TTM01010 - Introduction to tonnage tax: a brief guide
What is tonnage tax?
Tonnage tax is an alternative method of calculating Corporation Tax profits by reference to the net tonnage of the ship operated. The tonnage tax profit replaces both the tax-adjusted commercial profit/loss on a shipping trade and the chargeable gains/losses made on tonnage tax assets. Other profits of a tonnage tax company are taxable in the normal way.
What businesses qualify?
Companies within Corporation Tax, which operate qualifying ships that are “strategically and commercially managed in the UK”, can take advantage of the tonnage tax regime. All qualifying members of a group have to come in together.
What is “operating a ship”?
A company is regarded as operating a ship owned by it or chartered* to it, if it is:
- Used by the company, or
- Time or voyage chartered-out, or
- Bareboat chartered-out to another UK group member or, in some circumstances, bareboat chartered-out to a third party where there is short-term over-capacity and the charter does not exceed three years.
*A singleton company or group cannot enter Tonnage Tax if more than 75% of its net tonnage is time or voyage chartered-in from outside the group.
What types of ship qualify?
A qualifying ship must be seagoing**, at least 100 gross tons, and used for:
- Carriage by sea of passengers, or
- Carriage by sea of cargo, or
- Towage, salvage or other marine assistance carried out at sea, or
- Transport by sea in connection with other services of a kind necessarily provided at sea.
**A ship is regarded as “seagoing” if certificated for navigation at sea by a competent authority of any country, and part of the normal commercial operations of the ship is carried out at sea.
What types of ship do not qualify?
The following types of ship are excluded:
- Fishing vessels or factory ships
- Pleasure craft (this does not mean cruise liners, which do qualify)
- Harbour or river ferries
- Offshore installations
- Tankers dedicated to a particular oil field
- Certain tugs
- Certain dredgers
- A vessel the main purpose of which is to provide goods or services normally provided on land (e.g. floating hotel or supermarket).
How is tonnage tax profit computed?
A profit for each day a ship is operated* by a company is calculated by reference to the following table:
|For each complete 100 net tons up to 1,000||£0.60|
|For each complete 100 net tons from 1,001 to 10,000||£0.45|
|For each complete 100 net tons from 10,001 to 25,000||£0.30|
|For each complete 100 net tons above 25,000||£0.15|
- Operated means owned by or chartered to the company. A ship laid up continues to be operated by the company and tonnage tax will be due.
The daily profit is multiplied by the number of days operated (for a normal year 365)
A similar calculation is done for each ship operated.
The total for all ships is the company’s tonnage tax profit for the accounting period.
Example 1: For 365 days the tonnage tax profit of a singleton company with a 30,000 net ton bulk carrier would be £36,135.
At the full rate of Corporation Tax of 30%, tax payable would be £10,840.50p.
Example 2: For 365 days the tonnage tax profit of a singleton company with a 250 net ton supply vessel would be £438.
At the full rate of Corporation Tax of 20%, tax payable would be £87.60p.
(Rates of tax vary, depending on the total profit of the company and the number of companies in a group)
What profits are included?
The actual profits covered by a tonnage tax profit include those from:
- Core qualifying activities in operating its own ships.
- Other necessary ship-related activities integral to the above.
- Qualifying secondary activities.
- Qualifying incidental activities, not exceeding 0.25% of turnover from qualifying core and secondary activities.
- Distributions from overseas shipping companies (which only operate qualifying ships).
- Loan relationship profits and foreign exchange gains, which would otherwise be trading income.
- Gains on disposal of tonnage tax assets.
What are qualifying secondary activities?
These are ship-related activities which are not the direct operation of the company’s own ships but have a substantial connection with the company’s or a fellow group member’s core qualifying activities. These include:
- Support services to fellow group members’ ships that would be qualifying core or secondary activities if carried out for own ships.
- Carriage of passengers or cargo beyond the sea-leg of an inclusively priced journey where the transport is bought in from a third party.
- Administration and insurance services.
- Embarkation and disembarkation of passengers.*
- Loading and unloading cargo.*
- Excursions for passenger where cabin remains available to passenger.
- Normal sales and services to, and entertainment of, passengers.
- Similar services to third parties where use of surplus capacity.
Reciprocal arrangements with third parties.
- Not being part of the operation of a port.
What is “strategic and commercial management in the UK”?
HMRC will adopt a common-sense interpretation, taking into account the various strands of activity carried out in the UK, including:
Location of headquarters, including senior management staff
Decision-making of the company board of directors
Decision-making of operational board
UK stock exchange listing.
Taking bookings for cargo or passengers
Managing the bunkers, provisioning and victualling requirements
Technical management of vessels
Extent to which foreign offices/branches work under the direction of UK-based personnel
Support facilities in the UK (e.g. training centre, terminal, etc.)
Extent to which work is carried out in UK compared to elsewhere
Nature and extent of accommodation in UK
Number of employees in UK
Residence of key staff, including directors, in the UK
For an international group, a reasonable balance between UK activities and tonnage in the UK
Flagging, classing, insuring or financing of vessels in UK.
Are there any special rules?
There are special rules applying to:
- Vessels operating in the UK Sector of the North Sea on “offshore activities” (but not supply vessels, tugs, anchor-handlers or tankers, which are subject to normal tonnage tax rules).
- Transitional provisions on capital allowances (allowances for depreciation).
- Transitional provisions on chargeable gains.
- Ring-fencing of tonnage profits from non-tonnage tax profits or losses, particularly finance costs.
- Leasing companies owning vessels, which cannot make an election, and to which a special regime of capital allowances applies.
- Corporate partnerships.
- Legal avoidance.
How does a company enter tonnage tax?
A company can enter tonnage tax by electing for an initial period of ten years. For existing UK companies operating ships the election had to be made by 27th July 2001 (“window of opportunity”). For existing UK companies eligible for tonnage tax a new window of opportunity to elect ran from 1 July 2005 to 31 December 2006. For those new elections the regime applies to the accounting period in which election is made, commencing no earlier than 1st January 2005; but entry may have been backdated, or postponed for up to two years, in certain circumstances. A tonnage tax election may be renewed for a further ten years at any time prior to its expiry.
Companies newly qualifying for tonnage tax have one year from beginning to operate qualifying ships in the UK to elect into the regime.
A company may use the general non-statutory clearance procedure if it requires certainty that the company is a qualifying company for tonnage tax. See TTM02010. Guidance on non-statutory business clearances can be found at ONSCG2100 onwards.
What is the training link?
A condition of entering into the tonnage tax regime is that the company or group must enter into a “training commitment” with the Department for Transport (DfT). Broadly, this requires:
- The training of one trainee per year for each 15 officers, or
- Payment in lieu to the Maritime Training Trust.
- The trainees must be British or EEA nationals and ordinarily resident in the UK.
The training commitment should have received approval from the DfT by the 1st October in the accounting period for which it is intended to first elect for tonnage tax. But, as it is a requirement to have received approval before electing into tonnage tax, the application of an existing shipping operator to the DfT should be made in good time to allow an election by the deadline for election.
Further information may be found in Schedule 22 Finance Act 2000, and in the prgraphs of this Tonnage Tax Manual.
Further advice may be obtained from
Tonnage Tax Technical Adviser,
HM Revenue & Customs
Large Business, S0663, Newcastle, NE98 1ZZ
Telephone: 03000 585490
or e-mail: firstname.lastname@example.org
Companies with a Customer Compliance Manager should approach their named specialist CCM.