When discussing tax in relation to repossession, it is important to consider more than just VAT. You must also assess the asset's import status and customs circulation status within the relevant territory. These factors will influence where the aircraft or yacht can be moved and what actions can be taken with it.
Aircraft and yacht repossessions are complex.
There are many factors to consider when contemplating a repossession:
Security
There may be other creditors that may have a prior claim on the aircraft or yacht, you don’t want to find yourself taking over an asset that may not rightfully be yours to take.
The location of the asset
Where the aircraft or yacht is located may have a considerable effect on how you deal with the repossession. While some jurisdictions are an easy and creditor friendly place in which to repossess, other jurisdictions make it notoriously difficult to exercise your security.
The health of the asset
It is important to have a good understanding of the condition of the aircraft or yacht. For example:
Is it sea or airworthy?
Are you actually able to fly the aircraft safely and in compliance with air navigation orders?
The registration of the asset
The registration of the aircraft or yacht will also have an effect on the client’s ability to recover the asset. For example, if you intend on flying the aircraft your pilots will need to be type rated in the jurisdiction the aircraft is registered; this may be easier said than done.
Therefore, clients may need to contemplate re registering the aircraft simultaneously with the repossession in order to have the pilot type rated to legally fly the aircraft away.
The ownership of the asset
You might be financing or leasing the aircraft or yacht, but you need to consider who the legal owner of the asset is and what rights and obligations they have under such circumstances.
When could a repossession occur?
Repossessions usually take place because a debt obligation has not been fulfilled under the asset loan or lease agreement. In both circumstances the lender or lessor may want to take possession of the asset to realise some value.
Change in possession tax impact
What tax considerations arise when an aircraft or yacht is repossessed?
What is meant by free circulation status?
When assessing free circulation status, you need to consider whether the aircraft was manufactured and sold within a particular territory or whether it was imported into that territory. The origin and movement of the asset will affect its tax position.
What paperwork is needed to determine an asset's tax status?
To understand your tax obligations, you should gather all available paperwork relating to the aircraft or yacht. This helps establish whether the asset has free circulation status and/or VAT paid status.
Look for:
- The invoice from the manufacturer to the first purchaser.
- Any subsequent sales invoices between owners.
- Relevant ownership and transaction records.
What additional documents should be reviewed for imported aircraft?
For imported aircraft, you should review:
- Import certificates.
- Export certificates.
- Evidence showing the aircraft was held or sold outside the territory.
These documents may impact the asset's free circulation status.
How can Brexit affect an aircraft's tax status?
You should consider any impact Brexit may have had on the aircraft's UK or EU free circulation status. Once the relevant background information has been collected, it can be used to assess who will repossess the asset and under what circumstances.
Why does the repossession method matter for tax purposes?
The way an aircraft is repossessed is significant because it may create a VAT tax point. It can also affect the asset's import status depending on its physical location at the time of repossession.
What VAT costs should be considered after repossession?
Following repossession, you should consider any VAT costs incurred, including:
- Storage costs.
- Repair and maintenance costs.
- Legal fees.
Can VAT incurred after repossession be recovered?
You need to determine:
- Whether the party taking possession can reclaim the VAT.
- Whether another party involved can recover the VAT instead.
- Whether the asset is located in a jurisdiction where none of the parties hold a VAT registration.
In such cases, VAT recovery may need to be pursued through the 8th or 13th Directive refund processes.
Are there any VAT relief provisions that could help?
Yes. You should consider whether relief provisions available to lending companies could assist, such as:
- Customs warehousing.
- Inward processing relief.
How can customs relief procedures help during repossession?
These procedures can be particularly useful when:
- Storing an asset.
- Carrying out repairs and maintenance.
- Selling the asset.
Can an aircraft be sold while under VAT relief?
This depends on the jurisdiction. Some EU countries allow aircraft sales while the asset remains under VAT relief, while others do not. As the UK is no longer part of the EU, it permits such sales, which can make it an attractive jurisdiction for completing a transaction.
When do you plan a repossession?
When should repossession planning begin?
There are three key points at which repossession planning can begin:
- When creating the financing or leasing agreement.
- Before the contract is at risk.
- When repossession becomes necessary.
Why should repossession be planned when creating the financing or leasing agreement?
The best time to plan for repossession is at the very beginning of the transaction.
Contracts generally end in one of two ways:
- The agreement is successfully completed.
- The agreement fails, requiring consideration of repossession options.
Planning from the outset provides valuable time to assess:
- Contract terms.
- Stakeholder relationships.
- How parties will operate.
- Where the aircraft may be located if repossession becomes necessary.
If no repossession strategy was established at the start of the agreement, the next best time is before the contract enters any form of difficulty.
Planning now allows you to carefully consider how repossession would be handled if it became necessary, rather than being forced to make decisions under pressure.
Why is waiting until repossession is required a risk?
This is generally the least desirable time to start planning. The pressure of an active default situation can result in:
- Key considerations being rushed.
- Important details being overlooked.
- Errors being made during the repossession process.
In some cases, these mistakes can create additional legal, operational or tax issues.
Planning for tax in repossession situations?
Why is paperwork so important?
Paperwork is critical when assessing the tax implications of a repossession. The more background information you have about the asset, the better placed you are to make informed decisions.
Ideally, this information should be collected at the start of the financing or leasing arrangement.
How often should asset documentation be reviewed?
Documentation should be reviewed regularly. Keeping records up to date means the necessary information is already available when tax related decisions need to be made.
Is every repossession situation the same?
No. Every aircraft and yacht has its own unique circumstances. As a result, repossession planning and tax assessments should be considered on a case by case basis.
Should professional tax advice be obtained?
Yes. Martyn Fiddler strongly recommends obtaining professional advice to avoid costly mistakes.
What are the risks of not seeking professional advice?
Without professional tax advice, there is a risk of:
- Misinterpreting the VAT treatment of the asset.
- Making costly tax errors.
- Leaving an aircraft or yacht vulnerable to seizure by customs authorities.
Professional guidance can help ensure that both VAT and customs considerations are managed correctly throughout the repossession process.
Who leads this work
Regulatory & Industry Bodies
Other Ownership & Corporate Services
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