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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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The ring fence: Finance costs

Group Companies

The rules for allocating finance costs between the tonnage tax and non-tonnage tax activities of a tonnage tax group are in paragraph 62.

See TTM07410 for the meaning of ‘finance costs’.

Group companies taken into account

In the case of a tonnage tax group, the position of all the UK companies in the group has to be taken into account in deciding whether only a just and reasonable proportion of any finance costs has been claimed outside the ring fence.

The calculation should also include the activities of any overseas companies that qualify to pay dividends under paragraph 49 (see TTM06400). If more than a reasonable proportion of finance costs are claimed outside the ring fence then an adjustment has to be made.

Principle of fungibility

The rules operate on the presumption that finance is fungible. In other words, that any borrowings of a company serve to finance all the activities of all the UK taxpaying companies in the group, even if they are initially earmarked to a particular company or for a particular project.

Just and reasonable apportionment

The just and reasonable calculation of finance costs attributable to non-tonnage tax activities should take into account the fact that finance requirements differ from activity to activity. Shipping is generally a capital-intensive activity due to the high cost of the assets and would usually be expected to absorb a large part of any finance raised. The calculation should also take into account any complex international financing structures that might distort the distribution of finance costs.

Adjustment required

If the group claims a deduction outside the ring fence for more than a just and reasonable proportion of its total finance costs an addition to the taxable profits of tonnage tax companies within the group is made for each such company.

The excess is shared among the tonnage tax companies in the group in proportion to their respective tonnage tax profits.  The addition for each company is treated as if it were a non-trading loan-relationship credit.

References

FA00/SCH22/PARA62 (finance costs - groups) TTM17351
   
Outline of finance costs adjustment TTM07400
Singleton company TTM07420
Interaction between transfer pricing and finance costs TTM07500