A recent BBC Panorama investigation into jet leasing schemes channelled through the Isle of Man to avoid tax has highlighted alleged VAT exemption breaches.
HM Treasury will investigate VAT exemptions on leased aircraft registered in the Isle of Man as a result of the programme.
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VAT exemption rules may have been breached via personal use of business assets rather than business use, alleges Panorama.
The BBC programme focused on the British tax aspect of 7 million data records from law firm Appleby, and key stories that emerged including the leasing of yachts and planes.
The programme outlined the example of Formula 1 driver Lewis Hamilton who had purchased a £16m (€18m) jet, with a £3.3m VAT bill that Hamilton avoided via several layers of leasing the asset back to himself.
“The jet is owned by Lewis Hamilton’s company in the Caribbean,” said BBC Panorama journalist Richard Bilton. “It leases the jet to a new company owned by Lewis Hamilton in the Isle of Man – so that’s Lewis Hamilton renting his own jet to himself. It’s then leased to a leasing company he doesn’t own that provides a crew and maintenance. They then lease it back to Mr Hamilton – that’s him renting his own jet back,” said Bilton.
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By GlobalData“This is the place [the Isle of Man] to come if you want to dodge tax on your luxury jet,” said Bilton.
Tax haven niches
“All these different tax havens in the world, they carve out a niche for themselves,” said Brooke Harrington, a research fellow at the Max Planck Institute in Cologne, Germany.
“There’s so many things that they can specialise in: being the jurisdiction of choice to register your jet, being the jurisdiction of choice to register your yacht or your family business. And that’s how they are competing, and it makes offshore very complicated.”
“It’s the artificiality of the scheme that should raise suspicions,” said Rita de la Feria, professor of tax law at Durham Law School.
“From the moment that you see the artificiality of the scheme you should raise questions about what the motivation is in this particular case. Questions should be raised as to whether this is a proper business for VAT purposes, in which case refunds should not have been granted.”
Hamilton’s lawyers said he had a “set of professionals in place who run most aspects of his business operations. “Isle of Man customs… gave informed approval to the scheme,” they told the BBC.
VAT rebates are a key benefit for businesses using leasing products, but the BBC programme alleged that the scheme for Hamilton did not comply with EU and UK tax rules because of the significant personal use of the plane, and that he should not have had a full VAT refund.
Hamilton visited the Isle of Man only once in the jet to sign off on the VAT exemption papers with officials, said Bilton.
The BBC alleges the jet was only used two-thirds of the time for business use and one third of the time for personal use, using evidence from social media sites referring to holidays using the jet.
Hamilton’s lawyers added that the practices “were not unlawful and do not constitute… abusive practices”.
Panorama said it had found 50 similar leasing schemes in the documents. It put the questions concerning misuse of commercial leasing VAT rebates by oligarchs and sports stars to Isle of Man chief minister Howard Quayle, who said on the programme: “We only accept cases for rebates on VAT if it is for 100% business use.”
Isle of Man Customs on the island later told the programme: “As long as it was for predominantly business use, they gave refunds anyway.”
Appleby has imported jets worth £1.25bn through the Isle of Man, which would mean over £790m of VAT rebates are now called into question, said the BBC.
Isle of Man response
The BBC provided Quayle with evidence of VAT rebate receipts from Isle of Man officials that stated knowledge of ‘private’ use of leased aircraft on official paperwork.
As a result of the BBC Panorama investigation, Howard Quayle issued a long response to the press, where he promised a full investigation into the leasing schemes and possible VAT rebate incursions by calling in HM Treasury to examine the cases.
The UK government declined to be interviewed by the BBC.
Quayle commented: “Media attention has centred on the importation of business jets into the EU through the Isle of Man, with a particular focus on the VAT treatment of aircraft leasing arrangements. You will have watched with considerable interest the matters I discussed with you unfolding over the weekend and yesterday and I wanted to provide an update.
“As outlined in the press release issued by the Cabinet Office on 24 October, we have invited HM Treasury to conduct an assessment of the practice for the importation of business jets via the Isle of Man into the EU.
“If there is any evidence of wrongdoing then all appropriate action will be taken against individuals or companies.
“The scoping of the assessment by senior officers has begun and will be published this month, with the work being completed in 2018.”
“As I have confirmed, during the course of an internal review, we have found no evidence of wrongdoing, or reason to believe that our Customs and Excise Division has been involved in the mistaken refunding of VAT,” Quayle continued.
“The VAT treatment of the importation of aircraft into the EU is a highly technical and complex area in which the Isle of Man follows the same policy, laws and rules as the United Kingdom.
“However, we acted swiftly and decisively and have taken action to demonstrate that the Isle of Man is a well regulated, open and transparent member of the international community.”
Editor’s analysis
While UK taxpayers have been stirred up by allegations of the super-rich avoiding tax, in the middle is the aviation and marine leasing industry, which has been operating in this field for decades.
The allegation, by association, seems grossly unfair for lessors that have been operating in the territories without issue for years. All of the leases written for the luxury asset market are compliant and legitimate, with regulatory oversight. If assets are used for other purposes beyond their lease terms after they are agreed it is by express decision of the original owner of the asset.
However it is difficult when the public’s attention is drawn to such associations. The industry will no doubt be concentrating on HM Treasury’s investigation into the alleged VAT exemption breaches, the reports on which are due in 2018.
Elliot Bishop, head of the luxury asset group at Shoosmiths, who deals with litigation in the luxury asset area, said that the drivers for the use of offshore leasing were part of a global competition for the registering of offshore assets.
“Celebrities and high net worth individuals often avail themselves of this scheme – typically the Isle of Man when it comes to private jets, and Malta when it comes to superyachts – because they have favourable VAT treatment if you register the asset in their jurisdiction,” said Bishop.
“The jurisdictions want to be able to build up a base that would be favourable for jets or yachts. Then the territories take advantage of the corporate service providers who exist on the Isle of Man or Malta so it generates significant income for their local economies. As long as the asset resides in the territory for a certain amount of time, then the charge to VAT will be lessened.”
The status quo has been maintained beyond political initiatives, added Bishop.
“It has been a successive issue for governments of successive colours, so clearly whichever view you’re taking – mainstream Labour or Conservative – they take the view that they would rather leave things be than play around with it.”
Knowledge on what is also known as the Maltese Lease means that it is a well-known method of leasing big-ticket assets for celebrities, for tax efficiency and privacy reasons.
“I have worked in the industry for many years and when the Paradise Papers hit the news, there was little surprise that these things were going on. The leases involved are for people – typically very wealthy – who have the ability to set up these structures offshore, which can be fully legitimate and allow for lower tax regimes to be put in place.”
Additionally there is an issue of discretion that is fuelling the Maltese Lease.
“A significant factor for the use of these structures is privacy,” said Bishop. “A lot of these assets are held in very complex structures for tax-mitigation reasons, but also because certain people are using them to maintain their privacy. They do not want their identity mentioned on the paperwork because they are high net worth or ultra-high net worth individuals, and it could compromise their safety.”
