This is how Lewis Hamilton avoided paying tax on a £16.5 million private jet

Formula One world champion Lewis Hamilton avoided paying £3.3 million in European tax on his £16.5 million ($21.7 million) private jet, according to Paradise Papers data obtained from Appleby, an offshore legal adviser.

The British racing driver has a fortune of £130 million, according to The Guardian, and is the 10th highest-paid athlete in the world, but this did not stop him from dodging tax on his lavish purchase.

The Guardian reported that as part of an Isle of Man scheme — which will now be investigated by HM Revenue and Customs — Hamilton, accountancy firm EY, and Appleby set up "seemingly artificial looking businesses through which they rented their own jets from themselves."

Hamilton reportedly used companies in the British Virgin Islands (BVI), the Isle of Man, and Guernsey in order to get £3.3 million in VAT returned to him when he imported his red Bombardier aircraft from Canada in 2013.

He also appears to have avoided paying tax on €1.7 million (£1.5 million) motorhome he purchased by setting up a company in the Isle of Man, and "channels his earnings through tax haven companies in Guernsey, Malta and the BVI."

Legitimate tax avoidance schemes are not illegal, according to The Guardian, and Hamilton reportedly said he was told by his lawyer that the arrangement was lawful, and "was not concerned with day-to-day management of his business."

However, experts told The Guardian that the scheme appears "artificial" and is "open to challenge," with law professors adding that it was potentially "abusive" and doesn't appear to follow European laws.

Further, while jet owners are entitled to reclaim VAT on the purchase and running costs of their aircraft if they use it for business purposes, VAT must be paid if they use it for holidays or private leisure.

Hamilton admits to using the jet for leisure purposes, estimating he would use it for private use a third of the time — despite having received a 100% refund when he reportedly should have paid £1.1 million in VAT.

So how did the scheme work?

1. His advisers created a jet leasing structure, and Hamilton bought the plane using a company in the British Virgin Islands.

2. The company leased the jet to a new company on the Isle of Man, also owned by Hamilton.

3. The plane was then leased to a management firm, who chartered the plane exclusively to Hamilton and another of his companies, based in Guernsey.

A number of Instagram images posted by Hamilton also show the red Bombardier Challenger 605 jet, making it clear that he is an ambassador for Bombardier — and that he is earning money thanks to the jet.

(Alison Millington - Business Insider)