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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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Ship leasing: Defeased leasing

Meaning of ‘defeasance’

Background

As the owner of the leased asset, a finance lessor is normally entitled to claim capital allowances in respect of capital expenditure incurred in acquiring the asset.

However, a finance lessor will not be entitled to any capital allowances in respect of capital expenditure incurred on a qualifying ship provided to a tonnage tax company if the lease is defeased.

Definition

A lease will be regarded as defeased for this purpose if the leasing arrangements include provisions which have the effect of removing the whole (or the greater part) of any non-compliance risk which would otherwise fall (directly or indirectly) on the lessor.

For this purpose:

  • A ‘non-compliance risk’ means a risk that a loss will be sustained by any person if payments under the lease are not made in accordance with its terms.
  • The lessor and any persons connected with him are treated as the same person (and ‘connected person’ has the meaning given in CTA10/S1122).

In practice, we regard ‘the greater part’ of the risk as having been removed if more than 50 per cent of the risk has been removed by the defeasance arrangements.

Excepted forms of security

When considering the extent of the lessor’s non-compliance risk for this purpose, certain forms of security may be disregarded. These are known as ‘excepted forms of security’, and they consist of:
 

  • certain parental or third party guarantees (see TTM10120), and
  • certain forms of security derived from the ship itself (see TTM10130).

There is no limit to the amount of ‘excepted security’ that can be provided in respect of a finance lease of a qualifying ship to a tonnage tax company.

References

FA00/SCH22/PARA90 (defeased leasing) TTM17496
   
FA00/SCH22/PARA91 (excepted forms of security) TTM17501