Best way to run a syndicate

As has been highlighted by JasonC and again Peter, the structure and how people will have to share, or pay for someone to carry out, work is critical and frequently getting someone to step up to the plate to assist nigh impossible.

Should you opt for the Limited Company or LLP route with VAT registration et al, please be aware that the old Customs & Excise enjoyed powers more far-reaching than any police force and those powers were grandfathered to the newly created HMRC with some deplorable excesses at the outset.

This is not to say that all contact with those authorities is fraught with trauma, simply that, depending upon your punctiliousness with the paperwork – and I am sure JasonC and Peter are able to expand on that issue – and the way the powers of HMRC are exercised, they can make your life more complicated than you would wish.

IME booking arrangements are another critical issue to determine at the outset between owners. Clarifying them can be materially assisted by the use of such free services as Airchunk, of which I have first hand experience (and in which I have no pecuniary interest!) and have found excellent.

A reasonable future booking policy is necessary to avoid the abuses highlighted by Peter: no bookings more than two of three months ahead, no more than three simultaneous bookings, no more than six consecutive days with the aircraft away from base without unanimous agreement between owners is also a suggestion I would make. The option for any booking to be ‘bounced’ for maintenance etc.will all need to be addressed in what, in a Limited Company or LLP would be a Shareholder’s or Partner’s Agreement and in the case of the FS to which I referred in an earlier post ( in point of fact an Industrial & Provident Society limited by shares and run as a non profit IPS) it would be enshrined in its constitution and/or it’s Memorandum and Articles of Association.

Even anodyne subjects, like aircraft cleaning, provide a platform for grievance: whilst Peter and JasonC are individual owners and are much more likely to maintain their aircraft in pristine condition, one owner whose standard falls below that of the others can prove aggravating, especially when rocking-up to find mud and crud on the aircraft, flies on the windshield etc. that someone else has overlooked can, IME lead to an exchange of heated words and more!

Banal and petty – you bet.

However any experienced divorce lawyer will tell you it’s the banal and petty issues which lead to the most serious conflict and getting people to sign up to these issues ahead of time will, once again IME, provide provide a yardstick as to their future performance.

This information is by way of background in order to assist in your discussions with any professional advisor you may consult.

The best of luck with your project.

What an interesting thread.

I write as a partner in a 100+ person accounting firm. I’m a Chartered Accountant as you may have guessed but I also head up our litigation support department. I spend a lot of my time advising people involved in serious stressful litigation and other disputes and in writing expert reports for the High Court. I own and fly a wonderful 24 year old TB20 (which Peter helped me to assess before purchase). I am not posting here to try to pick up business for my firm as may quickly be obvious from what I write below.

Before I looked at buying a plane (which was to be my first purchase of an interest in a plane since gaining my PPL / IMC) I looked at buying into a syndicate / group – I thought it would be a cheaper way of getting into plane ownership and that I would learn about owning a plane from others. I also thought that I would be happy sharing the use of the plane with others because I didn’t at the time fly every flyable weekend or indeed mid-week. It seemed like a very good compromise on all fronts. In fact, as soon as I looked deeper into it, it seemed like a very bad compromise on all fronts instead, except of course that the entry price was lower than outright purchase. What I found was as follows:

• There were lots of different ownership models – unincorporated trusts, limited companies, other undefined verbal agreements (!) No one was clear what was best. Many opted for arranging ownership through a company limited by shares (what is referred to in this thread as a Limited Company, but is in fact only one possible legal structure for a company.)

• Every single grouping that I looked into was dysfunctional in one way or another – groups with some rarely flying members were the most dysfunctional. Those members seemed to take particular dislike to coughing up more than the monthly sub and so were not willing to pay for repairs or upgrades. One plane I looked at had a reasonably sized tear in the fabric of the pilot’s seat that could not be attended to because there were no funds – needless to say, many of the instruments were also marked u/s. I’d hate to think what it was like under the hood as it were. There were also, as mentioned above, particular issues with groups with VFR/IFR disagreements re equipment maintenance and upgrades. There were also common dysfunctions within groups where one or more members were facing hard times financially – who pays their subs in the meantime to keep the plane flying and how does one deal with such non-payment as regards membership of the group?

• Those groups that had set themselves up as companies seemed to have seriously deficient accounting practices – their accounts at Companies House often didn’t comply with the Companies Act and the companies’ accounting policies seemed to me to be plain wrong – for instance depreciating the plane below residual value. (Someone needed to think about how properly to not apply depreciation when all it would do would be to lead to misleading accounts – but the payment of some real accounting fees would probably be required.) HMRC’s benefit in kind rules would also be a problem in some circumstances.

• Many of the companies were unclear of their corporation tax position and one or two “massaged” their accounts to show losses when in fact I think that a “mutual trading” argument could have kept HMRC happy in an alternative structure…but I haven’t looked into this so please don’t quote me.

The answer that these groups needed in order not to be dysfunctional were all of the things mentioned in the posts above (i.e. a good group of people in close agreement about how the plane would be maintained, some people with time and money etc.) and also, in my opinion, at least the following:

1. A properly drawn up legal agreement between the members of the group, whatever its formal legal structure. This agreement needs to be comprehensive and for instance include details of how decisions are to be made on upgrades and repairs and an agreed condition for the plane as a minimum flyable state. This agreement must also include how members who can’t pay or won’t pay are to be dealt with, and the mechanism governing how shares are to be sold, and what happens during the “for sale” period. Valuable trading companies unconnected with aviation often have very good shareholder agreements and borrowing from such agreements (and using a competent lawyer) would be a very good idea….but these things cost money.

2. I think that groups need to organise their affairs so that all members have to pay in more than is budgeted for spending. If every member of a group had to pay in say (as an example) £5,000 as an initial capital float and then had to keep up all future payments for monthly subscriptions and repairs, then if later someone didn’t want to pay their subs or could not, the group could still use their money (against their will as it were, but in accordance with the group agreement – see 1 above) whilst the dispute continued – so the plane would be just fine, whilst the non-payer remained non-paying, at least in the short term. I have not come across a single group that asks for a float contribution at the outset of membership.

3. The groups also need an engine and prop fund. I was surprised by how many groups did not have such a thing. One group member invited me to buy his share in a group where there was no such fund and an engine overhaul looming in a year or two. I wasn’t convinced that any of the other members had the money to contribute and I didn’t want to pay up for the subsidised flying over the past years that the selling member and others had enjoyed….

Key to all this is the unpleasant but necessary overlap of pleasure and “business”. Flying for most owners / part owners of small planes is a pleasure pursuit and not a business activity, but money, legality and commerce have to be involved. Unless one wants a mess in a flying group (and there are so many messes out there) I think one has to be very careful and lucky, or instead spend money with professional advisers (lawyers and accountants) at the outset. One needs the right structure, the right financing, the right agreement and the right tax position. Learning about such things does not come from flying nor from reading posts (including this one) on helpful online aviation forums.

I have learned a thing by reading this thread – I hadn’t thought about using an IPS or Friendly Society as the legal framework for a grouping and wonder if it is a good structure. Interesting. I think that an LLP is probably a bad structure – transparent for direct tax purposes and complex legally and accounting-wise, but it might work well for expensive planes where people are prepared to invest money at the outset in getting professional advice.

As I said, I’m not looking to ruin my pastime by getting involved on a professional basis with helping people to form plane ownership groups. I would hope that there are some good professionals in the field already, although I don’t know of any. The main issue is going to be cost : people spending say £20,000 on a plane share are not going to be happy to spend a percentage on top of that in taking good professional advice which is expensive.

One other thing. I have really enjoyed my sole ownership of my plane. I have flown much more than I otherwise would had I joined a group. I have enjoyed knowing all about my plane’s state and learning from here and other websites (thanks again Peter) how to keep my plane in a good state and how to stretch my flying. I have had no arguments with part-owners and I hope to get a good price when I ultimately choose to sell my plane which may at the time be easier to sell than trying to sell a part-share in a dysfunctional group!

Happy flying,

Howard

I’ve been a member of a Jodel DR1050 Group for over 24 years. One member of the 6 has been for longer. Originally we had one IMCR instrument pilot, who flew in IMC – and had arguments about the equipment. I had an IMCR, but did not consider flying it deliberately in IMC, due to the equipment. I would concur that VFR and IFR don’t mix well. I tried to sell my share at one time over keeping it night airworthy – no other member at that time flew at night. I stayed because no-one wanted the share.
Now, on a Permit, we are VFR Day only.
Over that time, we had one member stop flying and paying his monthly. We just let it run until his share value equalled his debt.
We’ve had 2 insurance write-offs – one a fatal. A fatal does not affect your premium, as that pilot is off the insurance. Other accidents do – and it would be wise to consider how the increased premium will be shared. We have a deductable which the pilot has to pay – with an agreed let-out for some situations.
As we are Permit, we do our own maintenance, and doing the work has never been a problem.
The flying is not shared equally – I do more than 60% of it. The present Group members ages are from 30+ to 78, with accountant, now retired businessman, retired police sergeant, off-shore geologist, truckdriver, and me – now retired teacher. We seldom all meet, but have had no major disagreements. More than three, has an advantage in disagreements – one to two is more likely to get bitter than one to three, or three to three. There’s no problem with people who pay, but fly very little – providing someone flies a lot.
As regard legal agreements – consider whether you would spend the money on legal action to enforce any clause in the agreement. We have a simple agreement. I have always argued for making a profit – that way unexpected expenses don’t cause problems. At present, we are ahead of our engine fund plan – if the engine agrees with the plan.
Monthly covers fixed costs – hangarage, annual, insurance etc. Flying hour charge (on tach) covers fuel, maintenance,and engine etc. funds. A charge per tach hour, a monthly charge, and deduct any oil or parts you buy, keep the accounting reasonably simple. The retired business owner does the books.
I would advise against charging dry – you’ll have problems with the fuel measurement.

Well… out of professional curiosity I have started to look at HMRC’s Inspectors’ manuals which are online – they are the official guidance to officers of HMRC and the manuals are made public to help taxpayers to better understand how tax law is interpreted by HMRC. (We should all however remember that HMRC’s choice of interpretation of the tax law is not itself the law. It is Parliament that writes the law and the Courts that decide what it means – not HMRC, so sometimes the Inspectors’ manuals will show HMRC’s slant on the law and not what the law actually means…so if you have the money to challenge HMRC in the Courts, as some people do, then you may later cause a change in HMRC’s manuals when the courts have decided that HMRC’s prior interpretation is wrong. Most often, the Inspectors manuals do explain the correct interpretation of tax law, of course.)

Anyway, mutual trading: If you are mutually trading then a “surplus” from such trading is not a “taxable profit”. That would be a Very Good Thing, but there are many hoops to jump through and it seems with companies that have share capital, the hoops may not be jumpable.

The whole chapter from HMRC’s manual is here Link

One of the interesting and unpleasant bits is here : Link (Look at the bottom and the clash with the Companies Act)

I think this is a very complex area….and mmgreve you’ll also need to learn about Financial Reporting Standard 12 before you start “accounting for the engine and prop liabilities as…liabilities”, because under FRS 12 I don’t think they will be liabilities at all- there being no “past event” from which the “obligation to pass economic benefit” will have flowed….but I’m willing to listen to a counter-argument.

These areas are massively complex and I am truly surprised that there is not more information in the public domain as to which are the real hoops through which a flying group needs to jump and which are legally jumpable and which not. Too much wheel re-inventing for my liking….

Howard

My knowledge of accountancy is what accountants derisorily call “management accounting” but I think anybody doing any “accounting” in a business involving an aircraft of any significant value will just end up seeing a substantial loss, simply due to the proper application of capital allowances. I recall one can write the asset down at 40% a year, or 25% if it is being rented out, and that will wipe out any taxable profit. That is not to say the business is not cash-positive, which is a different thing entirely… The only way to make a taxable profit is to run the business to the point where the aircraft is worth little (but is hopefully not quite yet a piece of total wreckage) and that probably explains the PPL training scene

“but I think any prudent company would make accruals for such a foreseeable event as an engine or prop overhaul"…not since FRS 12 came on the scene.

FRS 12 only allows for accruals when goods or services have been supplied before the year end, but no invoice has been received.

FRS 12 only allows provisions when they relate to a past events…not to a future event like a likely engine overhaul.

FRS 12 Link

So I think that the correct treatment would be to capitalise each overhaul and then write off the cost over the period until the next overhaul, rather than accrue.

FRS 12 was largely criticised when it was introduced, but HMRC like it – there are no more floating over-stated big bag accruals in companies accounts. HMRC therefore collect more tax. I have seen HMRC quote FRS 12 at companies when enquiring into the those companies’ accounts and tax returns….and FRS 12 is the law.

Ho hum.

Howard

Peter, capital allowances would indeed help with generating initial and perhaps ongoing taxable losses, until such time as the plane was sold…then there would be a large taxable profit by reason of a large “balancing charge” calculated as the difference between the low (nil?) tax written down value, and the higher sale price of the plane.

The overall net deduction for the capital allowances for the plane over the whole of the company’s ownership, would be the real loss in value over that whole period, although the annual tax flows would be largely down and then back up again in the final year to get to that net result.

Tax flows can be ugly for small businesses.

As a single private owner, the only reason I can see for holding an aircraft in a company is the possible liability value you get. This is the ability to protect your estate from being sued if there is an accident. There is no real tax advantage as you put all the money in, get no revenue and make a tax loss that achieves nothing.

Unless you can get VAT registration which means you are needing to show a true business, it purely adds cost and hassle.

Clearly for a syndicate etc, it may be a useful vehicle for regulating ownership and the relationships between “owners”.