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HMRC internal manual

Tonnage Tax Manual

The ring fence: Finance cost adjustment: Just and reasonable fraction

Determining the just and reasonable fraction

It is not possible to specify a single universally applicable formula for determining *F *in TTM07450, as different groups will have different operational and financial circumstances.  Each group will therefore have to devise its own methodology.  In devising this, HMRC will generally expect the following considerations to be taken into account:

i)  The calculations must observe the principle of fungibility.  This means that individual items of finance should not be linked with individual activities or individual assets.  Instead the financing should be viewed as funding the totality of all the tonnage tax and non-tonnage tax activities of the group’s UK companies and those of its overseas subsidiaries.

ii)  Any consideration of tonnage tax activities must include the activities of overseas shipping companies whose dividends would ordinarily be relevant shipping profits under paragraph 49 (and thus subject to UK corporation tax solely under the tonnage tax regime).  This is the case irrespective of whether any such dividends are paid during the accounting period under review.  This approach is necessary to avoid distorting tax effects that could otherwise be caused as a result of the group’s commercial decisions as to where debt is to be located.

iii)  If the funding requirements of a business differ from activity to activity the calculation of the just and reasonable fraction should take this into account.  Shipping is generally a capital-intensive activity due to the high costs of the assets and would be expected to require greater funding than many other activities.

iv)  The existence of and circumstances surrounding intra-group financing across the ring-fence should be taken into account in considering the nature of the activities outside the ring fence and in arriving at the adjustment required.

v)  A group that utilises complex international funding structures must take these fully into account in determining whether or not a proposed methodology produces a just and reasonable result.

The methodology chosen must be used consistently from period to period, unless group circumstances change so that this would no longer produce a just and reasonable result.


Finance costs of singleton company TTM07420
Finance costs of group companies TTM07430