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HMRC internal manual

Tonnage Tax Manual

The ring fence: Finance cost adjustment

Broad approach of the legislation

The following paragraphs provide guidance on the implementation of FA00/SCH22/PARA61 to PARA63.  These require that where a single company or members of a group include an excessive deduction for finance costs in computing profits outside the tonnage tax ring-fence, then additional taxable profits should be brought into account to reflect the excess.  The rules will apply to all tonnage tax companies or groups that carry on non-tonnage tax activities and incur finance costs that are deductible for the purposes of Corporation Tax.

A simple example of a situation where an additional charge would normally arise is a diversified group that funds its shipping subsidiaries through equity and its non-shipping subsidiaries through debt.

The legislation does not include detailed rules prescribing exactly how the calculation of the additional profits should be carried out.  Instead, companies and groups may choose an appropriate methodology for this calculation to ensure a just and reasonable result when their own circumstances are taken into account.

This guidance assumes that a tonnage tax group is involved, although the principles can be adapted for a single company.  Where a group operates under a group arrangement HMRC will accept that these calculations should be carried out by the representative company and not by every tonnage tax company in the group.  However, any resulting adjustment should be allocated to all the tonnage tax companies, as required by FA00/SCH22/PARA62 (5).


Outline of finance costs adjustment TTM07400