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HMRC internal manual

Tonnage Tax Manual

HM Revenue & Customs
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Introduction to tonnage tax: Tonnage tax as a State aid

Tonnage tax is a State aid.  This is defined by the European Commission as an advantage in any form conferred on a selective basis to undertakings by national public authorities.  General tax measures are not State aids but tonnage tax is because it is granted to a particular sector. The concern is that such aid could distort competition and affect trade between the Member States of the European Economic Area by favouring certain undertakings, so being incompatible with the principle of the single market.  It follows that there is a general prohibition of State aids – Article 107 of the Treaty on the Functioning of the European Union, with a similar provision in the EEA Agreement (which covers Norway, Iceland and Liechtenstein in addition to the EU States). Tonnage tax aid is the difference between the tax payable under the scheme and tax which would be payable on general Corporation Tax principles.

The prohibition is, however, subject to certain exceptions one of which is that aid may be approved by the European Commission.  Approved State aid must be operated within the terms laid down by the Commission, which in the case of tonnage tax are found in guidelines on State aid to maritime transport published on 17 January 2004 (Commission Communication C(2004)43).

When guidelines change (the previous version was dated 5 July 1997) the tonnage tax legislation is amended to ensure continuing compliance. This is the main reason for the amendments made by FA05/SCH7 (see [TTM01030]( The original UK tonnage tax scheme was approved by the European Commission as compatible with the Treaty when introduced (notification of 2 August 2000 under reference N 790/99). It follows that there should be no problems with State aid, and a company’s clearance may be relied on (see TTM02040) provided the UK legislation is observed and the operations genuinely contribute to economic activity in the European Economic Area.

Exceptionally, if aid is identified by the European Commission as having been granted unlawfully, it may order recovery of the aid from the recipient together with compound interest.