Guernsey: All Change In The Yachting Industry

Last Updated: 29 June 1999

The traditional yachtsman who has a 30ft sailing yacht is surprised by the cost of the superyachts, how much their owners lavish care and expense on them and the number of 'hangers-on' it takes to support the larger yachts.

Those who have experience in commercial shipping, while well aware of the high costs of building and running large vessels, are surprised by the lack of the strict budgetary and technical controls that are usually provided by onshore ship managers. Furthermore, from their professional viewpoint, they cannot understand how a yacht often costing more than an equivalent-sized commercial vessel does not have to comply with strict manning and other regulations.

However large a superyacht is, it remains 'one man’s toy' and, in most cases, the pleasure he derives from the superyacht comes from its purchase and occasional use rather than any long-term commercial operation. Cynics argue that the pleasure derived from actually owning a yacht is often inversely proportional to its size and that the owner of a small sailing yacht may well have more fun using it than the hard-pressed owner of a large 40m superyacht which requires endless administration time and expenditure.

The existing situation of yacht brokers and builders selling yachts, and offshore companies (often in Guernsey) forming companies to own and register them is well known. Also well known are the requirements for insurance cover over the superyacht and crew and the ancillary services, such a radio licensing and satellite communication commissioning.

However, I believe that the current status quo will be significantly changed in the future by the increased regulation of the ownership and operation of superyachts. Thus the 'professional amateur' status of the yachting industry will change into a more professional yacht management industry similar to merchant shipping. The forces for change are as discussed below.

Value Added Tax

This Europe-wide tax on goods and services has caused the yachting industry difficulty since the end of 1992 when it was agreed by all European member states that VAT legislation should be amended to the extent that only yachts used by non-European residents can remain in EU waters on a VAT-free basis. Although all member states agreed to implement these changes immediately in 1993, several of them have still not acted.

Nevertheless, it will certainly become more difficult for an EU resident to avoid paying VAT on a superyacht. As a result of this many VAT avoidance schemes have been developed, some with more credibility than others. However, there are several schemes which appear to work well in practice and where the scheme costs compare favourably against an up-front VAT liability of between 15% and 25% of the value of the superyacht. In essence, any client embarking on any of these schemes should be absolutely certain of the risks associated with the scheme and would be well advised to use a scheme designed and supported by a leading tax advisor.

The 'holy grail' for all yacht owners is to have their yacht classed as commercial and therefore eligible for the same VAT exemptions as any commercial vessel including purchasing VAT-free fuel and supplies. The market abounds with stories of how best to achieve this almost mythical status. In general any yacht that is chartered as a commercial venture can benefit from such advantages without the need for any particularly great or elaborate ownership/registration scenario. Problems occur for yachts which are chartered occasionally but cannot be considered as used solely for commercial operations.

The Luxembourg Marine Registry has developed the specific category of 'commercial yachts', which has been primarily devised for the fiscal advantages of commercial yacht status. Other commercial yacht classifications do exist, but these are more concerned with safety requirements than any fiscal gain. In practice all of these commercial registers have stricter manning and safety regulations than those for pure pleasure yachts. The Luxembourg flag in particular has wide ranging and specific regulations for manning and safety which must be adhered to and which bear closer comparison with a commercial ship operation. Thus the more relaxed nature of running a pleasure yacht does not always suit the more stringent commercial registration regime.

The problems of VAT will not go away and owners are now beginning to realise that they must either pay VAT on a new yacht or choose an alternative deferment scheme which itself may well have repercussions for the ongoing operational expenses of their yachts. The benefits and disadvantages of each option open to the owners must be considered before a final choice is made.

Manning and Safety Regulations

Most large yachts are registered at one of the Red Ensign Ports of Registry (eg: London, Southampton, and Guernsey) and it is a fair assumption that the great majority of these yachts do not comply with the manning and safety regulations specified by the British authorities. These regulations are specific in stating the minimum safety and manning regulations. Indeed, if the regulations were strictly enforced, every larger British registered yacht would have Merchant Navy officers.

The current status quo will change when the British Marine Safety Agency introduces codes of practice for commercially operated yachts over 24m. Although the introduction of the regulations has been slow, it seems likely that British yachts used commercially will have to be manned in accordance with specific regulations.

The Marine Safety Agency recognises that the existing requirements for Merchant Navy qualified deck officers and engineers are not in accordance with the usual practice in the yachting industry and have amended them to allow previously qualified yacht skippers to upgrade, their paper qualifications to those similar to a Merchant Navy qualifications. Such upgrades include radar courses, fire fighting and medical training. In effect the requirements have been made less stringent, but will be enforced to a greater extent than those currently in force.

Although these requirements only apply to yachts used for charter, a prudent owner who does not charter his yacht, would still be well advised to review the regulations applying to his superyacht since greater attention will be given to compliance with the existing regulations. The prime enforcers of these new regulations will be the port states - the authorities in each port who will check that a visiting yacht is operated in accordance with its own flag’s requirements.

New Yacht Registers

Inevitably some owners will seek out a 'flag of convenience' that has less complex manning requirements. Yacht owners will look to their offshore yacht and company manager to offer a range of alternatives and there may well be a general drift away from the more traditional ports of registry to more unusual ones. In this way the yachting industry may follow its shipping equivalent by searching for a 'truly convenient offshore' register.

Yachts are one of the most ostentatious ways of displaying wealth and any proud owner, however cost conscious, does not wish to give the impression of scrimping and saving on the yacht’s upkeep. Therefore the traditional ports will continue to be the choice of many owners. The traditional yachtsmen will accept the changes as part of the fun of yacht ownership and will probably derive as much pleasure from discussing which VAT planning scheme to use as from actually sailing.

As technical changes make yachts easier to handle and maintain, the size of the new superyachts will grow and with this increase will come a need for owners to identify yacht managers experienced and knowledgeable in this complex world to ensure that they enjoy their superyachts without worry. For those yacht owners not so well-versed in the diversities of yacht ownership, and the possible problems that ensue, these changes may well only tend to force them away from ownership and perhaps simply to chartering yachts when required.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to iofch@mondaq.com

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