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Trade deficit widens – aircraft imports blamed

17th February, 2011

Bloomberg reported “The U.K. trade deficit unexpectedly widened to a record in December as aircraft imports surged before the government introduced a change in tax last month.”  

Basically, aircraft over 8 tonnes used to be zero rated and ones under 8 tonnes were not in the UK. But to align with the EU, the basis has changed. Now any aircraft purchased by an airline which runs primarily international services can purchase aircraft and parts zero rated.

Airlines which are only domestic will not be able to buy zero rated aircraft, even if over 8 tonnes. However, they will be able to reclaim VAT, so there is no significant extra cost to those airlines. The only disadvantage would appear to be one of cash flow – there will be a gap between paying and reclaiming VAT.

The only group that will loose out would appear to be where aircraft are privately used and thus where VAT cannot be reclaimed.

The change in VAT rules is not very significant. But it highlights one of the many tax dodges of the aviation industry. As well as no VAT on tickets and fuel, there is usually no VAT on aircraft purchases and parts.