VAT stifles imports, says UK charter firm

 - May 17, 2011, 1:50 AM

Imports of business aircraft into the UK have ground to a halt since tax authorities there scrapped its zero-VAT rating in January, according to Gama Aviation CEO Marwan Khalek. The change was forced on the UK by the European Commission with the intent of harmonizing VAT rules for aircraft sales, but the outcome has been a confusing muddle in which no one seems sure how VAT should now be applied.

Khalek, who is also chairman of the British Business and General Aviation Association, has been pressing HMRC (Her Majesty’s Revenue and Customs) to clarify how the rules now apply and to ensure that the UK is, in fact, in alignment with the VAT regime in other European Union (EU) countries. “The VAT issue is a nightmare and the HMRC couldn’t have made a worse job of this if it had tried,” he told AIN.

At the heart of the confusion is how the key VAT exemption is interpreted, namely whether an operator can be categorized as “an airline.” UK aircraft management and charter operators like Gama say they can’t get a straight answer from HMRC on this and Khalek said that the uncertainty is having a “paralyzing” effect.

For example, Gama has a management client who recently acquired a new aircraft. It was delivered after the January 1deadline for the VAT rule change and so tax would have applied at the current 20-percent rate. Instead, the owner, who is not resident in the European Union for tax purposes, put the new jet on the Cayman Islands register with the right for it to have temporary admission to the EU. The only drawback of this arrangement is that the aircraft now cannot be made available for charter and Gama had been counting on having a couple of hundred hours of charter capacity from it.

From Khalek’s perspective, UK officials have “gold-plated” the VAT tax rules–choosing to interpret them as literally as possible in a way that causes maximum disadvantage to owners and operators. The UK industry believes that tax rules, as with many aviation regulations, are implemented more flexibly in other EU states.

Despite his annoyance over this latest setback to the industry, Khalek takes comfort from what he sees as signs of recovery in the market. In addition to its UK base, Gama (Stand 354) also has operations in the U.S. and the United Arab Emirates.

“The recovery is continuing and the picture is pretty much the same in all regions,” said Khalek. “The level of inquiries [for charter] is increasing and even though profit margins are still under severe pressure, the volume [of flight activity] has picked up.”

According to Khalek, the aircraft management sector now is more stable in that fewer owners want to dispose of their aircraft. “Most of those who were looking to sell were doing so not so much to sell the asset but to stop the running costs from hemorrhaging,” he explained. “But as the resale market is recovering slowly so is the business and things are picking up now that owners once again have more need to use their aircraft.”

Despite the UK tax situation, a Dassault Falcon 2000 is joining Gama’s Farnborough-based fleet this month and the company is also handling the delivery of a Cessna Citation for another client. Its footprint in the Arabian Gulf also is increasing, with the recent addition of a new Bombardier Challenger 850–the first of its type to be registered in the UAE. Across three continents, Gama now operates more than 75 aircraft.

Khalek remarked that the continuing political insecurity and violence in some parts of the Middle East and North Africa may actually stimulate interest in using private aircraft. “Business aviation has always had blips as a result of adversity, but this does tend to demonstrate the versatility of this mode of transport,” he commented.

Having diverse activities, spanning management, charter, maintenance and consultancy, has been crucial to Gama’s resilience in tough trading conditions. The group’s Lees Avionics subsidiary at Farnborough has been expanding its maintenance capability over the past year. It recently won a major contract from Babcock to upgrade the cockpits of 93 Grob 115E training aircraft for the UK Ministry of Defence.