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HMRC internal manual

Tonnage Tax Manual

Qualifying companies and ships: Strategic and commercial management


The definition of a qualifying company in FA00/SCH22/PARA16 (1)(c) provides that qualifying ships operated by a company must be strategically and commercially managed in the UK. This is not the same as the ‘central management and control’ test relevant to determining whether a company is resident in the UK, but see TTM03810.

Origin of test

Tonnage tax is a State aid approved by the EU Commission (by letter dated 2 August 2000). The Commission issues guidelines, the most recent version being Commission Communication C(2004)43, reported in Official Journal 2004/C 13/03, ‘Community guidelines on State aid to maritime transport’. The guidelines contain the following paragraph.

The objective of State aid within the common maritime transport policy is to promote the competitiveness of the Community fleets in the global shipping market. Consequently tax relief schemes should, as a rule, require a link with a Community flag. However, they may also, exceptionally, be approved where they apply to the entire fleet operated by a shipowner established within a Member State’s territory liable to corporate tax, provided that it is demonstrated that the strategic and commercial management of all ships concerned is effectively carried on from within the territory and that this activity contributes substantially to economic activity and employment within the Community.

The test is therefore aimed at ensuring that there is, through the strategic and commercial management of ships in a territory, a substantial contribution to economic activity and employment within the EU (and the EEA).  The Commission requires evidence of economic links including details of vessels owned and operated under EU registers, EU nationals employed on ships and in land-based activities and investments in fixed assets (ships and supporting assets).  The EU dimension should be borne in mind when interpreting the following TTM paragraphs, although these are written from the UK standpoint.  The Commission guidelines list the aims of maritime transport State aid as

improving a safe, efficient, secure and environmentally friendly maritime transport [industry]

encouraging the flagging or re-flagging to Member States’ registers

contributing to the consolidation of the maritime cluster established in Member States while maintaining an overall competitive fleet on world markets

maintaining and improving maritime knowhow and protecting and promoting employment for European seafarers

contributing to the promotion of new services in the field of short sea shipping following the White Paper on Community transport policy.  

A company within tonnage tax should be able to demonstrate that it contributes towards meeting the aims: though this does not necessarily mean all of them (short sea shipping may not be relevant, for example).

With effect from 1 April 2008 there is a strict flagging requirement for certain vessels for UK tonnage tax (see TTM03900). Financial years 2005 2006 and 2007 are ‘excepted years’: FA00/SCH22/PARA22A has been disapplied by statutory instrument (see TTM03905). But regardless of the flagging rules, companies must be able to demonstrate strategic and commercial management that meets the above criteria.

The Commission’s guidelines stress that companies as well as the Member State authority (HMRC) must be aware of their rights and obligations. If State aid rules are breached, the Commission may order recovery of unauthorised aid, together with compound interest - see TTM03820. As the strategic and commercial management test is not defined, HMRC adopt an interpretation which takes into account the different strands of management activity that might be considered relevant. In cases of doubt companies may use the non-statutory business clearance procedure (see TTM02030).

Two-legged test

All elements of management activity relevant to the ships in question should be taken into account in determining whether strategic and commercial management is carried out in the UK, and whether these management activities contribute substantially to economic activity and employment within the EU.  Particular care should be taken if there is any element of artificiality in the company’s arrangements.  It is unlikely the test could be satisfied without contributions from both legs.


FA00/SCH22/PARA16 (1)(c)  (strategic and commercial management) TTM17086
Strategic management TTM03810
Commercial management TTM03820
Additional factors TTM03830
Examples TTM03840