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HMRC internal manual

Tonnage Tax Manual

Ship leasing: Outline

As explained elsewhere (see TTM09001 onwards), companies within Tonnage Tax cannot claim any capital allowances in respect of their expenditure on qualifying ships. Without any special rules it would be open to tonnage tax companies to route all their ship purchases through a bank, using it as a conduit to access tax reliefs otherwise unavailable to them.

(Where a ship is leased the capital allowances go to the lessor and the benefit of those allowances may be shared with the lessee through a reduced level of lease rental payments charged.)

However, the complete abolition of capital allowances for ships leased into the Tonnage Tax regime was not introduced since it could deprive the shipping industry of a valuable form of finance.

The legislation in (FA00/SCH22/PART10) does not abolish capital allowances for non tonnage tax companies that lease ships to tonnage tax companies, but it does place restrictions on the availability of allowances. In particular:

  • No allowances are available if more than 50 per cent of the lessor’s non-compliance risk has been defeased, see TTM10010
  • No allowances are due if the lease is part of sale and lease-back arrangements, see TTM10200
  • There are quantitative limits on the amounts of the allowances which may be claimed, see TTM10400

These restrictions also apply to the capital allowances available on ships leased to a partnership which has a tonnage tax company as a member, see TTM13310.

Prior to 19 December 2002 these restrictions only applied to finance leases. From 19 December 2002 the restrictions apply to all leases, not just to finance leases. The restrictions are also subject to two exceptions. The first exception applies where the lessor remains responsible for operating the ship, and the second applies where the lessor grants the lease on account of short term over-capacity and the term of the lease does not exceed three years, see TTM10415.


FA00/SCH22/PARA89 to PARA102 (capital allowances on ship leasing) TTM17486