We know that in order for aircraft components to be considered for 0% VAT, they must be installed in qualifying carriers. But is clarification from the customer always necessary? The recent decision of McBraida plc v Revenue and Customs Commissioners certainly seems to indicate so. Our Tax team examines this landmark case more closely and looks at the lessons to be learned for others.
Testing the "look through" principle
A key issue for businesses is identifying when their supplies of aircraft or aircraft parts can be sold free from VAT through a supply chain.
Re A Oy C-33/11 established that aircraft can be supplied VAT free to a recipient in a supply chain which is not itself an airline, provided there was evidence that the aircraft was intended for use by an airline operating for reward chiefly on international routes (a qualifying carrier). How this principle should be applied in respect of supplies of parts for aircraft through a supply chain has now been tested in the UK in McBraida plc v Revenue and Customs Commissioners  UKFTT 43 (TC).
The decision: certainty required
For 0% VAT sales, suppliers of parts for aircraft must look to their customers to confirm that their parts will be installed in qualifying carriers. The recent decision of McBraida plc v Revenue and Customs Commissioners  UKFTT 43 (TC) (22 January) confirms that this is a prerequisite which must be met, otherwise the supply is at risk.
McBraida supplied aircraft engine parts to aircraft engine manufacturers. Many of the parts McBraida sold were ultimately installed in aircraft used by qualifying carriers. McBraida applied a 0% VAT rate to its supplies. However, HMRC made an assessment for approx. £2.9m in VAT and penalties claiming that the 0% rate did not apply based on the evidence available at the time of sales. McBraida had supplied parts where there was a possibility that the relevant parts might not be installed or incorporated in a qualifying aircraft (e.g. because an engine type was still in its development phase), and it had not received confirmations from customers in respect of all of its supplies.
The tribunal agreed with HMRC that, in order to benefit from the UK's 0% VAT rate for supplies of aircraft parts through a supply chain, the supplier must be certain that the part they supply would be used in a qualifying aircraft i.e. one used by a qualifying carrier. It concluded that the following conditions must have been met at the time of supply:
- the relevant parts were of a kind which is ordinarily/customarily installed or incorporated in a qualifying aircraft; and
- the relevant parts were certain to be installed or incorporated in a qualifying aircraft (and were actually so installed or incorporated). In other words, there must not be any degree of doubt or possibility (however remote) that the relevant parts might not be installed or incorporated in a qualifying aircraft.
How can suppliers ensure compliance?
In practice, this means that suppliers of parts for aircraft must obtain clear, written confirmation from their customers covering both of these conditions, with the tribunal recognising that HMRC's published guidance in Notice 744C in this respect is misleading. The tribunal also clarified that as long as the evidence produced by a supplier shows that, on the balance of probabilities, it was absolutely certain at the time of the supply that the parts in question were going to be installed or incorporated in a particular type of aircraft which is subsequently identified as being a “qualifying aircraft", then VAT zero-rating could be applied.
McBraida's appeal was allowed only in respect of those instances where it had in fact received customer confirmations and only where those confirmations were sufficient and correct to persuade the tribunal that, on the balance of probabilities, the relevant parts were certain to be installed or incorporated in a qualifying aircraft.
The case also confirmed that the supply of a partly-processed part (in this case an oil jet distributor assembly) would not qualify for VAT 0% / zero-rating treatment.
Why this matters
The decision criticises HMRC guidance for implying that customer confirmation as to the use being made of an aircraft part is not always required. The reality is that it is vital for suppliers of aircraft parts to obtain customer confirmation as to their actual use of such parts when agreeing contracts and careful consideration must also be given to the wording and extent of such confirmations so that it has the necessary and sufficient effect of satisfying the UK's conditions for zero-rating of parts for aircraft.;