BRUSSELS (Reuters) - Italy and the Isle of Man found themselves in the European Commission's crosshairs on Thursday as the EU executive took steps to force them to scrap illegal tax breaks for yachts and private jets or face court action.

The EU executive said incorrect value added taxes levied by Italy and the Isle of Man breached common tax rules and distorted competition.

The Commission said it had sent a letter of formal notice, the first step in its infringement proceedings, to Italy for not levying the correct amount of VAT on the leasing of yachts.

It also warned Italy about its system of exemptions for fuel used to power charted yachts in EU waters, in a notice called a reasoned opinion. This second step is typically followed by court action if countries fail to allay the Commission's concerns.

Britain also received a letter of formal notice over the Isle of Man's VAT practices related to supplies and leasing of aircraft. The island, located between Great Britain and Ireland, is a self-governing territory that is under British sovereignty although not part of the United Kingdom.

"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," European Taxation Commissioner Pierre Moscovici said in a statement.

Italy and the UK have two months to respond to the letters of notice before they get a warning. In the excise duty case, Italy will have two months to convince the Commission or be taken to court.

Cyprus, Malta and Greece were targeted by the Commission for similar yacht VAT breaches in March and have subsequently said they would revise their legislation.

(Reporting by Foo Yun Chee; Editing by Peter Graff)

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