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HMRC internal manual

Tonnage Tax Manual

The ring fence: Finance costs

Outline of finance cost adjustment

As explained in TTM07020, a company’s tonnage tax activities are treated as if they are a separate trade.

In the absence of a special rule to prevent it, a company could arrange for all of its debt to be carried in the non-tonnage tax trade, obtaining a tax deduction for all the costs of debt finance, with its tonnage tax trade funded by share capital.

Likewise, in a tonnage tax group, those companies within the ring fence could be funded very largely by share capital, whilst tax-deductible debt is used to fund those companies outside the ring fence.

Thick capitalisation rules

To prevent this type of manipulation of the different types of funding between a company’s or group’s tonnage tax and non-tonnage tax activities, there are special rules in paragraph 61 onwards. These are sometimes referred to as the ‘thick capitalisation’ rules.

Adjustments on a just and reasonable basis

The basic rule is that if the finance costs charged outside the ring fence exceed a just and reasonable proportion of the total costs, then the excess is brought into account outside the ring fence (as additional non-trading loan relationship credits on the tonnage tax companies).

See TTM07420 (singleton companies) and TTM07430(groups).

Meaning of finance costs

The definition of finance costs is very widely drawn, and will include all costs arising from what would be considered on normal accounting principles to be a financing transaction, (see TTM07410).


FA00/SCH22/PARA61 (treatment of finance costs; single company) TTM17346
FA00/SCH22/PARA62 (treatment of finance costs; group company) TTM17351
FA00/SCH22/PARA63 (meaning of finance costs) TTM17356