What is changing?
Following recent challenges from the EU in relation to yacht leasing, there was an element of inevitability to the announcement on 3rd December 2019 regarding reduced VAT rates on high seas charters. In a move to harmonise the rules across the EU, Italy, France, Malta, Cyprus and Croatia have been asked by the EU Commission to modify their practices from 1st January 2020. We are not sure if it is by chance or design but at least these changes are being implemented out of season which provides optimism that clarity can be achieved before the start of the 2020 season.
What were the rules previously?
Under the previous rules, charters commencing in these jurisdictions could benefit from reduced effective VAT rates depending on the specific movement of the yacht during each charter. If the yacht evidenced an element of ‘High Seas’ use, a reduced rate could be applied. From 1st January 2020, these reduced rates will no longer be applicable. This ‘High Seas’ use stemmed from an interpretation of the EU VAT Directive 2006/112/CE which aligns the application of VAT with where the effective use and enjoyment takes place.
What does this mean?
This change will bring to an end the reduced VAT rates on charters including the practice of “touch and go” in International waters in order to obtain a reduction in the VAT rate for the whole charter. The Directive does appear to allow for VAT to be applied pro-rata for the time spent inside the Community so periods of Non-EU use might still benefit from the exclusion from VAT on time spent outside the Community. Industry experts are working with the different affected authorities to draft clear guidelines and these are expected in the coming weeks.
Who will be affected?
Anyone undertaking a yacht charter in the EU, whether it be an owner or a third-party charterer, will be subject to these changes from 1 January 2020. With VAT rates at very similar levels across the EU it will be interesting to see how this impacts where yachts charter in 2020.
What action should we take now?
Consideration should be given to inserting a special condition into charter contracts stating that the reduction of VAT is not guaranteed and that in the case of change, the charterer will have to pay the difference. As a result, the charterer should be asked to pay the full 100%, with the undertaking that the charterer will be reimbursed the difference between this amount and the VAT ultimately due.
For contracts already signed for the 2020 season, an addendum should be considered.