Dear Martin,

Thank you for the advice that you gave me recently over the telephone re my purchasing a new boat. I have decided on the boat that I want and agreed a price with the dealer. He has persuaded me to buy a rather larger and therefore more expensive model than I had originally felt that I could afford because he has said that if I buy it as a part of a ‘leasing agreement’ I can expect to pay much less VAT. This sounds wonderful, but I am concerned that if anything goes wrong with this arrangement I may well be facing and enormous bill for VAT that I can’t afford. Have you had any experience of these ‘leasing deals’? Is it safe for me to go ahead with this method of purchase? If not, should I buy a smaller boat and just pay the VAT.

Yours sincerely, John Davenport.

Dear John,

Thanks for your email. I am pleased to read that you have now made a decision on what boat you are going to buy. In answer to your questions in your email my views are as follows.

Firstly whilst I obviously know about these leasing deals, I am not an expert on the subject. I do know however that many people have saved a lot of money by reducing the VAT substantially as a result of ‘leasing’. The law concerning this type of ‘loophole’ is changing and my advice would be not to buy a boat on this basis. Finally, yes I would go for a smaller boat and just pay the VAT.The reason for my being so adamant on this subject is based on a recent ruling from The European Court of Justice and advice given to their members this month regarding leasing by the Royal Yachting Association, which is below,

I have adapted their comments to show what I feel will be the reaction of the Portuguese Customs to this ruling.I hope that it will be helpful, I think that you will sleep better at night if you take their advice!

Best regards, Martin Northey.

A number of owners of expensive motor cruisers and yachts in Europe have bought their vessels using a Cross Border Leasing Scheme, this reduces the amount of VAT (IVA) that has to be paid substantially. Portuguese Customs (Alfândega) may well have viewed this loophole as a frustration of their legal right to collect IVA in full on new boats, they have until now considered this system of purchase as a legal method of tax avoidance rather than evasion.

However this may well now be changing because The European Court of Justice has ruled recently on the use of Cross Border Leasing Schemes.Cross border leasing makes use of schemes that typically exploit the difference in the application of the VAT rules between certain EU member states thus producing VAT-free rental charges followed by a purchase of the vessel subject to VAT but at a much lower amount than if it had been purchased outright when new.

In 2005 the Royal Yachting Association advised caution with these schemes in their members’ magazine and advised that UK Customs were seeking a ruling from the European Court of Justice (ECJ). The ECJ has now handed down its ruling on the Halifax Plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd case. The ruling means that tax authorities can attack VAT avoidance using an "abuse" doctrine but only if it would offend the underlying policy of the legislation to give the business the benefit. The Court emphasised that the abuse doctrine cannot apply in cases in which there was some wider business as well as tax avoidance objective.The case considered the VAT treatment of a structure entered into solely in order to reduce the VAT element in the cost of purchasing a new boat and became the leading test case on VAT avoidance.

HM Revenue & Customs (HMRC) were arguing for a general anti-avoidance doctrine based on the taxpayer's motives, which if adopted by the ECJ would have introduced a high degree of uncertainty into VAT affairs. The subjective nature of such a doctrine would have caused identical transactions to be given different VAT treatment just because of the decisions or motives of directors or proprietors. The ECJ’s decision emphatically rejects this and says that the test supplied must be objective.

There is likely to be an increase in litigation on VAT avoidance matters. The judgement gives less scope to HMRC to legislate against VAT mitigation than Customs would have wished for. That said there is enough in this judgement to give HMRC a weapon to counter pure VAT mitigation.

I am sure that the Alfândega has been following the two cases that the ECJ have ruled on with interest. As a result they may well seek to collect IVA on boats that they feel have either not paid IVA at all or are endeavouring to pay substantially less than the amount that they feel they should pay. The RYA therefore recommends that people seek legal advice if they have already entered into such a scheme. As for the future, they advise people not to get involved in these schemes. Purchasers should also be wary of purchasing a vessel that has previously been subject to a cross border leasing scheme as Customs may well view the vessel as not VAT paid and you may therefore find yourself with a vessel that is difficult to sell on due to anomalies on its VAT situation. For further advice contact the RYA Legal Department Tel: 0044 845 345 0373 or Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it