The VAT "Chain"

When you buy a VAT paid boat you must ensure that the seller has genuine proof of this.

Mr Green had bought a second hand Sunseeker Manhattan from a dealer on the South Coast. He was a sensible purchaser who had bought boats previously.  He was aware that the seller, Mr Smith would have to prove to him that he was the owner, that the VAT had been paid and that the boat was as described in the advertisement.  He insisted that a written contract was produced and that it contained all the usual warranties.  In due course he saw copies of all the previous Bills of Sale, registration and proof that the VAT had been paid.  When he saw the copy documents Mr Green wisely insisted that he saw the original VAT documents.  This would enable him to satisfy HMRC, if questioned.  

The seller had nothing to hide.  He had bought the boat from its second owner, who had in turn bought it from its first owner.  The complete chain of ownership could be seen from the Bills of Sale.

The first purchaser had bought the boat new and had immediately taken it to Spain.  He had left all this in the hands of his agent, who said that he would pay the IVA in Gibraltar.  The relevant certificate was still with the documents.

Mr Green received all these documents at completion and spent the next five years enjoying the boat.  He was then fortunate to be in a position to sell it and buy a much larger vessel.  He found a buyer and presented all his documents to him. Mr Holman was a cautious man and he passed them to his Spanish lawyer. He was not happy with the IVA certificate so Mr Holman insisted that Mr Green prove that it was genuine.

The law

Under the VAT Guidance issued by HMRC, VAT is accepted as paid if appropriate documentary evidence supporting this can be produced.  Such evidence should be carried at all times and Customs officials in EU Member States may require you to produce it.  Acceptable evidence in the UK is the original invoice or receipt, evidence that the VAT was paid at importation or invoices for materials used in the construction of a home built vessel.  Registration documents do not prove VAT status as there is no link between these and payment of VAT.

The Outcome

Poor old Mr Green was unable to prove that VAT had been paid. He thought he had an original document but having consulted Spanish lawyers it transpired that the original purchaser had been duped by his Spanish agent, who had pocketed the money and provided a forged document.  The IVA authorities in Spain had no record of payment and the vessel was therefore deemed as non VAT paid.

Where did this leave Mr Green?  The boat was in not in fact VAT paid and he was now either liable for payment on the current value or he had to sell it non VAT paid.   

He was not too happy and immediately consulted his legal advisors. They could only threaten legal action against Mr Smith, who had innocently misrepresented that the VAT had been paid. Despite being innocent of any wrongdoing, in reality, he was in breach of his sale contract with Mr Green and had to settle.

Mr Smith in turn, had a contract with his seller, who could have then have taken legal action against the original purchaser, who also genuinely thought that that he had paid the IVA.

The financial outcome was that Mr Green settled with Mr Smith for £30,000 and, in a falling market, Mr Green reduced the price to Mr Holman by £40,000.  It was fortunate that Mr Smith could be located and that he had funds to make this payment.  It is also very likely that the pervious owners would not have been contactable or simply unable to pay.

Lessons learned

The moral is that great attention needs to be paid to VAT documents particularly if they are foreign.  Although all sale contracts should contain a warranty about VAT, this is only enforceable against the person making it.  If the seller, at some future point, is proven to have been inaccurate or mistaken, he may be in breach of contract but will only be able to pay this if he can be successfully sued or indeed found. Avoid all this by checking them thoroughly at the time of purchase.

For further information, please contact Brian Taylor on +44 (0)1752 526032 or b.taylor@ashfords.co.uk, who specialises in marine work including contracts, collisions and VAT advice.

First published in 'Motor Boat & Yachting – Europe's best motor boat magazine'. 

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