12 Nov 2018
The European Commission has launched proceedings against the Isle of Man after its probe into the Paradise Papers uncovered widespread VAT evasion in the yacht and aviation industries in the bloc.
The EU investigation was launched following the Paradise Papers exposé which showed – amongst other issues – that wealthy individuals who were using their jets for private purposes, apparently claimed to be using them as part of a leasing business in order to dodge paying VAT, which is levied on aircraft used for private purposes.
The Commission has now singled out the Isle of Man’s tax scheme, alongside Italy, explaining that aircraft for private use should not be VAT-exempt, as VAT is only deductible for business use.
Last year, an Isle of Man government spokesman said there is a scheme in place where business jets can be imported to the EU through the Isle of Man and obtain a 100% refund if the aircraft is purely for business purposes.
On Thursday the EU said it wants to step up its fight against tax avoidance in the yacht and aircraft sectors by implementing infringement proceedings against the Isle of Man and Italy.
“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 said.
“VAT is only deductible for business use. Supplies of aircraft, including leasing services, meant expressly for private use should not be VAT-exempt.”
An EU official also told KYC360 that the Isle of Man had facilitated tax evasion through its regime.
“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,” the EU statement added.
“A letter of formal notice was sent to the UK concerning the Isle of Man’s abusive VAT practices with regard to supplies and leasing of aircraft.”
The UK now has two months to respond to the Commission, and if it does not respond within that timeframe, the Commission could issue a reasoned opinion.
The Isle of Man’s scheme stirred up huge controversy when the Paradise Papers were published, causing Labour leader Jeremy Corbin to say in parliament: “There are 957 business jets in the Isle of Man, and that seems a bit excessive for any island, anywhere. I hope that that will be investigated and that due tax is collected from those people who are trying to avoid it.”
The Labour leader also mentioned another Isle of Man scheme used to import yachts into the EU but which was shut down in 2010 after the then Labour government intervened.
Asked to comment, an Isle of Man government spokesman said: “The Isle of Man Government applies the same policies, procedures and rules as the UK relating to the importation and leasing of aircraft.
“As this is a particularly technical and complex area of VAT legislation, last year the Isle of Man Government invited HM Treasury to undertake a review to confirm the policies and procedures adopted.
“We understand that this review is now nearing completion and will enable HM Treasury to fully respond to the EU Commission’s request.”
A UK Treasury spokesperson also said the department is now finalising the review.
“The Isle of Man is self-governing and makes its own decisions about how to make sure VAT rules are followed,” he said.
He added that the UK is looking at the formal EU notice and will ‘respond in due course.’
In addition to the Isle of Man, the EU has taken infringement action against Italy.
“The Commission decided today to send a letter of formal notice to Italy for not levying the correct amount of VAT on the leasing of yachts. The Commission also decided to send a reasoned opinion to Italy because of its illegal system of exemptions for fuel used to power charted yachts in EU waters,” the Commission said.
Italy also has two months to respond to the Commission. If it does not act within the next two months on the reasoned opinion, the Commission could take the case to the EU Court of Justice.
– Irene Madongo
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