Tax on boats used for business
Written by Ray Coman
The tax position on leasing of a boat and associated services will vary from one owner to the next. An owner actively involved in the business will enjoy tax relief associated with running a trade. Where the boat is purchased as an investment with little or no extra services provided, the tax relief against rental income will be more limited.
The cost of a boat cannot be deducted from taxable profits where no crew or provisions are provided. The arrangement is sometimes referred to as bareboat charter. The prohibiting of tax relief on the cost of a boat is specifically stated under exclusion 6 of the Capital Allowance Act 2001.
Where the boat is being used not merely as an investment, but as a trading asset, tax relief would be available for its cost. Various case laws have established that a clear profit motive would need to be shown. In practice, where a skipper and/or other services such as on-board catering are provided, a percentage of the original cost of the boat can be deducted each year from profits. This is known as a capital allowance.
It is not possible to write of the whole cost of the assets in the same year that it is bought. The exclusion from first year allowance is set out in section 46 of the CAA 2001. The same law would preclude a boat from the super-deduction.
On the basis that the boat is not expected to have a useful life beyond 25 years, it will not need to be in a special rate pool. Therefore, the rate of capital allowance at the time of writing is 18%. The percentage for a long life assets is much lower and can be found in the above link.
The difference between the original cost of the boat and the capital allowances is referred to as written down value. The scrap value in the case of a disposal, or sale value in case of a second hand sale are compared with the tax written down value. The difference between the written down value and anything it fetches on disposal will be either written off or added back to tax. This is referred to as a balancing allowance or balancing charge. Therefore over the life of the boat, the whole cost could be deducted from profits.
Where building costs amount to an improvement, for instance because the size of the boat is changed, the enhancement value is added to the capital cost of the asset. If capital allowances are available, the cost of improvements can be deducted from tax. Costs which are for repairs can be deducted from profits at the time that these are incurred.
Provided a boat is being used for business purposes it is possible to reclaim the VAT. If there is private use of a boat, VAT reclaim would be limited to the portion of business use. HMRC are aware that yachts are often used by business owners and company directors for recreational purposes and care should be taken to evidence a clear business motive behind any VAT claim.
A consequence of reclaiming VAT on a boat is a requirement to register for VAT and therefore charge customers VAT. It is rare that a boat would be hired for business purposes and therefore unlikely the end-user would be able to reclaim any VAT charged. Therefore, if the yearly turnover is below the VAT registration threshold (£85,000 at the time of writing), hire charges can be more competitively priced by not volunteering for VAT registration.
Where boat hire is outsourced to a service provider who is VAT registered, the cost to the user will depend on the arrangement. If the hire company is merely an introducer and the consumer is aware that the boat is being hired from the boat owner, VAT would only need to be charged on hire services. This is an agency arrangement. Where the hirer is only aware of transacting with the hire company, then VAT is charged on the whole cost of leasing the boat. In this case the hire company is principal. A VAT registered hire company would usually be able to recover VAT charged by the boat owner. Where the hiring company is ‘principal’, VAT can be reclaimed on the boat without affecting the price of service to the end-user. Where no hiring company is used, or the hiring company is merely a booking agent, there is an opportunity to price more keenly by not registering for VAT. This is because provided turnover is below £85,000 any VAT registration would be voluntary. Boats purchased second hand via private arrangement would not have any VAT that can be reclaimed.
If a boat owner has formed a company, the owner would be treated as receiving a benefit in kind for using the boat. The benefit in kind would be equal to 20% of the market value of the boat. This benefit in kind would be subject to income tax and employers’ national insurance. As a further drawback, the company would have additional reporting way of a form P11d.
Reimbursements from owner to company will reduce the value of the benefit in kind. However, 20% of the value will often exceed any benefit the owner enjoys from private use. Usually where a boat has been transferred to a company for tax purposes, these benefits will be negated where the owner makes use of company property.
If the boat owner does not use a company, a private use apportionment of expenses will be removed from tax deductible expenses. Let us say a third of the time, the vessel is used by the owner, in that case only two thirds of the expenses, including capital allowances, would be deducted from tax adjusted profits. Where business use of a boat cannot be exclusive, it will be preferable to keep the asset outside of a company.
For a boat used predominantly by its owner, what little income it produces will often be lower than the running costs. These losses cannot be deducted from the owner’s income because HMRC will take the view that the taxpayer has a hobby rather than a business. The badges of trade are used to help any interpretation of an activity as a business rather than a hobby.
A company can be effective at reducing or delaying tax if the company owner does not require profits immediately. Profits will be subject to corporation tax which, for a higher rate taxpayer, will be lower than income tax.
Companies that own property are exposed to a double tax charge. If the property appreciates in value, any gain on disposal of the property would be subject to corporation tax as well as personal tax. However, given that boats will typically lower in value over time, there is less risk of any double tax charge.
Profits from the business can be reinvested, for instance, to purchase additional boats. The owner has the opportunity to delay withdrawal of profits until he or she is a basic rate taxpayer. This strategy could dovetail with retirement plans for owners that hold a passion for the sea.