VTRANS110310 - Chartering: Meaning of “charter”
General
The term “charter” has caused difficulties in determination of the correct VAT treatment of supplies of ships and aircraft for several reasons. Firstly, within the shipping and aircraft industries the term “charter” is used loosely to describe several different types of supply including freight or passenger transport, and is also used in slightly different ways in respect of ships and aircraft. Secondly, there is a complex interaction between the rules on both place of supply and liability, of charter, hire, passenger transport and freight transport services.
To try and clarify the matter this section will generally refer to the supply of the hire of a ship or aircraft (with or without a crew) or the supply of transport and not to chartering of a ship or aircraft.
This section will also clarify the circumstances where a supply of a ship or aircraft with a crew can be treated as a hire of a means of transport.
Because of the interaction between the various principles involved, this section deals with both place of supply and liability.
{#IDATEQZH}Hire or transportation?
The following is intended as a guide to illustrate the distinctions between hiring of a means of transportation and of transportation.
- A bus trip is transportation where you have no control over where it goes and when.
- A taxi where you instruct a driver what to do but he is in control. This can have the characteristics of a hire but it can also has the characteristics of transportation.
- Self-drive hire is a bareboat or dry charter where you are fully in control.
Generally the supply of ticketed or scheduled journeys will clearly be a supply of transport. Equally the hire of a ship or aircraft without crew will be a supply of a means of transport. Where the difficulty has always been is the supply a crewed ship or aircraft (q.v. taxi above) which can be seen as the supply of transport or the supply of a means of transport and both can be generally termed a “charter” within the industry as set out above.
The ECJ case of Navicon C-97/06 held that:
35. The Sixth Directive has reserved different legal schemes for those two types of contract, namely chartering contracts and those relating to the provision of transport services. The exemption for chartering vessels used for navigation on the high seas was laid down in Article 15(5) of the Sixth Directive (Art 148(a) of the PVD), while the exemption for services relating to the carriage of goods is governed by Article 15(13) (Art 146(1)(e) of the PVD). It thus follows from the wording of that article that treating those contracts as equivalent, in order to bring them within the same VAT scheme, has no basis in the system of exemptions established by the Sixth Directive.
37. It nevertheless falls to the referring court to take into account the relevant circumstances in which the chartering transaction at issue in the main proceedings took place, to seek its characteristic elements in order to be able to decide if that transaction should be considered as chartering or as a provision of services for the carriage of goods. In particular, that court must take account of the terms of the contract concluded between the parties and the specific nature and content of the service provided in order to determine whether that contract satisfies the conditions of a chartering contract within the meaning of Article 15(5) of the Sixth Directive.
38. In that regard, ……, a chartering contract differs from a contract for the carriage of goods in that it requires one party, the ship-owner, to make available to the other party, the charterer, all or part of the vessel, whereas, in the case of a contract for the carriage of goods, the undertaking which the carrier assumes towards the customer relates only to the transport of those goods.
This case sets out the premise that a supply of a crewed ship or aircraft can either be a supply of that ship or aircraft as a means of transport or as a supply of a transport service; but as mutually exclusive concepts. Which any given supply is will largely be a matter of fact.
Policy on treatment:
- Where a supplier A supplies a means of transport with a crew to a customer B who in turn supplies a transport service to a third party C, the supply by A to B will be the hiring of a means of transport and the supply by B to C transport.
- Where a supplier A supplies a means of transport with a crew to a customer B and undertakes to transport that customer or any person designated by that customer and/or his goods; other than where that customer is making the supply of transport services themselves then that is the supply of a transport service from A to B.
This will also be the case where the supplier fully organises and schedules the transport programme for his customer but part or all of the services necessary for him to provide his service to his customer is carried out by subcontractors.
This sets out the principle that a supply of a crewed ship or aircraft (or indeed any vehicle) to effect the transport of passengers or goods is a supply of passenger or freight transport. The test is simply whether the essence of the supply is of transport services to the immediate customer as principal to that supply; or, whether it is to make available a means of transport to a person who in turn makes the supply of transport to his customer.
The principle set out above is open to rebuttal where there is a strong argument for an alternative view: for example,
- transport does not actually take place or
- transport is not the predominant supply.
For example
- A passenger airline hires in a crewed aircraft to operate a scheduled passenger service. The supply of transport is by the airline and the supply of the crewed aircraft to them is a supply of a means of transport.
- An air-taxi is “chartered” to take a businessman to a meeting; that is a supply of transport even though it is unscheduled and labelled as a “charter”.
- Where a crewed yacht is hired for a week’s cruising; that will be a supply of transport. However, if the same vessel is hired for an event that does not actually involve any movement that can’t be treated as transportation (as a matter of fact) and that should be treated as a supply of a means of transport.
- The making available of a crewed ship or aircraft on stand-by or as long-term hire will not normally be the supply of a transport service, but the full contractual terms will need to be considered.
Historically HMRC accepted that where a ship or aircraft was supplied under a charter/hire agreement with a crew and the supply involved transport then the supplier and customer should reach an agreement as to whether the supply should be considered as a supply of a means of transport or a supply of transport.
Charter of part of a ship or aircraft
ECJ case of Navicon C-97/06 held that
Art 15(5) of VAT 6th Directive should be interpreted as covering both full chartering and partial chartering of vessels used for navigation on the high seas.
In other words it is possible to charter part of a ship (or aircraft), quite how that would work in practice is unclear and any examples should be forwarded to VAT Principals Team.