The European Commission says the UK must take action over the way the Isle of Man administers VAT.

The move comes after the ’Paradise Papers’ investigation led by the Guardian and the BBC’s Panorama programme highlighted the case of Formula 1 driver Lewis Hamilton’s purchase of a jet.

He avoided VAT when he bought it through the Isle of Man.

The Isle of Man’s government says it follows the same rules as the UK on VAT and did nothing wrong.

And it asked UK authorities to investigate.

A year on, and the island is still awaiting a report from Her Majesty’s Revenue and Customs into the issue.

Now the European Commission has highlighted what it calls tax avoidance in the yacht and aircraft sectors.

It is implementing infringement proceedings on tax breaks being applied in the pleasure craft industries of Italy and the Isle of Man.

The European Commission has sent a letter of formal notice to Italy for not levying the correct amount of VAT on the leasing of yachts.

And a letter of formal notice was sent to the UK concerning the Isle of Man’s ’abusive’ VAT practices with regard to supplies and leasing of aircraft.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs union, said: ’It’s simply not fair that some individuals and companies can get away with not paying the correct amount of VAT on products like yachts and aircraft.

’Favourable tax treatment for private boats and aircraft is clearly at odds with our commonly-agreed tax rules and heavily distorts competition in the maritime and aviation sectors. With this in mind, the commission is taking action to clamp down on rules that try to circumvent EU law in these areas.’

A statement reads: ’VAT is only deductible for business use. Supplies of aircraft, including leasing services, meant expressly for private use should not be VAT-exempt. The commission believes that the UK has not taken sufficient action against abusive VAT practices in the Isle of Man with regard to the supplies and leasing of aircraft.’

Italy and the UK now have two months to respond to the arguments put forward by the commission regarding VAT on yachts and aircraft, respectively.

The UK and the Isle of Man use the same VAT system.

Under European and international law, the UK is responsible for the conduct of the Isle of Man because the Isle of Man is not a sovereign state but a Crown Dependency of the UK.