Charter Income

[Genoa]

I am currently looking at buying a new (or recent second hand) boat, and will need to borrow about 50% of the value. The loan will be about £80k. However, I want to charter the boat for about 60% of the season, and assume I can make about £20k pa for a 44' yacht. Is it possible to offset the income received from the cost of the loan, prior to the taxman taxing his 40%, treating it as personal income. A Spanish charter company and brokerage is offering an interesting scheme to offset charter income against the purchase price. Is any one doing this in the UK? What are the best sources of information ?
I would be interested in any feedback

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[FullCircle]

Me too. So be good enough to give us the skinny on this no doubt legitimate wheeze.

Ta

Jim & Lynn

<hr width=100% size=1>Our engine will never wear out - it only runs for 5 mins before packing it in again.

 

[Talbot]

There are several companies doing this, especially catamarans being chartered in west indies. My thoughts are that yes your boat may well be paid for at the end of 3-4 years, but it will be shagged and only worth a fraction of the original price! If it was such a good wheeze, why are the charter companies trying to get people to sign up for it!

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[Twister_Ken]

Dunno, but general opinion is that charter income covers the costs of equipping the boat to charter standards, finance, and running costs, but doesn't make a profit on the investment, and that you end up with a shagged boat.

<hr width=100% size=1><A target="_blank" HREF=http://www.writeforweb.com/twister1>Let's Twist Again</A>

 

[Observer]

Dunno about boat being shagged or not but the business principle being exploited is leverage. Charter company probably not awfully creditworthy so can's raise (enough) debt on its own covenant. If it can lure private punters to finance the acquisition cost, it makes a nice living from charter management without having to find (and service) the equity and debt it would otherwise need.

If the charter manager is good enough (sufficient charter revenue plus management) it probably makes a lot of sense for punter as well. Big IF.

<hr width=100% size=1><A target="_blank" HREF=http://aflcharters.co.uk>Dream Dancer</A>

 

[Sea Devil]

I looked at buying a new boat over 5 years with a big charter company in the Windies.... All looked wonderful except very difficult to get any gurrantee that the boat will in fact be chartered. boats more than 5 years old or so are harder to charter than newer ones - anyone who is chartering prefers to have an almost new boat that is all singing all dancing - when you hire a car what is it - almost always it is not more than 2 years old.

When I read the small print to achieve the return they suggested possible on a new buy to charter it transpired that they included 6 weeks a year of my own usage (rated at the top charter rate) I was expected to charter it to 'friends, for another 4 weeks of the year - (the 'friends' paid the charter company the going rate) and so on - certainly if you are pretty rich the tax break makes the deal more worth while and interesting but I am not in that situation.

I then looked at buying ex charter boats - more than 6 or 7 years old - owned once having left the business - really tired - sad state - and I think anyone who charters has to expect their boat to suffer. The boats are going to be sailed hard with a lot of people on board.

my son regulaly charters from Sunsail in the Solent - he goes with a crowd of friends so price is not really the issue - he expects and gets good quality almost new boats with excellent equipment - I suspect he may be a typical charterer.

Not sure what all that means except most small charter companies cannot compeat with the Sunsail - Moorings type operations and will probably not achieve sufficient charters to make the hassel worth while - could be wrong of course but from what I have seen in the med particulaly Greece where the govermant offeres greek charterers big tax breaks most stay in business a very short time because of the lack of clients..
If it works for you let me know and I will think about it too!!!!!!!
regards
Michael

<hr width=100% size=1>If you have time visit my web site
www.michaelbriant.com/sailing

 

[tcm]

the boat will need to be coded for "serious" charter - or in other "legal" charter and that ain't cheap. You can't just lend out the boat, and there are insurance ramifications too.

imho, unless you are willing to lettem charter for August in the med, or over christmas in the caribbean, it ain't worth the hassle.

incidentally, even "new" sailing boats are already shagged: fultime charter puts on 1000 hours a year in a sailing boat in the carribee.

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[jfm]

Dull tax post

On the specific tax question, assuming you do it yourself and not thru the moorings.sunsail schemes. the answer is as follws. I assume UK use.

1. First, if you do it in your own name, no company---->

a. The interest cost (just the interest, not the loan principal repayments) will be partly tax deductible. The "partly" will be a negotiation with your tax inspector but likely to be the charter use % so say 60% of interest will be tax deductible.

b. Likewise 60% maintenance etc, tax deductible

c. you can also deduct boat depreciation but special rules determine how much, ie the real depreciation is irrelvant (except in the year you sell the boat) You can deduct the 60% of 25% of the boat's cost, each year, on a reducing balance basis. Ie in year 1 you deduct 60% of 100% of boat cost, in year 2 you deduct 60% of 75% of boat cost, year 3 60% of 56.25% of boat cost, etc. When you sell the boat, some of this may be taxed under a clawback calculation. Eg if you sell at end of year 2 for say 72% of new cost, you have taxable income of 60% of (72-56.25%) of boat cost, ie 60% of 15.75% of boat cost. In other words, your total tax deduction will have been 60% of 28% of boat cost, (28% being the true depreciation)

If after all this the charter income is so high you make a profit, then 41% tax. If it's a loss, you pay no tax but you cannot deduct the loss from your taxed day job salary

2. Second, if you buy boat in a company----->
a. all the interest is tax deductible from the charter income
b. if make a loss, cannot use it against salary from your day job, same as above
c. Your personal use of boat will be a tax killer - benefit in kind rules. Without something clever, your 40% use will cost you personal tax cash each year of 41% (your personal tax rate i assume) x 40 (use factor) x 15% (a number in tax law) x cost of boat. Every year, eek. But you could cure this using a special trust deed, quite easily, which sadly many company-boat owners fail to do. So assume zero benefit in kind tax, if you do it right

There's a bit more detail but I'm getting bored typing and you'll be bored reading by now. 20k pa charter income means no certainty of VAT registration, so you might pay VAT on the entire boat purchase cost, which is a bit barmy... unless you IoM VAT register but that costs £3k pa in professional fees, dang.

 

[Sailfree]

If you are serious about it you can Charter your boat to offset some of your total running cost. By implication though by chartering you need to add £10000 of equipment (safety equipment etc for coding) to your boat and unless you are with the big boys that charter matched fleets of basic boats the best income will only be achieved by the highest specification level (heater, radar & chartplotter etc) on the boat and with a charter company offering highest levels of service and cleanliness.
By chartering there can be no cheap mooring but a berth at an expensive well equipped mariina that the charter company operates from. Well equipped and well looked after boats get a following and repeat bookings.
Initial years you will suffer the high depreciation of all new AWB suffer (and slightly higher due to chartering). You should remember though that lack of use is even worse than heavy use. A successful boat will go out most weekend and not necessarily get heavy use.
If you start with the understanding that you will not recoup you costs and it is not an investment it is merely a way of owning a boat and offsetting some of your total running costs you may be satisfied. There is slightly higher wear of running gear which leads to a higher maintenance bill to maintain the boat in good condition.
The costs and risks are much less if you buy a secondhand boat already on charter with regular bookings but you then loose the brief pleasure of a new toy! Buying an established boat also results in a more bonfida business case.
The VAT people and income tax now look very carefully at people who claim to be buying a boat for charter boat and disallow those they consider are really buying it for their own benefit. There was an article in YM where the VAT people are currently refusing to refund the VAT element of a new boat purchase. 40% owner use spread over the year is probably too much to claim a charter business as genuine. You must also invoice yourself and pay VAT for all periods of owners use. I do it as it is the only way I can afford having our own boat but I am careful to stick to the rules and have shown on 2 VAT inspections that I fully pay for owners use. PM me if you are serious and require specific information.


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[Genoa]

Re: Dull tax post

Thanks,
At last someone who really understood the issue. The basics ofa shagged boat are well understood by all. The issue is how to make depreciation a tax deductable expense against any form of charter revenue. Is this all documented somewhere?

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[jfm]

Re: Dull tax post

As you say, I'm only covering the tax, not the shagging risk of chartering your boat - that's a separate subject.

The tax jargon for tax deduction on depreciation is "Capital Allowances". It's documented in the Capital Allowances Act 2001, a document so dull it makes my post look flash. But google UK for capital allowances, or look on <A target="_blank" HREF=http://www.inlandrevenue.gov.uk>http://www.inlandrevenue.gov.uk</A>. The 60/40 split part in my post above isn't much documented, most of what you read assumes an asset will be 100% business use, not a blend of private and business use, but the 60/40 split I described is what the Revenue will let you do.

The cost of MCA coding varies but I would expect you can do it for less than sailfree's £10k. I coded a new mobo, 58feet, february this year, for 12 passengers and 2 crew, incremental cost was about £4,500, including gear and surveyor fees. Some of the mods I did diy, so maybe I avoided £1000 of labour, but still it was much less than £10k. Incidentally, some of the MCA gear you have to buy is good stuff, like proper first aid stuff, etc, so I didn't begrudge paying it. You need to read the MCA rules imho because the surveyors occasionally dont understand them so tell you to add gear and make mods which are perhaps not required by the rules.

Sailfree's VAT commentary is ok BUT (a) if you VAT register in IoM (which is part of UK, for VAT purposes) the VAT recovery on purchase price is refunded without question, only catch is you wind up paying 3k legal fees pa, dang (b) in your case you can recover 60% of VAT dead easy by jointly owning your boat with your charter company, on a time share. Obviously this costs you the other 40% VAT but you get an easy life (c) if it's a big boat (50 feet plus) you can acquire it VAT free, with no legal fees or clunky leasing schemes, just simple outright ownership, if you're prepared to locate it in France for a few months, but based on the price you mention I assume you are looking sub 50foot so not relevant

Also on VAT, if you get a refund of the purchase VAT as per a + b above, you have to charge VAT when you sell her, so it is a cash flow benefit mostly, I mean you give back the tax saving at the end, to the VATman. But if you use option b, you will recover 60% of the initial VAT but only have to charge VAT when you sell the boat on about 1/3 of the sales price, AND you wont have to pay VAT on charter fees everytime you charter her (as sailfree is doing - he is paying dribs and drabs of VAT out of his own pocket every time he uses his own boat, yuk) ) so you actually make a better saving than first appears. To get this effect needs a special little document - boat share agreement- between you and your company. If you run the boat thru Europe (c above) the VAT saving is almost absolute

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[cartman]

Re: Dull tax post

get a good accountant. I charter my boat regularly as a self employed venture. Most of my costs can be offest against tax. Boats are a depreciating asset and that helps. The only way to make cash in this business is to have a fleet of boats (see sunsail etc as mentioned by somebody else). You have to do it because you want to. be very wary of charter management companies.. I do much better by going alone and teaming up with other like minded people. we specialise in chartering old boats cheaply, and do steady business with that. It pays the bills and means i get to go sailing for more or less nothing.

Steve

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[Sailfree]

Re: Dull tax post

First nothing is tax deductable if the Inland Revenue (IR) decide that you did not commence a business with an intention of making a profit. This became well established when many sucessful people tried offsetting the cost of their expensive hobbies eg motor racing against their income. 40% private use demonstrates you are not trying to make a profit. It is acceptable to book and pay for periods when you wish to use the boat but the boat must be exclusively available for charter outside these owner hire periods. I understand that some over ambitious charter owners have had any losses they tried to offset pro rata to the ratio that the boat has been used for charter to the remainder (whether the owner used it or not).
I am currently discussing capital allowances on a construction project and the Inland Revenue are definately rewritting the rules! I am not clear whether this more agressive approach is driven by bonuses, government targets or sympathy with the governments lack of cash!
The grey area is when you try to make a profit but fail. My understanding is that as a limited company you are not allowed to offset losses in a disimilar area of business to the main business but as a sole trader you can. As a sole trader losses can be offset against your income tax whether PAYE or otherwise. These losses may be due to depreciation, running costs etc but beware of treating others as fools. On one boat I did get more than it was valued in the books due to a part exchange deal (the difference in cost was still correct - boat distributors are not fools either!) I had to put an adjustment in the accounts for that year.
Its tempting to listen to words you like to hear but remember that the Inland Revenues interpretation of the rules are not always consistent between offices and the cost of disputing them can be very expensive. Generally they try to be fair and possibly some people get away with some doubtfull claims but only because the IR have bigger fish to fry.


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