This is an often misunderstood topic, in part due to recent court cases and the "rumour mill". Also although HMRC are clear on how they would like boats to be treated for VAT purposes their published views sometimes do not accurately reflect the law. In particular, what has not been so clear has been the actual application of the law in relation to claims for tax-free status on the sale/purchase of a new boat.
A few general points first:
The sale of any vessel is only subject to VAT if the owner is carrying on a business.
Boats are either standard rated (taxable at 20%) or zero-rated (taxable at 0%).
If nothing is said about VAT in the purchase documentation, the price includes any VAT due.
It is the seller’s responsibility to charge the correct amount of VAT and he has to account for it to HMRC.
Houseboats are always zero-rated. Houseboats are defined for VAT purposes as ‘boats or other floating decked structures designed or adapted for use solely as places of permanent habitation, and not having the means of, or not capable of being readily adapted for, self propulsion’.
So if your boat is classified as a houseboat and you have no means of propulsion (engine), nor any easy way of fitting one in the future, then the houseboat will be VAT-free.
What about live-aboards that are not houseboats? Well, this is an interesting topic and, in the words of HMRC, proving whether a vessel qualifies partly involves proving a negative as explained below.
This is how it works:
A VAT-free boat is known as a ‘qualifying ship’. There are two specific legal criteria for a qualifying ship.
The first is that the boat has not been ‘designed or adapted’ for recreation or pleasure. The fact that your boat is designed as a live-aboard and not as a ‘pleasure craft’ means that it fulfills the first condition even if you are not intending to live aboard permanently or at all.
The second criterion relates to gross tonnage. This gross tonnage figure must be not less than 15 tons. Gross tonnage is to be calculated as under the Merchant Shipping Acts. Where gross tonnage has not been certified in accordance with those Acts HMRC guidance in Notice 744C (available online) sets out a modified version of that calculation for VAT purposes.
The HMRC formula for calculating gross tonnage for vessels of less than 24m in length is as follows.
L (m) x B (m) x D (m) x 0.16 (see below for HMRC definitions of L,B & D)
HMRC then go on to specifically define the D measurement for canal boats and this is measured from under the top of what we know as the gunwale to the base plate.
As an interesting example, take ‘Panache’ the widebeam boat featured on our build diary of a huge 69’ long (L) x 11" beam (B) with a height of 46” (D).
Let's work out the calculation by first converting the imperial measurements to metric so we have:
21.03m x 3.35m x 1.16m = 81.35 x 0.16 = 13.01 gross tons… Not a qualifying vessel.
So heres the interesting part in order to get a boat even of this size to qualify the standard (D) measurement would need another 190mm adding giving a (D) measurement of 1.35m. See the revised calculation below:
(21.03m x 3.35m x 1.35) = 95.10 multiplied by 0.16 = 15.21 gross tons, a qualifying ship.
So here's the bottom line:
Provided that the boat is not designed or adapted for recreation or pleasure at the time you buy it and so long as the gross tonnage (L x W x D (from the underside of the back deck, or gunwale if no back deck) x 0.16) works out to be not less than 15 tons the supply of the boat is zero-rated so no VAT. Simple!
Many boat builders are now offering specially designed wide beam craft with higher gunwales that give live-aboard boaters the opportunity for VAT savings.
Misconceptions regarding VAT exempt vessels & residential usage:
There is no legal requirement that a VAT-free vessel be designed as or even used as a residence. Any conditions in HMRC’s Notice 744C (‘Ships, aircraft and associated supplies’) which go further than the statutory provisions are of no legal force. There is no legal justification for imposing an additional condition of permanent residential use.
A word of warning:
It is vital as a 'Purchaser' you read all the contractual documentation regarding the purchase of any vessels and in particular VAT free vessels. There's been a case highlighted to us where a boat had been sold as 'VAT free' unfortunately on incorrect grounds which post sale lead to the HMRC correctly chasing the seller for the VAT which should have been charged. In this particular case the contract of sale placed the responsibility to satisfy any such VAT claim on the purchaser so they had to stump up.