“Payments on account of supplies of goods or services that have not yet been clearly identified cannot be subject to VAT.”
Clarifying VAT on unidentified pre-payments (the BUPA Principle)
This concept is supported by the decision of the European Court of Justice in the BUPA Hospitals Ltd andGoldsborough Developments Ltd v Commissioners of Customs & Excise Case (C-419/02) (“BUPA Case”). In this case, the CJEU ruled that prepayments of the kind at issue in the BUPA Case whereby, lump sums are paid for goods referred to in general terms in a list which may be altered at any time by agreement between the buyer and the seller and from which the buyer may possibly select articles, on the basis of an agreement which he may unilaterally resile from at any time, thereupon recovering the unused balance of the prepayments, is not considered to be a payment on account.
The Advance Provisioning Allowance (APA) in yacht chartering
The above ruling may find its relevance to the concept of advance provisioning allowance (“APA”) in yacht chartering. To begin with, provisioning is a key part of a yacht charter experience and is often facilitated through the APA. The APA refers to a financial arrangement between the yacht owner or operator and the charterer, where a prepayment is made for the procurement of supplies – such as food, beverages, fuel, port fees and other operating expenses, the so-called variable expenses – required for a specific voyage. Furthermore, the APA is generally managed by the yacht’s Captain during the voyage, being responsible for the keeping of records of all expenditure relating to these variables. Any unutilised APA funds are typically refunded to the charterer. Likewise, any excess expenditure may need to be settled by the charterer at the end of the voyage.
VAT implications of the APA: Chargeability and Input Recovery
The question of VAT applicability on the APA itself has been shaped via EU VAT law and rulings of the CJEU, particularly the BUPA Case referred above. As a result, the APA shall be deemed to be a payment on account and in order for the tax to become chargeable when the customer has made a payment on account, all the relevant information concerning the chargeable event, namely the future delivery or future performance, must already be known. Therefore, in particular, when a payment on account is made, the goods or services must be precisely identified. It follows that, payments on account of supplies of goods or services that have not yet been clearly identified cannot be subject to VAT.
Regarding the right to recover input VAT on costs paid using the APA – which right is a key fundamental factor under the EU VAT legislation whereby, it provides for VAT neutrality for taxable persons in relation to supplies of goods and services bought in that are used or intended to be used in the course of their economic activity insofar as the input VAT incurred as a result thereof is attributable to taxable or exempt (with credit) supplies made or intended to be made – insofar as the costs incurred are recharged to the charterer separately at the end of the voyage, then, the yacht owner or operator may be in a position to claim back any input VAT incurred. In this case, the Captain is required to communicate the VAT identification number to the suppliers for the supplies purchased using the APA funds.
Furthermore, costs such as those referred to above namely provisioning costs incurred by the operator or owner of a vessel which is “used for navigation on the high seas and carrying passengers for reward or used for the purposes of a commercial… activities” may fall within the remit of the VAT exemption (with credit) which is governed by Article 148 of Council Directive 2006/112/EC (the “VAT Directive”). However, it is important to note that, such a VAT exemption is not extended to the recharge of these costs when the charterer is a natural person as established by the CJEU in the ‘Bacino Case’ (C-116/10). In general, whilst subscribing to the above, a prudent approach should always be considered when the right of recovery is being exercised on these costs.
Member-State Variations and Practical considerations
It should be appreciated that different Member States may hold different interpretations on whether such a right may be exercised on APA costs and therefore, the practical application of this right may also differ across jurisdictions.
