What do we actually know?
The EU-UK Trade and Cooperation Agreement (the Agreement) does not have a single mention of the words yacht, superyacht, pleasure vessel or recreational vessel. Not ideal and therefore we have to apply general law as we know it to the superyacht industry as it will be affected by Brexit.
Will Contracts Change?
The content of contracts should not change. People who want to build new yachts, buy or sell second-hand yachts or indeed do anything which requires a contract, are still free to do so under English law. The reasons for choosing English law have not changed, the expertise of the practitioners and certainty of legal outcome through precedent still rank high in clients’ reasons to choose English law. The choice of English law or the choice of law of an EU member state will be respected both by the English courts or the courts in the EU Member states. What is absolutely certain is that Brexit does not affect arbitration and the enforcement of arbitration awards. However, the December 2020 Agreement is silent on what happens in respect of the enforceability of judgements of English courts in the EU or the courts of EU member states in the UK.
In the past, contractual discussions about law and jurisdiction were often just a battle of national wills or commercial positions taken by individuals. The discussions were never about the principles of jurisdiction or enforceability. That may now change. However, in the European context these issues mainly arise in relation to old contracts, which are no longer supported by EU rules. With new contracts it is a different story, because parties can usually fall back on new global rules. So although there will be instability in the short term, with aggressive litigators challenging English jurisdiction agreements and some disputes being litigated in two countries at the same time, this state of affairs should not continue for very long. It is even possible that the EU will agree to treat the UK like most EFTA states where litigation is concerned, although it has not decided whether it will do that yet. The picture is an evolving one and somewhat confusing, so clients should seek specific legal advice on this topic, especially if their disputes are not going to be resolved by international arbitration.
Can my superyacht fly the Red Ensign in the EU?
The UK flag is no longer a European flag. Historically it has always been the case that the Red Ensign, defaced or otherwise, was less likely to be boarded by European customs officers than other flags especially if the home port was London. Now, all Red Ensign flagged yachts are non-EU flagged. Their presence is not illegal in the EU and although EU Regulation 3577/92 could be invoked by individual EU member states to prevent non-EU flagged yachts from operating commercially in EU waters, no EU state has ever done so. Superyachts flying the Caribbean Red Ensign have chartered successfully unhindered in the EU for many years, apart from very short lived interruptions in Greece and Palma. This is unlikely to change with the UK now joining that fleet. What might happen is that there may be demands to prove the tax status of the yacht in the EU. Is the yacht VAT paid and in free circulation (pre-Brexit status) and private? Is the yacht VAT paid or VAT accounted for and in free-circulation and operating commercially? Or is the yacht in the EU under the temporary importation regime? You need to know the answer and provide proof.
Operating my superyacht commercially?
The principle change here is that if the superyacht owning company was VAT registered in the UK, but it operates principally in the EU you will have to move your [home] chartering VAT registration to an EU member state.
What about my crew?
If you have any crew that are British nationals and the yacht is permanently berthed in an EU port, they will be treated the same as any other non-EU crew. That means they will have to be stamped in and out of the Schengen area when they board and disembark in order to pause the maximum 90 days out of a rolling 180 days, that they are allowed to remain in the EU. As to employment law? The general rule is that the law most closely connected with the delivery of the employment will apply. If the yacht is permanently moored in the EU, France for example, then French employment law is likely to apply.
Now this is where it gets interesting. For the first time superyachts which are owned by UK nationals or residents, provided they are not resident or established in the EU, can claim Temporary Importation Relief (TIR) for 18 months. As always, these 18 months can be renewed endlessly by leaving the EU and restarting the TIR clock. This would allow a UK national or resident to take delivery of a new build, or a secondhand yacht, offshore and sail into the EU Customs area without paying import VAT, however this does limit how one can use the yacht in the EU and whom one can have on board when the beneficial owner is not present. However, if the yacht sails into the UK, HMRC will demand UK import VAT.
Additionally, for those who had a VAT accounted for, or VAT paid, yacht where the yacht has previously been to the UK, HMRC say that if you are looking to return to the UK and claim Return Goods Relief (RGR) you must do so before 31st December 2021 or you will have to pay VAT again on your return to the UK. However, if the yacht has never been to the UK and paid or accounted for VAT whilst outside the UK, RGR will not be available, even if it comes back to the UK before the end of 2021. In those circumstances you will have to avoid the UK and stay in the EU where your VAT status will be preserved. If you paid VAT in the UK and sell the yacht in the UK, you will lose EU VAT paid status. One final issue, will EU flagged, and taxed yachts be able to start or end charters in the UK? The answer is yes, but they will have to be VAT registered in the UK and pay VAT to the UK authorities for the part of the charter that happens in the UK. As an aside, UK based retail and charter brokers will have to file accounts for their commissions to HMRC.
The UK as a refit hub
The biggest potential side effect of Brexit is that the UK may become a destination for refits for non-UK flagged yachts owned by non-UK nationals or residents. This pre-supposes that the size of the refit justifies the fuel spend just to get to the UK. Now any qualifying superyacht can mitigate its tax exposure by applying for Inward Processing Relief from the VAT on any refit expenditure. However, the slight kink in the tail is the potential impact on the RGR for an EU tax paid yacht returning to the EU post any refit. In order to preserve any EU VAT paid status, firstly, a superyacht must return to the EU within 3 years and secondly, she must be substantially in the same condition she was in when she left the EU. A major refit might blow a hole in that with a potential VAT charge on reimportation into the EU calculated on the value of the refit work. Ordinary maintenance may well be exempt but speak to your tax advisor before coming to the UK for a refit. For non-UK yachts which are benefitting from TIR in the EU, the problems of RGR will not apply to them and in those circumstances VAT free refits in the UK begin to look quite attractive.
Perhaps it was too much to expect to have all the post-Brexit issues definitively resolved, but at least we have the measure of them and can move ahead.