Just five months before the UK is set to leave the EU, Brussels has initiated legal action against the country for failing to take adequate measures against what it described as “abusive value-added tax (VAT) practices in the Isle of Man with regard to the supplies and leasing of aircraft.” The European Commission (EC) last week sent a letter of formal notice, the first step in European infringement proceedings, to Britain requesting information on the tax breaks being applied in the Isle of Man on certain business jets that are used for private purposes.
The Commission’s action is in response to last year’s leak of the so-called “Paradise Papers” that revealed cases where an Isle of Man company acquired a business jet that it then leased out, with a private use in the end—often by the owner of said company. Under EU law, VAT can be deducted only on the acquisition or importation of the jet if the final use is for business.
European Commissioner for economic and financial affairs, taxation, and customs union Pierre Moscovici said favorable tax treatment for private aircraft is “clearly at odds with our commonly-agreed tax rules and heavily distorts competition” in the aviation sector, though he did not quantify the alleged evasion.
A spokesperson for the EC told AIN it could not provide more details owing to the confidentiality of the file.
The Commission might decide to refer the matter to the EU Court of Justice, though this is unlikely to materialize if the UK exits the bloc without a deal at the end of March. The UK has two months to reply to the letter of formal notice and up to two months to respond to the next step in the infringement procedure, a reasoned opinion, or a formal request to comply with EU law.
The Isle of Man is a self-governing Dependency of the British Crown; it is not part of the UK, nor of the EU, though it is part of the EU customs union.
In the wake of the Paradise Papers, the Isle of Man last year invited the UK Treasury to undertake a review to confirm the policies and procedures on the treatment of VAT on aircraft, which it said is a “particularly technical and complex area” of VAT legislation.
“We understand that this review is now nearing completion and will enable HM Treasury to fully respond to the EU Commission’s request,” an Isle of Man government spokesperson told AIN, while pointing out that “the Isle of Man government applies the same policies, procedures, and rules as the UK relating to the importation and leasing of aircraft.”