Case: Lack of sufficient evidence to zero rate aircraft engine parts

[2019] UKFTT 0043 TC

Judge Tony Beare

Decision released 22 January 2019

VAT – Zero-rating under paragraph 2A of Group 8 to Schedule 8 of the Value Added tax Act 1994 for supplies of aircraft engine parts – Whether the Appellant has sufficient evidence to establish that the conditions for zero-rating under that provision have been met – Yes, in relation to some of the supplies but not all of them

McBraida plc [2019] TC 06939

Summary

McBraida sold aircraft engine parts which it zero rated on the basis that they were exported to customers outside the EU. Exports cannot be zero-rated unless the supplier holds sufficient evidence that the goods have left the EU, HMRC did not consider that McBraida had sufficient evidence and therefore issued VAT assessments. McBraida appealed those assessments on two grounds, first that its evidence of export was satisfactory and, second, that even if the parts were not zero-rated as exports they qualified for zero-rating under paragraph 2A of Group 8, Schedule 8, VATA 1994.

The possibility of ‘paragraph 2A zero-rating’ was suggested by McBraida’s professional advisors after the sales had been made. The dispute between the parties is complex and at this hearing the FTT restricted itself to consideration of paragraph 2A, leaving other issues to be resolved separately.

Paragraph 2A permits the zero rating of parts and equipment ‘installed or incorporated’ in a ‘qualifying aircraft’. Note A1 of Group 8, ibid, defines a ‘qualifying aircraft’ as one used by an ‘airline operating for reward chiefly on international routes’ and, subject to conditions, one used by a ‘state institution’.

McBraida supplies parts which are used in a range of engines which, in turn, are used in different aircraft. The FTT heard detailed evidence regarding the engines and the characteristics of the aircraft involved. The FTT also heard detailed discussion regarding the evidence available to McBraida at the time of supply and the level of certainty required before an aircraft part could be zero rated because it would be ‘installed or incorporated’ in a ‘qualifying aircraft’, as an example some of the parts under consideration might have been used for engine development work and not fitted in an aeroplane.

The FTT concluded (para 249) that the supplier needed to know, at the time of supply, that ‘on the balance of probabilities’ installation or incorporation in a qualifying air craft would occur.

The FTT examined the evidence provided to it, some of which included declarations by McBraida’s customers as to the use of the aircraft parts, and concluded that in some cases, using balance of probabilities as the standard of proof, zero-rating was justified and in some cases it should not apply (unless the parts were exported, that issue was due to be resolved separately).

Comment

This decision is a reminder that zero-rating is an exception to standard rating (which is the norm) and that suppliers are therefore required to provide evidence to support it. In the case of exports and the supply of aircraft parts, HMRC publish detailed guidance, some of which has the force of law, as to the evidence that they will accept.

The qualify of McBraida’s evidence of export was not considered in this judgement. However, reading the long and detailed analysis of the parts and their use, it is hard to avoid concluding that had the supplier taken more careful account of HMRC’s requirements it would have avoided a complex (and therefore probably costly) dispute.

For commentary on the zero rating of parts for qualifying ships and aircraft see In-depth Commentary at ¶22-275.

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