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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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Capital allowances: Balancing charges (P&M)

Deferment of balancing charge arising before entry

Under the normal capital allowances regime, a company incurring a balancing charge on the disposal of a ship can claim to defer that balancing charge and set it against expenditure (roll-over) on new shipping acquired within 6 years (CAA01/S134 onwards, see CA25300 onwards). A company may elect into tonnage tax after making such a claim for deferment of a balancing charge, but before it has incurred any expenditure on new shipping.

A tonnage tax company may not set off such a deferred balancing charge against expenditure on new shipping unless it were a qualifying company (see TTM03001) at the time the deferred balancing charge arose, or would have been had the tonnage tax regime been in force then.

If this condition is satisfied, the normal rules for setting off the deferred balancing charge against the expenditure on new shipping (as described in CA25300onwards) will continue to apply as if the company had not elected into tonnage tax. For this purpose, ‘expenditure on new shipping’ means the same, as it would have done if the company were not a tonnage tax company.

Practical effect

The practical effect of this is that in most cases a deferred balancing charge can be rolled over against the cost of a new ship in the same way that it could have been if the company had not entered Tonnage Tax. If it is rolled over, the balancing charge will not fall to be re-instated at the end of the 6-year deferment period.

If, exceptionally, the condition described above is not satisfied, it will not be possible to roll the balancing charge over against expenditure on new shipping, and at the end of the 6 year period (from the date of disposal of the original ship) the balancing charge will fall to be reinstated (see CA25400).

See TTM09240 for examples illustrating the rules relating to deferred balancing charges.

References

FA00/SCH22/PARA72 (deferred balancing charge on disposal of ship) TTM17401