A range of transactions involving aircraft on the Isle of Man M-register is under investigation, following accusations that value-added-tax (VAT) has been rebated incorrectly to owners due to their much higher than declared personal use of the aircraft. An Isle of Man government spokesperson told AIN it will "robustly defend" its reputation as a responsible and transparent jurisdiction.
Following revelations in British newspapers and in BBC television program Panorama on Sunday night, the Isle of Man has been rebutting accusations that some aircraft transactions administered by specialist trust companies on the island have wrongly been awarded UK VAT rebates. This often means that VAT is, in fact, never paid, as owners can first wait for the rebate decision.
One such company is Bermuda-based global law firm Appleby and its former subsidiary Estera. Both also have offices in the Isle of Man and other so-called “offshore” jurisdictions. The Isle of Man is not part of the UK or the European Union, but is part of the UK for VAT purposes, with a special agreement in place. Importation of aircraft to the UK is subject to VAT unless the aircraft is operated predominantly for business purposes, and VAT cannot be reclaimed on costs incurred where the use is private, rather than for business.
The possible abuses have come to light after a data breach that led to millions of Appleby documents beiing leaked to a German newspaper, which then passed them to the International Consortium of Investigative Journalists, a group that includes Panorama and the UK’s The Guardian.
While many of the revelations from the so-called “Paradise Papers” appear to involve blatant use of offshore jurisdictions to avoid tax, it is not always clear when such avoidance constitutes tax evasion.
Tax Structure Questioned
Some of the accusations made against the Isle of Man date back to 2004 and relate to its changing laws to suit those wanting to create tax-efficient structures. Since that time the Isle of Man has been vocal about leading the way among offshore jurisdictions in addressing any issues the EU has and promoting transparency.
However, those investigating the Paradise Papers have homed in on one particular transaction: the purchase by (now) four-time Formula 1 racing champion Lewis Hamilton of a Bombardier Challenger, painted a distinctive red. They point to a series of offshore companies that lead back to Hamilton leasing the jet from his own company and say this disguises a far greater proportion of personal use. However, given the hectic nature of the F1 season and the fact that Hamilton uses the jet to travel between races, it seems unlikely that there is blatant “tax dodging” going on.
AIN has been working on obtaining clarification from the Isle of Man government, which operates the Isle of Man Aircraft Registry that was started in 2007. There are only 460 M-registered aircraft. Media reports of almost 1,000 reflect the number of registrations done, but many of the aircraft were later taken off the register. In addition, television and newspaper reporting has suggested these 460 aircraft are based on the island when in fact they are all around the world, mainly being used for business purposes by private individuals and companies.
For the past few years, an annual Isle of Man Aviation Day has provided an open forum for discussing the aircraft registry and aircraft transactions, including tax on "benefits in kind." This refers to the split between personal and business use, which owners must record accurately and declare in their personal tax reporting. The alternative is to charter aircraft out via an AOC holder but Simon Williams, Isle of Man director of civil aviation, confirmed to AIN that "Public transport [flights] may not be undertaken by aircraft registered on the Isle of Man Aircraft Register..." Some media outlets have suggested that M-registered aircraft had been operated on AOCs but Williams in effect denied that this is possible, although he has indicated recently that the Registry has considered changing this rule.
Many of the panel discussions at the Isle of Man Aviation Days have centered on structuring with the law and the complex definitions of what constitutes an acceptable transaction that qualifies for a VAT rebate.
It now seems likely that the current examination by the UK Treasury could at the least lead to an Isle of Man Customs and Excise Practice Note similar to one issued in 2011 to counter abusive yacht transactions that referenced key VAT case law. Other action by the HM Revenue and Customs (HMRC) would be on a case-by-case basis, and until any such outcomes are known, it is difficult to ascertain whether any Isle of Man transaction has contravened UK or EU law, unless the abuse is so blatant that HMRC can take immediate retrospective action.