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HMRC internal manual

Employment Income Manual

HM Revenue & Customs
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Other expenses: entertainment expenses: disallowance under Section 356 ITEPA 2003: employees of tonnage tax companies

Section 357(1) (4) and (5) ITEPA 2003A “tonnage tax company” is a ship owning company which has elected to have its corporation tax profits calculated in accordance with the formula in Paragraph 4, Schedule 22, FA 2000.

Employees of tonnage tax companies are subject to the same rules in relation to entertainment expenses as employees of any other business except that they do not have to satisfy the “employer disallowance” condition in Section 357(2) and (3).

This is because tonnage tax companies do not have a conventional Schedule D, Case I computation, and so do not suffer a disallowance for entertainment expenses under Section 577 ICTA 1988. It is therefore impossible for the employees of such a company to satisfy the “employer disallowance” condition. To prevent what would otherwise be an inequitable result the legislation treats tonnage tax employees as a special case, and provides that they do not have to satisfy that condition (see Section 357(1) and (4)).

Note that there is no special treatment if a tonnage tax employer gives the employee an expense allowance not specifically for entertainment, or simply pays the employee an all-inclusive salary. In those cases, if the employer’s profits had been computed in the normal manner, there would not have been a Section 577 ICTA 1988 disallowance on the employer. So Section 356 ITEPA 2003 prevents the employee from obtaining a Section 336 deduction for entertainment expenses.