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Economics

Points of sail: what Brexit means for yacht manufacturers

The yachting industry is waiting to find out how it will be affected by tax changes after the UK leaves the EU.

  • There are concerns that yacht owners could be faced with additional VAT charges if the UK leaves the single market and customs union
  • UK exports of boats to the EU were worth £172m in 2016; this market could be threatened by a scenario where VAT had to be paid both in the UK and in the EU
  • British Marine, which promotes the UK’s boating industry, is working with the Treasury to clarify the situation and ensure a favourable outcome

Among the legislative tangles that must be unravelled as the UK extricates itself from the EU is that of VAT. The UK government has stated its intent to leave the single market post-Brexit, and, following the status quo of the anticipated transition period, consumers, manufacturers and retailers on each side of the border could find themselves bound by new strands of red tape when it comes to VAT and customs duty.

For the UK yacht industry, this is a major concern: under current rules, VAT-paid yachts in free circulation sailing within EU waters do not attract further liabilities to VAT or customs duty when arriving in one member state from another. But after the transitional period ends in December 2020, these boats could be subject to VAT both at point of sale in the UK and on entry into the EU (and vice versa).

“As things stand, once we leave the EU, we may leave the single market and customs union,” says Nick McChesney, partner – indirect tax at chartered accountants PKF Littlejohn. “There are a number of factors for the yacht industry that need clarifying due to the nature of yachts; they’re often classed as non-business assets and are mobile in nature. This raises particular issues in relation to their VAT and customs treatment upon import and export.”

Following the EU referendum, industry body British Marine has identified the risks facing the UK’s marine sector, including over VAT and VAT paid status (VPS). “The tax status of new and pre-owned boats has been an integral part of the life of brokers and dealers for years, particularly as they are charged with being able to legally pass clear title to a new owner at the point of sale,” says Alastair Walton, chairman of Boat Retailers & Brokers (BRBA), a group association within British Marine. “The terms of Brexit, as it relates to the financial implications of being able to cruise in UK or EU waters, are far from clear. The BRBA and British Marine are working closely with the UK Treasury and customs departments to lead them to an agreement that will cause the least disruption to owners’ cruising plans.”

Union rules

VAT’s potential for limiting where boats can freely go represents its greatest threat to the UK yacht industry. If VAT had to be paid both on purchase in the UK and upon sailing into the EU, it would add 20% to the price.

“The overriding concern is that given the desire to have freedom of movement within the EU, potential buyers – at home and abroad – will look to source vessels from EU-based businesses rather than the UK, leading to a loss of UK revenue, impact on ancillary and supporting trades, and potential loss of jobs,” says Andrew Harries, senior external relations and communications executive at British Marine.

Currently, recreational craft are classed as Union goods, with VPS, meaning duties and other customs requirements have been fulfilled in a member state. They can sail within the EU customs territory and temporarily out of it without losing this status. But once Britain leaves the EU, yachts based here will be outside the Union’s customs territory, and, unless an exception is negotiated, will no longer be Union goods. Recreational vessels based in the EU, however, could potentially retain this status, regardless of the owner’s nationality. “There is no certainty on this point, leaving questions around the Union goods status of a significant number of the 60,000 boats currently kept outside the UK, post-Brexit,” says Harries.

The history with yachts is that many countries interpret the rules to try to help the sector

Dean Carey
Partner, Constable VAT Consultancy

As well as owners, yacht manufacturing and sales companies will be affected. “The loss of Union goods status would have a significant, negative impact on the boat market in the UK,” Harries warns. “The value of total UK exports of boats – new and second-hand – to the EU stood at over £172m in 2016. This significant export market would be penalised by customs procedures and VAT charges to cross the UK/EU customs border.”

Similar issues would affect the annual £93m of boat imports to the UK from the EU. “Imports of boats to the UK have already declined by 1% since the EU referendum, and areas where the UK is a major importer, such as sailboats, would suffer disproportionately in a ‘no deal’ scenario,” Harries says.

Fathoming the depths

Manufacturers are already aware of the risks posed by Brexit, with research by British Marine showing that uncertainty over the UK’s future trading relationship with the EU has led to a 22% fall in the business outlook among boat builders, and a 58% fall across the industry as a whole. The costs of fixtures and fittings could also rise with post-Brexit border tariffs. “Manufacturers may have supply chain issues depending on where they source their parts and how these supply chains may be impacted by the new trading agreements with the EU post-Brexit,” says Adrian Jones, a director and tax adviser at Martyn Fiddler Associates.

However, even if no customs deal is arranged, if current legislation stands, UK yachts should be able to enter the EU under temporary admission (TA) procedures, for a maximum of 18 months (extendable to 24 if the yacht is laid up for six of those). This applies to recreational arrivals, and new yachts being sold on the EU market. VAT-free TA arrangements would encourage UK owners to base their yachts in the EU.

“I would put money on EU territories with a big stake in the economics of the yachting sector favouring this,” says Dean Carey, VAT for yachts specialist at Constable VAT Consultancy. “Certainly the history with yachts is that many countries interpret the rules to try to help the sector.”

With this in mind, a two-tier VAT system seems an unlikely product of Brexit. “I would be very surprised to see VAT biting twice,” says Carey. “If a yacht is built in the EU then shipped to the UK, I would expect to see the sale zero-rated (as an export) and the yacht subject to import VAT on arrival in the UK, and vice versa. And a vessel flagged and owned outside the EU that is used for private purposes should be eligible for temporary admission or returned goods relief.”

“Customs and VAT consequences should be neutral for a buyer,” Jones says, “as the supplier will export the yacht free of sales tax in the supplier’s jurisdiction and the only VAT payable will be in the country of the purchaser.”

Jones adds: “There were special arrangements made for yachts and aircraft at the inception of the single market, so it may be possible for similar special arrangements to be made for Brexit – optimistically some kind of grandfathering. These may not be a mirror of those for the creation of the single market, but at least there is a precedent for special arrangements.”

Brexit might actually deliver benefits to UK yacht owners by allowing VAT to be permanently deferred. “With the single market and the revised temporary admission relief rules in place, I can imagine that a lot of UK yacht owners will have their vessels exported when buying them (zero-rated) and claim temporary admission relief as a non-EU resident when they take their yacht into the EU,” says Carey. “When their 18-month temporary admission relief expires, they can pop out to a non-EU location and then head straight back to start another 18-month VAT-free period. Why keep your vessel this side of the Channel if you can buy it for 20% less by keeping it on the other side?”

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