In today’s economy, business aviation operators are looking to reduce operating costs whenever and wherever possible. The ability to exempt Value Added Tax (VAT) on aviation fuel purchases will save you an average of 19-20% on fuel uplifts in Europe, and this translates into dramatic operating cost savings over time. Operators must, however, do their homework when selecting a VAT exemption program, as all programs are not all created equal.
1. Know the difference between VAT exemption and reclaim of VAT
With a VAT exemption program, qualified operators exempt VAT at point of sale. When using a VAT reclaim service, however, you pay VAT at the pump and then make application to reclaim the tax later. Note that tax reclaim service fees generally run about 30% of taxes reclaimed, more paperwork is involved, and you may wait months for your VAT refund. The best option when you qualify is to exempt VAT up front. You’ll not only save the full cost of the VAT (and avoid the additional fees when VAT is reclaimed later), but you will not have to wait for a VAT rebate. VAT on fuel is common in Europe, but these taxes are also assessed in other parts of the world. In the US, it’s known as a sales tax, and in Canada it’s referred to as Goods and Services Tax (GST).
2. Consider VAT exemption options
More and more fuel resellers are offering VAT exemption at point of sale to qualified private non-revenue and charter (non-scheduled commercial) operators. Be aware that programs differ in terms of number of countries and types of operations covered. Some programs are more comprehensive than others and provide enhanced VAT exemption opportunities. Below we’ll discuss what to look for when comparing these programs.
3. Understand how VAT exemption programs work
VAT exemption programs provide a streamlined process for operators to sidestep point of sale VAT when they’re qualified to do so. Across the European Union, Norway and Switzerland, VAT ranges between 8 – 27% on fuel with an average VAT rate of 19-20%. Currently Switzerland charges 8% VAT, Ireland is 13.5%, Belgium is 20%, Poland is 23%, Denmark is 25%, and Hungary has a VAT rate of 27%, but these percentages may change at any time by the governing authorities. Qualified private non-revenue and charter operators are often able to exempt this entire tax on their invoice and will not be faced with complex post-trip tax reclaim procedures and high VAT reclaim fees.
4. Choose the best VAT exemption program
Always choose an exemption program from a VAT-registered fuel reseller. It’s also important that fuel invoicing is compliant for the applicable countries, for both point of sale tax exemption and tax reclaim ability after the fact. If your fuel reseller or VAT exemption program is non-VAT registered in a particular country, you’ll likely face certain potential issues and complications. Some programs may incorrectly exempt VAT, and you may find you’ll be asked to repay the VAT later. In other cases, invoices received from the fuel reseller may not be VAT compliant, and you may have problems during the VAT recovery process. It pays to do your research upfront, and select a VAT exemption program that’s both VAT registered and fully compliant.
5. Renew VAT exemption program registration annually
VAT declarations should be renewed each year. This is important for both program compliance and auditing purposes. All documentation on file must be current for the particular year. If you don’t renew annually, you may lose out on VAT exemptions for certain countries. Best practice is to renew your VAT exemption declaration prior to the first of the year, or right at the beginning of the next year.
6. Beware of potential problems if not using the best VAT exemption program
Always ensure you’re using a VAT exemption program registered in all countries where you’re receiving VAT invoices. Otherwise, you may not receive all the VAT exemptions you’re entitled to. Ask your fuel reseller how their VAT exemption program is structured and how they determine the rules in providing exemptions. Ensure that your reseller is VAT registered in all applicable countries. Even though the EU territory follows the same European Commission (EC) directives, each has its own nuances in terms of VAT exemptions and required procedures. In some cases, there are additional compliance requirements needed to gain tax exemptions.
7. Exemptions apply to private non-revenue as well as charter operations
While charter operators have greater flexibility in VAT exemption possibilities by qualifying as commercial operators, many private non-revenue operators may also qualify for tax exemption at point of sale. Exemption options vary by location, and it’s best to confirm any and all available exemptions pre-trip. In some EU countries, for example, private non-revenue operators flying for business purposes may exempt VAT, but private operators on “leisure” flights may not. Best practice is to know where you’ll receive VAT exemptions and what criteria you must meet so that fuel uplifts may be planned most cost effectively. To take full advantage of VAT exemptions, it’s best to have all required documentation onboard at all times.
8. Know the difference between VAT and MOT
VAT is a percentage tax applied to applicable goods and services, while mineral oil tax (MOT), also known as Excise Duties or TIPP, is really a duty and technically not a tax. MOT is applied to a specific product (fuel), while VAT can be applied to fuel, ground handling, and other service costs. MOT is assessed at a certain amount per unit volume (liter or gallon), while VAT is always a percentage tax. MOT is a line item on your invoice, and it’s taxable for VAT purposes. Based on an EU ruling last year, MOT exemptions are only available to “qualifying airlines” and not to “business” operators. There have been cases where business aircraft operators have been deemed as qualifying airlines depending on their type of operation. This is something that should be looked into and determined with the help of an aviation attorney.
9. Best practice for choosing a VAT exemption program
Keep in mind that VAT exemption programs differ in terms of the registration process, user friendliness, types of operations that are covered, and the number of countries where such exemptions apply. The first step in choosing a VAT program is to do your due diligence in comparing service offerings. Ensure that the program you’re considering is compliant, and that it’s VAT-registered for each of the countries where VAT exemptions are possible. Look for a program that’s robust, easy to use, and provides you with all the information you seek. For more information, see the EU Directive on VAT.
When signing up with a VAT exemption program, be mindful that they’re all somewhat different and do not necessarily provide the same benefits. A key consideration with any VAT exemption program is demonstrated regulatory compliance and correct VAT registration of the service provider. The last thing you want is to have your VAT exempted and then, two years later, find that these taxes are owing and collectable.
If you have any questions about this article, contact Christine Vamvakas at email@example.com.
Category : Best Practice
About James Burkhalter
James Burkhalter is an accountant with expertise in transactional taxes, including value added taxes applied to business aviation operators for aircraft handling, maintenance, supplies, aircraft importation, and fuel. James served at Universal Weather and Aviation, Inc. from 2010 until 2013 and at the time of his departure he held the position of Senior Transaction Tax Analyst.
About Steve Woods
Steve Woods worked for Universal Weather and Aviation, Inc. through February 2016. At the time of his departure, Steve served as Director, Sales and Supply, Europe, Middle East & Africa, UVair. One of Steve’s specialties is his understanding of the complicated and varying differences by country of value-added taxes throughout Europe.
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