Sales, Use and International Tax Activity Update - July 2009

EU Commission Attempts to Ground UK Airline VAT

The European Commission has issued the second stage of infringement proceedings against the United Kingdom. The EC has requested that the UK amend its national legislation regarding the VAT exemption for transactions related to aircraft under the premise that the UK law does not conform to the intent of Article 148 of the Sixth VAT Directive. The second step of the infringement proceedings is a reasoned opinion and allows the UK two months to amend their national rules. If they do not comply the EC may refer the issue to the European Court of Justice.

Article 148 of the Sixth VAT Directive exempts supplies of aircraft used in international transport from VAT. To qualify for the exemption the aircraft must be used by an airline operating for reward chiefly on international routes. The European Court of Justice ruled, in Case C-382/02, that the exemption applies even for an aircraft operating on domestic routes as long as it is used by an airline operating for reward chiefly on international routes.

The UK legislation applies an exemption to aircraft whose weight exceeds 8,000 kg as long as it is not designed or adapted for private pleasure flying. Aircraft weighing under 8,000 kg are not exempt from VAT. This criteria is applied regardless of whether or not the aircraft if used by an airline operating for reward chiefly on international routes.

Based on the above discrepancies the EC has formally requested that the UK change its national rules to conform to EU intent.

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