UK Must Modify Aircraft VAT Exemption

by Robert Lee, Tax-News.com, London

29 June 2009

The European Commission (EC) has formally requested that the United Kingdom amend its legislation governing the VAT exemption for transactions related to aircraft.

The UK has been directed to amend its VAT rules in this area because, according to the Commission, they are based on criteria different from, and “inconsistent with,” those employed in the European VAT Directive.

The UK government has been given two months to furnish the EC with a satisfactory response detailing how it intends to address the anomalies. Failure to do so could mean the matter being referred to the European Court of Justice (ECJ).

The EU VAT Directive exempts from VAT certain supplies of goods and services related to aircraft as long as those exemptions relate to aircraft that are used by an airline “operating for reward chiefly on international routes". A recent ECJ ruling extended these exemptions to aircraft operating on domestic routes, but only for airlines operating mainly internationally.

In the view of the Commission, the UK applies the exemptions according to different criteria, those of the weight of the aircraft and of its design.

Under UK rules, any aircraft under 8,000kg is not exempted even where it is used by an airline meeting the relevant conditions. Conversely, aircraft of a weight over 8,000 kg and not designed nor adapted for private pleasure flying are exempted, even where the aircraft is not used by an airline operating chiefly on international routes.

“The Commission has formally requested the United Kingdom to change its national rules,” the EC confirmed on June 25.

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