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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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Introduction to tonnage Tax: General principles of tonnage Tax

Optional regime

Tonnage tax is an optional regime – subject to the rule that all UK shipping activities within a group of companies are taxed on the same basis.  Groups of companies not electing into the regime will be unaffected.

Tonnage tax is not mandatory because certain sectors of the industry or certain companies may find that they would actually pay more tax under a tonnage tax regime than they had previously.  For example, a shipping group may have continuing losses (as a result of capital allowances etc.) which it currently surrenders as group relief to profitable, non-shipping, members of the group – under tonnage tax there would be no shipping losses to surrender, and as a consequence there would be tax to pay.

10 year rolling election

Companies electing in will do so for a 10-year period – and that election may be renewed (on a rolling basis) at any time during the 10 years.

If an election is made then all qualifying members of the group must join in that election.

Alternative way of computing shipping profits and losses

Participating companies will have their taxable profits from shipping based on the tonnage of the ships they operate, rather than by reference to their actual business profits.  The ‘relevant shipping profits’ (FA00/SCH22/PART6) are replaced by the ‘tonnage tax profit’ (FA00/SCH22/PARA4), which will be chargeable to Corporation Tax in the normal way.

Where trading profit would be relevant shipping income, any loss accruing to the company is similarly left out of account for the purposes of Corporation Tax, as will capital losses (subject to time apportionment) on the disposal of tonnage tax assets.

Training requirement

Participating companies will also have to sign up to ‘a minimum training obligation’ for the training of seafarers.

This is designed to secure industry ‘best practice’ levels of training and is a key element in the Government’s long-term policy to regenerate the nation’s maritime skills base. The Department for Transport administers the training requirement.

Ring-fenced regime

Tonnage tax fixes the level of a company’s taxable profits from shipping – but not from any other activity.  To prevent non-shipping income benefiting from the tonnage tax regime, the regime is tightly ring-fenced.  This means that:

  • profits from non-shipping activities will still be computed by reference to normal rules;

  • arm’s length prices will be used for tax purposes where there are transactions across the ring-fence between connected parties and between the tonnage tax and non-tonnage tax activities of a company;

  • no deductions outside the ring fence are allowed for finance costs for what can be reasonably regarded as the costs of financing tonnage tax activities;

  • no group relief, loss relief or other deduction can be set against tonnage tax profits; and

  • there is reduced entitlement to capital allowances for finance lessors of ships leased into the regime.

Anti-avoidance

In addition to this there is a sweep-up anti-avoidance provision to deter deliberate serious or repeated abuse of the regime. This has been put in place with the agreement of the shipping industry and is mentioned in the UK’s State aid approval (see TTM01250). It would be contrary to Parliament’s intention for a company to enter into transactions that enable the benefit of tonnage tax to leak out beyond the shipping industry. If a company or group of companies misuses tonnage tax in this way, there is power to expel it from the regime with additional penalties.

This anti-avoidance provision will not be invoked lightly. This rule will not be used to attack innocent mistakes, minor errors in computations or genuine misunderstandings. Nor will it be used to attack any bona-fide pre-election restructuring that is required to enable a group to opt for the regime, for example, the divisionalisation of shipping and non-shipping activities.

References

FA00/SCH22/PARA3 (profits of tonnage tax company) TTM17011