There are important lessons to be learnt from this case despite it being about the import of an aircraft in 2016, when the UK was still governed by EU customs law.
HMRC will likely feel emboldened in applying the conclusions of the Upper Tribunal to similar cases, as the Upper Tribunal dismissed all six grounds of appeal and confirmed that the First-tier Tribunal’s (“FTT’s”) Decision was well-reasoned and contained no material error of law.
The lessons learnt
- As this case demonstrates, HMRC pays close attention to how importers manage their customs reliefs.
- If you make use of VAT and duty reliefs, make sure your authorisations are valid and regularly check all associated conditions.
- Check the customs status of goods before completing import declarations so you do not unknowingly apply incorrect customs procedure codes.
- Make sure to quote the correct commodity code on the import declaration.
- Do not ignore HMRC’s instructions: if, as in this case, HMRC reaches out with advice on how to proceed in order to fully benefit from VAT and duty reliefs, take notice.
- Do not assume HMRC will be lenient on contraventions, especially where the contravention happened through negligence or lack of appropriate internal controls.
- Do not assume HMRC will issue authorisations with retrospective effect, even when the circumstances are exceptional; it is HMRC’s prerogative to grant or reject retrospection based on the specific circumstances, and in our experience HMRC has become more restrictive of late.
- To claim remission of customs debt and import VAT, you must demonstrate that there was no “obvious negligence” on your part, such as allowing an authorisation to lapse, failure to realise it has elapsed until weeks or months later, or failure to remedy the situation when raised by HMRC.
- Flight path matters when moving a VAT and duty suspended aircraft between EU member states due to the concept of “direct v indirect export” in EU customs law (a concept not found in UK customs law post Brexit; all UK exports are direct exports). If you have an EU subsidiary, make sure the EU export declaration is completed in a manner consistent with the intended type of export. If the aircraft is intended to be processed in another EU member state before leaving the EU, for example, the Export Accompanying Document must clearly state it is an indirect export and must name the Office of Exit in the other EU state to avoid risk for complications.
- Could the outcome of this Upper Tribunal case have been the same for a yacht? Yes, the same legal principles apply in equal measure to yachts and aircrafts.
Background to the case
The case concerns Caerdav’s importation of an aircraft on 15 November 2016. The aircraft was registered out of Tanzania and operated by Lufthansa. The owner intended to sell the aircraft to a US airliner. Lufthansa flew the aircraft from Tanzania to Sofia in Bulgaria for maintenance work, where it landed on 2 October 2016, having been entered into the European Union (“EU”) customs special procedure of Inward Processing by Lufthansa Technik Sofia (“LTS”).
LTS also completed an EU export accompanying document showing Bulgaria as the country of export with Sofia as the customs Office of Exit and the US as the destination country (a “direct export”). This is an important point: the apparent intention was not to make a direct export but to make an “indirect export”, where the aircraft would fly to the UK, then on to Shannon in the Republic of Ireland, before finally departing from the EU to the US.
With the maintenance work in Sofia completed, Lufthansa flew the aircraft to the UK across Serbian and EU airspace. The aircraft was imported into the UK by Caerdav on 15 November 2016, claiming end-use relief in the mistaken belief that their End Use authorisation was still valid when in fact it had expired. At all material times, the UK was a member of the EU, as were Bulgaria and Ireland but not Serbia.
HMRC were initially of the view that no liability arose for Caerdav in respect of the aircraft and suggested as such in two letters in October and November 2017. HMRC then came to a different view and issued a decision letter on 18 April 2018 followed by a C18 demand note for customs duty of £275,547.12 and import VAT of £55,086.33 on 23 April 2018.
Caerdav’s appeal to the FTT and later the Upper Tribunal was essentially about:
- whether or not the aircraft’s importation into the UK was as part of an indirect export through the EU from Bulgaria and onwards to Ireland and the US. If so, this would be covered by the Inward Processing customs procedure and consequently no import VAT and duty would be due;
- if not, whether the customs debt could and should be remitted by HMRC; and whether HMRC’s letters to Caerdav in October and November 2017 gave rise to a legitimate expectation that import VAT and duty would not be imposed.
The Upper Tribunal sided with HMRC and found that the FTT’s decision was well-reasoned and contained no material error of law. It dismissed all six grounds of appeal, leaving in no doubt the importance of applying VAT and duty reliefs correctly.
Our customs and VAT specialists can provide further advice if you have arrangements similar to those in this case.
Approval code: NTAJ14082347
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.