EU puts pressure on tax haven for private jets and yachts in Isle of Man

European commission writes to UK over ‘abusive practices’ in crown dependency • Formula One Driver Lewis Hamilton named among those who avoided tax

The European Commission has launched infringement proceedings against the Isle of Man and Italy over what it says are illegal tax breaks given to some of the world’s wealthiest people over their purchases of private jets and yachts.

Last November, UK media giants The Guardian and the BBC, revealed how the Isle of Man, answerable to the British government and property of the Queen has continuously allowed billionaires and multinational companies to avoid a total of £790m of VAT on more than 200 aircraft imported to Europe since 2011.

This information came to light through the Paradise Papers, a leak of data from the offshore law firm Appleby, which was obtained by the German newspaper Süddeutsche Zeitung and shared by the Washington-based International Consortium of Investigative Journalists with media around the world, including the Guardian.

Previously, Cyprus, Malta and Greece have all promised to amend their legislation on VAT and yacht-leasing following earlier infringement proceedings. Now, Isle of Man, is in the infamous light of these new revelations.

The Formula One driver Lewis Hamilton was among those who avoided tax under schemes now deemed by the commission to be contrary to EU tax law.

Hamilton, who paid no VAT when importing his red £16.5m Bombardier jet, said at the time that he had instructed a senior lawyer to check his arrangements and he had been told they were lawful.

A number of Russian oligarchs who have since been blacklisted under US or European sanctions regimes also avoided tax using the schemes. They include Vladimir Putin’s family friends Arkady and Boris Rotenberg and the aluminium magnate Oleg Deripaska.

The commission’s decision is a blow for EY, one of the “big four” accountancy firms, whose local office in Douglas advised on many of the private jet refunds approved by Isle of Man customs. EY declined to comment.

The commission has written to the UK government highlighting what it described as “abusive VAT practices” in the crown dependency. It announced the decision to shut down the tax loophole in a press release on Thursday that cited the Guardian’s reporting.

“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 stated.

Pierre Moscovici, the commissioner for economic and financial affairs, said: “It’s simply not fair that some individuals and companies can get away with not paying the correct amount of VAT on products like yachts and aircraft. Favourable tax treatment for private boats and aircraft is clearly at odds with our commonly agreed tax rules and heavily distorts competition in the maritime and aviation sectors. With this in mind, the commission is taking action to clamp down on rules that try to circumvent EU law in these areas.”

The Isle of Man is in a customs union with the UK, which means aircraft and boats imported to the island can travel freely throughout the European Economic Area without being subject to customs checks. Such freedom of movement is a major perk for jet owners.

The Appleby files revealed how EY clients benefited from complicated arrangements for their private jets, which made it appear that the aircraft were being used as part of a leasing business when in fact they were only ever used by their owners.

Hamilton and others appeared to have in effect leased their aircraft from themselves, using contracts drawn up between a series of offshore companies.

The Isle of Man allowed tax to be avoided by agreeing that these structures meant the jets were part of a leasing business. VAT is only levied on aircraft destined for private use. It can be reclaimed if the jet is used for business.

In the UK and the Isle of Man, VAT is 20% of the purchase price. With some jets costing as much as £46m, the tax bills can run into several millions. Thanks to the leasing schemes, owners paid zero VAT, meaning a potential loss to the public purse of tax receipts running into hundreds of millions.

In its press release, 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. 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.”

Members of the European parliament’s Tax3 committee are also investigating jet imports and plan to visit the Isle of Man this month.

Italy also faces infringement proceedings over a number of issues, such as allowing yacht owners to reduce the VAT paid on bigger boats.

The UK and Italy have two months to respond to the arguments put forward by the commission. Italy can ultimately be taken to the European court of justice if it refuses to comply. Brexit means the UK will not face court action and can therefore decide whether it wishes to follow Europe’s lead or retain the loophole.

A commission spokesperson said the article 50 negotiating guidelines on Brexit reiterated that any future relationship with the UK would have to ensure a level playing field in a number of areas, including taxation. They said the UK had been a strong supporter of tax reform and it was in the UK’s interests to ensure dependencies did not end up as conduits for profits and income that should be taxed in the UK itself.

A UK Treasury spokesperson confirmed receipt of a letter of formal notice from the commission and promised a response in due course. The Isle of Man is self-governing and makes its own decisions about how to follow VAT rules, but the Treasury has been invited to review its procedures. “This is a complex area of VAT law and it is important that we take our time to get this right,” the spokesperson said.

In a statement, the Isle of Man said it applied the same policies and procedures as the UK on the importation and leasing of aircraft. On the Treasury inspection, it said: “We understand that this review is now nearing completion and will enable HM Treasury to fully respond to the EU commission’s request.”