MTT45635 - Particular entities and adjustments: Shipping: Ancillary international shipping cap adjustment

The amount of ancillary international shipping profits that can be excluded through the international shipping exclusion is capped at 50% of the core international shipping profits.

The cap is first calculated at the level of the territory, with any necessary adjustment then being apportioned between relevant members when determining their ancillary profits.

This is set out in section 158(8) of Finance (No.2) Act 2023.

Calculation

The cap threshold for the territory and the cap adjustment for each member can be determined through the following steps:

Step 1: Determine the core international shipping profits for all the members in the territory.

Step 2: If step 1 produces a positive figure, multiply by 0.5 to find the cap threshold for the territory. Otherwise, the cap threshold is nil.

Step 3: Determine the net ancillary international shipping profits for all the members in the territory (ignoring the cap adjustment itself).

Step 4: Subtract the cap threshold from the result of Step 3 to find the total cap adjustment for the territory. If the result is nil or less, there is no cap adjustment for any of the members in the territory. Otherwise, proceed to step 5.

Step 5: The cap adjustment for the territory is allocated between those members which have positive ancillary profits, apportioned according to the following formula:

(Ancillary profits of the individual member) / (Ancillary profits of all the members in the territory which have positive ancillary profits)

Interaction with substance based income exclusion (SBIE)

Amounts that have not been included in the international shipping exclusion because they exceed the ancillary cap can be included in the SBIE amount. See MTT32070 for further guidance.

Example 1a – core profits, ancillary profits

Z Ltd is a member of a group which has four other members located in this territory in the period ending in 2041.

All five of these members have international shipping business. Altogether, they have £1000 of core international shipping profits for the period.

Z Ltd has ancillary profits of £700. A1 Ltd and A2 Ltd have ancillary profits of £50 each. A3 Ltd has a net loss from ancillary activities of £20. A4 Ltd has neither a gain nor a loss from ancillary activities.

Step 1: The core international shipping profits for all the members is £1000 in total.

Step 2: The cap threshold for the territory is (£1000 * 0.5) = £500.

Step 3: The ancillary profit for the territory is (£700 + £50 + £50 - £20 + £0) = £780.

Step 4: The cap adjustment for the territory is (£780 - £500) = £280.

Step 5: The proportion of the cap adjustment allocated to Z Ltd is (£700 / (£700 + £50 + £50)) = 0.875. (0.875 * £280) = £245.

Z Ltd will therefore have ancillary international shipping profits of £455 after deducting the cap adjustment (£700 - £245).

The remaining amount of the cap adjustment will be allocated between the other members which have ancillary profits (A1 Ltd and A2 Ltd).

A3 Ltd and A4 Ltd are not included in the calculation at step 5 because they do not have ancillary international shipping profits (A3 Ltd having a loss from ancillary activities and A4 Ltd having neither profit nor loss).

Example 1b – ancillary profits do not exceed cap threshold

The group amends its information return for the period ending in 2041. It now reports that Z Ltd has made £400 of ancillary profits, rather than £700. The other figures have not changed.

The result of step 3 is now £480, and the result of step 4 is therefore (£480 - £500) = -£20. As the result of step 4 is nil or less, there is no cap adjustment for any member located in the territory for this period.

Example 2a – core loss, ancillary profit

In the following period, ending in 2042, the five members located in the territory have made an aggregate loss of £500 from core international shipping activity.

Z Ltd made an ancillary profit of £200. A1 Ltd made a loss of £100 from ancillary activities. The other members made neither a profit nor a loss.

As this figure is nil or negative, the cap threshold determined at step 2 will be nil.

Step 1 – The core international shipping profits for the territory are -£500.

Step 2 – This is nil or less, so the cap threshold is nil.

Step 3 – The ancillary profit for the territory is (£200 - £100 + £0 + £0 + £0) = £100.

Step 4 – The cap adjustment for the territory is (£100 - nil) = £100.

Step 5 – For A1 Ltd, the cap adjustment is nil because it has no profit from ancillary activities. It therefore has ancillary international shipping profits of -£100. This is added back to the underlying profits as a result of the shipping exclusion.

The proportion of the cap adjustment allocated to Z Ltd is (£200/£200) = 1. (1*£100) = £100. This is deducted from the £200 net profits from ancillary activity to arrive at its ancillary international shipping profits of £100.

In aggregate, the ancillary international shipping profits for the territory is nil. This is correct because:

  • the core international shipping profits are negative, so the threshold of the cap is set to nil.
  • prior to applying the cap, the territory has net ancillary international shipping profits, and these must be reduced to nil for the territory overall.

Example 2b – core loss, ancillary loss

The group amends its information return for the period ending in 2042. It now reports a loss of £300 from ancillary international shipping activities for Z Ltd, rather than a profit of £200. The other figures have not changed.

The result of Step 3 is now (-£300 - £100) = -£400, and the result of step 4 is also (-£400 - £0) = -£400. As this is less than or equal to zero, there is no cap adjustment for the members located in the territory for this period.

The entirety of the -£400 will be reflected in the shipping exclusion. This is correct because:

  • the core international shipping profits are negative, so the threshold of the cap is set to nil.
  • prior to applying the cap, the territory has net ancillary international shipping profits of -£400. This is mathematically beneath the threshold of nil, so the threshold is not exceeded and there is no need for a cap adjustment.