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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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Ship leasing: Quantitative restrictions on allowances

Restrictions begin to apply: Procedure

When the quantitative restrictions begin to apply, an appropriate amount must be taken out of the lessor’s normal capital allowance pool, and a corresponding amount must be allocated to the 18 per cent and 8 per cent class pools.

Notional disposal

The first step is to bring an amount of notional disposal proceeds into account in the lessor’s normal capital allowance pool at the beginning of the accounting period during which the change bringing the restrictions into force takes place.

The amount to be brought into account (referred to in the legislation as ‘Amount A’) is the lower of:
 

  • the total qualifying expenditure remaining in the pool at the beginning of that accounting period, and
  • the ‘tax written down value’ (see TTM10530) of the ship as at the beginning of that accounting period.

This step has the effect of removing the ship from the normal capital allowance pool.

Temporary pool

At the same time as the notional disposal proceeds are brought into account, an amount of qualifying expenditure equal to ‘Amount A’ is placed in a separate single asset pool (known as the ‘temporary pool’).

This temporary pool is then closed as at the date of the change bringing the restrictions into force. At that date the ship is treated as being disposed of for a notional amount (‘Amount B’) equal to the ‘tax-written down value’ (see TTM10530) of the ship as at the date of the change. This will usually result in a balancing allowance or charge.

Opening and closing the temporary pool has the effect of giving the lessor capital allowances at the normal rate for the period from the start of the accounting period to the date of change.

Notional expenditure

The lessor is then treated as incurring new qualifying expenditure equal to Amount B on the ship that is subject to the finance lease as at the date of the change.

That expenditure is allocated to the lessor’s 18 per cent and 8 per cent tonnage tax class pools in the same proportions as the lessor’s original qualifying expenditure would have been allocated if the lease had been subject to the restrictions from the outset.

CAA01/S220 applies to time-apportion that expenditure for the period from when it is treated as incurred as would be the case for any other new expenditure on a finance-leased asset (see CA28450).

This final step has the effect of giving restricted allowances for the remainder of the period from the date of the change.

‘Tax written down value’

See TTM10530 for details of how to work out the tax written down value of the ship as at the start of the accounting period, and at the date of the change.

Example

See TTM10490 for an example of how these provisions operate in practice

References

FA00/SCH22/PARA98 (change of circumstances bringing in case) TTM17566
   
FA00/SCH22/PARA100 (tax written down value) TTM17576
Restrictions begin to apply: Introduction TTM10470
Restrictions begin to apply: Example TTM10490