The ECJ decision in the Finnish case A Oy [C‑33/11, published on 10 September 2012] focuses on the zero-rating of aircraft for VAT purposes and provides some useful clarification in relation to an area fraught with complexities.
The background to this decision is that on 1 January 2011 the UK was forced by the European Commission to remove the automatic zero-rating of aircraft weighing over 8,000kg. The new UK VAT legislation mirrors the European VAT legislation (compare Note (A1)(b)(i), Schedule 8, VAT Act 1994 and Article 148(e)&(f), Directive 2006/112/EC).
Unfortunately, these rules contain many unclear terms. HMRC struggled to provide guidance, revising their original VAT Notice by July 2011 and refusing to confirm even for major operators that they qualified as “airlines”. As a result, the scope of the UK zero-rating of aircraft was drastically restricted and purchasers renewing their aircraft were (and continue to be) shocked to find 20% VAT being charged.
However, is the European VAT legislation as restrictive as HMRC’s interpretation?
Zero-rating applies to “aircraft used by airlines operating for reward chiefly on international routes.” This phrase raises many questions, such as: What counts as an “airline”? Who is the “user”, if a private individual charters an aircraft from an airline?
The new ECJ decision provides some welcome clarity on certain aspects of what constitutes a zero-rated aircraft and who can use it, which in part fly in the face of HMRC’s guidance to date. It will be interesting to see whether and how this decision affects current HMRC policy. Even then, many uncertainties are likely to remain in relation to the zero-rating of aircraft.
Nevertheless, it now seems clear that certain structures, which arise naturally from the practical needs of aircraft-owners, can give rise to VAT-free aircraft ownership and this is therefore an important decision.