The pilot, the plane and VAT advice

The pilot, the plane and VAT advice

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I have been approached to assist in connection with a self-employed plumber, who also happens to be a qualified pilot.

This client, who has never been registered for VAT as a sole trader (his gross income from his work as a plumber is below the threshold for compulsory registration), purchased a second-hand plane for £75,000 about 2 years ago. He has since spent approximately £40,000 (including VAT of about £6,000) renovating it.
 
His original intention was to offer his services as a pilot (with his own plane!). He also thought that he might buy further second-hand planes, renovate them and sell them on at a profit. With this in mind, he recently incorporated a company, after being advised that, if he carried out the work as a pilot / plane seller on a self-employed basis, all his income as a plumber and pilot, etc, would be aggregated and he would end up having to register for VAT and to account for VAT on his total gross earnings, including those as a plumber. He wanted either to sell the plane to the company or to lease it to the company, so that the earnings as a pilot would be generated by the company. Any further plane purchases would be made by the company.
 
He has registered the new company for VAT from the date of incorporation. He has not actually yet carried out any work as a pilot, nor has he bought any further planes.
 
The client wants to know if there is a way of reclaiming the input VAT incurred to date on the renovation of the plane, given that he bought the plane in his personal name and is not registered for VAT. He does not of course wish to apply for back-dated registration in his own name, because, even if this is permitted by HMRC, he would then need to account for VAT on his earnings as a plumber.
 
He is aware that he should purchase further planes via the company and account for VAT on his activities as a pilot, reclaiming any input VAT incurred. I assume that he would be able to reclaim any input VAT on parts, fuel, etc, and that any future plane sales would be accounted for under the margin scheme.
 
However, is there any way of reclaiming the input VAT already incurred on the plane purchased in his own name?
 
Many thanks in anticipation of any assistance and guidance.

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By Rob Fox
17th Jun 2011 13:10

The pilot, the plane and VAT advice
There are a number of pitfalls here. Let's take input tax first: as the plumber bought the aircraft in his own name a couple of years ago, VAT on this and the repairs falls on him, not the company. From what you say, it couldn't now be argued that there was an intention for the company to own and manage the aircraft from the outset.
He would only be in a position to recover the VAT incurred if he sought registration for VAT, as a sole proprietor. If he asked for a current date, VAT on buying the plane can potentially be recovered (VAT General Regs. 1995, Regulation 111; goods on hand acquired not more than 3 years previously, services received not more than 6 months previously and not expended). If he asked for retrospective registration, yes, he'd have to account for VAT on his plumbing services, He might recover more VAT on the plane repair services, BUT - and it's a big one - in either case he would have to be able to demonstrate that the plane was acquired for and is being used for a business purpose. (I've not heard of a plumber needing a plane to get between workplaces or fly down a pipe, so I presume it would be a separate business activity to the plumbing). It sounds to me that the plumber, having acquired one plane, now thinks there might be a business; showing that he did say a year ago will be difficult.
To complicate matters further, I infer that there is private use of the plane, so any VAT claimed would have to be restricted to that part relating to the business use.
Given this he might like to ring-fence his current plane from the venture he's proposing, and develop that from scratch in the company.

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