is threefold. First the yacht, unlike the ship, is considered a means of transport for private pleasure use in that it is customarily received by the user not for the purposes of any business carried on by him but for personal pleasure. This tends to be the case, whether the yacht is hired or not. Second, the nature of a yacht charter transaction is such that the provision of transport is only incidental – the charterer’s real objective is to hire the yacht itself, not to take a ride. Third, the yacht’s usual place of use is in inland waters, as opposed to ship’s use on the high seas for international transport. The implication is that a yacht is held to be essentially a private pleasure craft habitually sailing in inland waters in cabotage fashion. If it were operated like a working ship commercially for international transport then it would qualify automatically for VAT exemption under the provisions of the current law.
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This bulletin is prepared by Moore Stephens Consulting Limited. Yachting VAT Note is designed to keep readers abreast of current developments and trends. It is a general guide only and is not intended to be comprehensive. No liability is accepted for the opinions it contains, or for any errors or omissions. In all cases you should seek professional advice specific to your circumstances.