Paradise Papers reveal F1 champion’s advisers set up offshore structure that experts say may be open to legal challenge

The Formula One world champion, Lewis Hamilton, one of the world’s richest sportspeople, avoided paying European taxes on his private jet using an Isle of Man scheme that is to be investigated by HM Revenue and Customs.

The big four accountancy firm EY and Appleby, the law firm at the centre of the Paradise Papers leak, helped Hamilton and dozens of other clients set up seemingly artificial leasing businesses through which they rented their own jets from themselves.



Two law professors who reviewed the scheme described it as potentially “abusive”, saying it doesn’t appear to follow European rules. “No one seems to be enforcing the laws that exist,” said Rita de la Feria, chair of tax law at the University of Leeds.

After being challenged by the Guardian, the Isle of Man government has called in the British tax office, which will this month begin a review of 231 tax refunds issued to private jet owners since 2011, in a $1bn VAT giveaway.



Hamilton said he had instructed a senior lawyer to check his arrangements and was told they were lawful. He said his practice was to rely on professional advice, and he was not concerned with day-to-day management of his business.



Legitimate tax avoidance schemes are not illegal. There is no suggestion Hamilton was directly involved in creating the scheme used for his jet. He sought professional advice and followed it.

What experts say, however, is that the scheme created appears to be so artificial that it is open to challenge, that it allowed Hamilton to avoid tax that would otherwise have been due, and that the Manx government did not take the proper steps to collect the VAT owed.



Hamilton appears to have used shell companies in the British Virgin Islands (BVI), the Isle of Man and Guernsey to avoid the entire £3.3m VAT bill triggered when he imported his £16.5m red Bombardier aircraft into England from Canada in 2013. Hamilton set up another Isle of Man company to purchase a €1.7m motorhome that he uses at racetracks. No VAT appears to have been paid on that purchase either. Hamilton denies using shell companies, and says the Manx entities were part of his businesses.

The British racing driver, born and raised in Stevenage, takes numerous steps to shelter his £130m fortune. He is contracted to Mercedes, with whom he secured his fourth world championship last month, via a Guernsey company. He holds a Malta company for image rights, and has lived as a tax exile since 2007, first in Switzerland and now in Monaco.

How Isle of Man gives big refunds to super-rich on private jet imports Read more

Files leaked from Appleby suggest as much as £1.1m of the VAT he appears to have reclaimed on his jet should have been paid, along with hundreds of thousands due on the continuing costs of flying the jet.



The Paradise Papers data was obtained by the German newspaper Süddeutsche Zeitung and shared by the International Consortium of Investigative Journalists in Washington with more than 90 media partners including the Guardian, the New York Times and the BBC.

It shows how Isle of Man customs hosted a private meeting with an EY adviser during which details of the structure were discussed, and agreed to fast-track the paperwork.

Facebook Twitter Pinterest Hamilton wins the world championship in Mexico, making him the only Briton with four drivers’ championships. Photograph: Mauger/LAT/Rex/Shutterstock

A fortnight after Hamilton’s advisers approached Appleby, the plane arrived in Europe, landing at Ronaldsway airport in the Isle of Man on 21 January 2013. Turnaround was so rapid that an Appleby officer joked by email that they were “moving forward with the pace of a grand prix!!!”.

When Hamilton landed in the Isle of Man at 6.40am on a rainy Monday, a customs officer was on out-of-hours standby – for a £60 fee – to stamp and sign the import form.

Hamilton was not the only passenger. Alongside him in the Challenger 605, painted an unmissable “candy apple” shade with matching red cabin lighting, was his pop star girlfriend, the former Pussycat Dolls singer and X Factor judge Nicole Scherzinger.

The couple, who have since broken up, had used the jet a few weeks earlier for a Christmas break with family in Oahu, Hawaii, and were returning to Europe.

Supervising proceedings at Ronaldsway was Brian Johnson, a director at Appleby’s aviation wing. Having masterminded the creation of the Isle of Man’s private aircraft registry in 2007, Johnson moved to the private sector, putting his air industry contacts to commercial use. When asked to confirm his involvement with the import, Johnson declined to comment.



His job was to ensure a crucial piece of paperwork was issued by Manx customs: the C88A import form. It shows that taxes have been accounted for. Without this, planes cannot circulate freely in and out of European airports. In countries such as France, they risk being impounded unless the owner can prove they have paid import VAT.



At 7.30am, Johnson sent a message from his BlackBerry: “Customs form delivered to aircraft. Clear to go.”

Meet the Isle of Man jet set: oligarchs, bankers and a murder suspect Read more

Having spent barely an hour on the tarmac, the plane was ready to leave for Stuttgart, where Hamilton was due to visit the Mercedes racing team he had just joined.

Shortly afterwards, the public learned Hamilton had joined the private jet set. In the first of many social media posts featuring the plane, which Hamilton christened #redjet on Twitter, he shared a picture of himself reclining in one of the plush leather seats.

His advisers were relieved that the media had not carried too many awkward details. “I thought the article is OK,” his accountant wrote in an email. “Not too much concentration on the VAT benefits and it mentions the availability for charter, which is helpful.”

Lewis Hamilton (@LewisHamilton) Landed in Abu Dhabi ✈. Looking forward to the race weekend ahead. #AbuDhabiGP @bombardierjets #redjet #ambassador pic.twitter.com/uNFI9tYoLi

Flight logs in the Appleby data show no sign that Hamilton’s plane ever returned to the Isle of Man. But it was and continues to be part of a Manx leasing business.

The business was set up for Hamilton by Appleby with advice from EY, using a formula that was offered to dozens of other super-rich clients.

How it worked

The advisers devised the structure and decided the price at which the jet should be leased between the various companies in the chain. Appleby staff set up a Manx company and provided a director, and EY arranged the VAT registration and secured approval for the scheme from customs. This arrangement is not unlawful.



The jet was owned by a BVI company called Stealth Aviation Ltd. At a cost of €140,000 a month, it leased the plane to a specially created Isle of Man company, Stealth (IOM) Ltd, incorporated in January 2013.

Stealth (IOM) leased the plane to a private jet operator in England, at a slightly higher price. This margin allowed the Isle of Man company to turn a profit and therefore claim to be “in business”.

Based at Farnborough, the jet operator is a genuine business that services and charters private jets. It was paid a fee to look after Hamilton’s plane, provide pilots and crew, and do repairs and maintenance.

The operator then signed further rental agreements with Hamilton directly, and with his Guernsey-based company BRV Ltd. Each company in the chain added its percentage to the costs.

The lease payments were flowing out of bank accounts belonging to Hamilton at one end and into bank accounts belonging to him at the other end. The profits made by the Isle of Man company belonged ultimately to its owner and only customer: Hamilton.



The data suggests the sole purpose of the leasing business was to allow Hamilton to rent his plane from himself. Invoices show the jet was not leased to anyone else, and there appears to have been no effort to market it to other customers.

Hamilton’s accountant wrote in an email: “The intention is … to charter the aircraft to third parties, however, it is not clear how much charter (if any) will be achieved – no advanced bookings to date.”

Creating a genuine leasing business was essential, however, to reclaim VAT at import. VAT is a European tax, applied in similar ways across all member states. The British and Manx governments, which claim to have exactly the same VAT rules and enforce them in the same way, set the rate at 20% of the purchase price of any goods and services sold.

Like a plumber who acquires a van, jet owners are entitled to reclaim VAT on the purchase and any running costs if they use their aircraft for business purposes. The idea is that those businesses will eventually, like the plumber, generate VAT income for the government by selling things to end consumers. So they get a tax break on the tools they need to carry out their trade.

EY and Appleby advised clients to demonstrate that their jets were being used for business in two ways: by creating a leasing structure and by using the plane for business travel. However, as with a plumber’s van, if a jet is used for private leisure activities, such as visiting family and friends or going on holiday, VAT must be paid, both on the import and any ongoing costs of flying the jet.



Hamilton does not deny that his plane was put to some private use. An article written soon after the purchase described the Challenger as Hamilton’s “£20m love plane”.

With Scherzinger based in Los Angeles and Hamilton in Monaco, the 500mph (800kph) jet would “ease the strain of his long-distance relationship”, friends were quoted as saying.

Facebook Twitter Pinterest Hamilton and Nicole Scherzinger, his girlfriend at the time the plane was brought to the Isle of Man. Photograph: Clive Mason/Getty Images

Charter contracts show Hamilton intended, at the date of import, to lease the jet for 80 hours a year under his own name, and for 160 hours a year using his Guernsey company BRV. If one-third of flights were going to be for personal use, his tax bill should have been £1.1m – one-third of the £3.3m due on the £16.5m purchase price.



His arrangement appear to raise the following red flags:



He appears to have received a 100% import VAT refund when experts say he should have paid tax in proportion to the amount of private use he intended to make.



He should have declared and paid VAT to any European governments whose airports he used for leisure flights.



The leasing business set up for his jet appears to be a letterbox company with no real economic purpose, and likely should not have been entitled to reclaim VAT from the Isle of Man.

Edoardo Traversa, a tax expert and law professor at Louvain University in Belgium, said: “The entire scheme seems abusive to me. Using a leasing scheme as such is not abusive. However, if you take other elements into consideration, such as the absence in motive of setting up those companies, the fact those companies do not seem to have any substance, all that is likely to lead the court to consider that the scheme is abusive.”

De la Feria, who also reviewed the files, said: “The only reason I can see for setting up these schemes is to hide private use and not pay VAT on it . If there was private use, this is clearcut avoidance.”

Lawyers for Hamilton said his advisers had made all necessary disclosures to customs and he had never hidden his private use of the jet. They say it was predominantly used for business and the leases reflected the commercial use to which he put the aircraft. They claim there were no tax advantages to using the Isle of Man as opposed to the UK or another EU member state for the import.



Both Appleby and EY declined to comment on individual clients and have said that there is nothing unlawful about their advice.

EY said: “All our advice, whether in planning or compliance, is based on our knowledge of tax law and providing transparency to tax authorities. EY does not offer mass market tax-planning schemes. We support efforts to ensure that tax systems remain robust and relevant to today’s ever-changing business world.”

When Hamilton flies in and out of Germany, Hungary, France and Britain, making use of taxpayer-funded runways, border agencies and air traffic control centres, much of his income is not being shared with those countries’ governments.

The papers also reveal details of how Hamilton channels his earnings through tax haven companies in Guernsey, Malta and the BVI.

In March 2015, data from the Malta companies registry shows he incorporated 44IP, named after his racing number, in that country. Official documents describe the company’s purpose as holding “image rights … trademarks, royalties, copyrights”. Its shares are held by Inday Rose Ltd, the BVI company that also ultimately owns his jet, and BRV. As well as renting the jet, BRV holds Hamilton’s contract with Mercedes, the data suggests.

The purpose of 44IP appears to be to channel income from sponsorship deals via Malta, which charges foreign shareholders a 5% corporation tax rate.

The jet is earning money for Hamilton. He has been featured standing next to it in advertising campaigns and regularly shares glossy photos and videos of his prized possession. Alongside valuable sponsorship deals with the cosmetics group L’Oréal and the speaker brand Bose, Hamilton has been paid to promote Bombardier.

Motorhome

In 2015, Hamilton’s advisers arranged the import of a €1.7m motorhome into Europe via the Isle of Man. It appears that no VAT was paid at import. The trailer, a contraption that expands at the press of a button to create extra space, manufactured by the German company Schuler, was to be painted a glossy red like his jet.

Facebook Twitter Pinterest A PR image depicting a Schuler motorhome. Photograph: Schuler

A Manx company, Stealth Transportation (IOM) Ltd, was incorporated in preparation for the transaction. Hamilton’s lawyers say the entity was not a shell company and his trailer, which includes office and treatment space, is used exclusively for business purposes.

• This article was amended on 7 November 2017 to correct a picture caption which referred to Hamilton winning the Mexico Grand Prix. Hamilton did not win that Grand Prix but his performance at that event secured him his fourth world championship.

