Tonnage Tax is an optional alternative method of calculating the corporation tax of shipping companies based in the UK.
It is calculated by reference to the net tonnage of ships operated by such companies. Tonnage tax profit replaces both the tax-adjusted commercial profit/loss on a shipping trade and chargeable gains/losses made on tonnage tax assets. Other profits of companies electing to apply the tonnage tax regime are taxed in the usual way. Depending on a shipping company's/ group's particular tax profile (for example, does it already qualify for substantial tax losses or reliefs under general corporation tax rules) the tonnage tax regime may offer a more favourable effective rate of corporation tax for shipping companies based in the UK.
What is the purpose of Tonnage Tax?
The tonnage tax regime was introduced in the UK in 2000 to create a positive economic environment for international shipping companies that are based in the UK. The aim was to enable the renewal and growth of existing UK-based shipping companies, whilst also attracting inward investment. This regime has addressed the decline in the UK merchant fleet. The number of shipping companies based in the UK has increased and subsequently this has also increased the number of individuals employed in the UK shipping industry.
Which companies qualify?
Companies that are liable to pay corporation tax and which operate 'qualifying ships' that are 'strategically and commercially managed in the UK' are qualifying companies and can elect to apply the Tonnage Tax regime. All qualifying companies in a group must elect to apply the regime together.
When is a company 'operating' a ship?
As a general rule, a company is deemed to be operating a ship if it is, 'owned by, or chartered to, the company', subject to certain exceptions.
A company is deemed to be operating a ship (with certain exceptions), if it is:
a) used by the company; or
b) time or voyage chartered-out; or
c) bareboat chartered-out to another UK group member or, in some circumstances, bareboat chartered-out to a third party where there is short-term over-capacity and the charter does not exceed three years.
(N.B. A singleton company or group cannot elect to apply the tonnage tax regime if more than 75% of its net tonnage is time or voyage chartered-in from outside the group.)
What is a qualifying ship?
A qualifying ship must be:
a) Seagoing - a ship is seagoing if it is certificated for navigation at sea by a competent authority of any country and part of the normal commercial operations of the ship are carried out at sea;
b) at least 100 gross tons; and
c) used for:
(i) Carriage by sea of passengers; or
(ii) Carriage by sea of cargo; or
(iii) Towage, salvage or other marine assistance carried out at sea; or
(iv) Transport by sea in connection with other services of a kind necessarily provided at sea.
Vessels that are excluded include:
a) Fishing vessels or factory ships;
b) Pleasure craft (this does not include cruise liners, which do qualify);
c) Harbour or river ferries;
d) Offshore installations;
e) Tankers dedicated to a particular oil field;
f) Certain tugs;
g) Certain dredgers; and
h) A vessel the main purpose of which is to provide goods or services normally provided on land (e.g. floating hotel or supermarket).
Ships that are strategically and commercially managed in the UK
Guidance published by HM Revenue & Customs ("HMRC") emphasises that Tonnage tax is, 'a State aid approved by the EU Commission'. The guidance states that the qualifying 'test is … aimed at ensuring that there is, through the strategic and commercial management of ships in a territory, a substantial contribution to economic activity and employment within the EU' (Tonnage Tax Manual, TTM03800).
The HMRC guidance indicates that they will 'adopt a common-sense interpretation' of this test, taking into account activities including:
a) Location of headquarters, including senior management staff
b) Decision-making of the company board of directors
c) Decision-making of operational board
d) UK stock exchange listing
a) Route planning
b) Taking bookings for cargo or passengers
c) Managing the bunkers, provisioning and victualing requirements
d) Personnel management
e) Training organisation
f) Technical management of vessels
g) Extent to which foreign offices/branches work under the direction of UK-based personnel
h) Support facilities in the UK (e.g. training centre, terminal, etc.)
3) Other factors
a) Extent to which work is carried out in the UK compared to elsewhere
b) Nature and extent of accommodation in the UK
c) Number of employees in the UK
d) Residence of key staff, including directors, in the UK
e) For an international group, a reasonable balance between UK activities and tonnage in the UK
f) Flagging, classing, insuring or financing of vessels in the UK
How do you calculate Tonnage Tax profit?
The tonnage tax profit of a company is calculated by applying the following four steps:
1) Profit per day a ship is 'operated' by a company is calculated by reference to the table below:
|For each complete 100 net tons up to 1,000||£0.60|
|For each complete 100 net tons from 1,001 to 10,000||£0.45|
|For each complete 100 net tons from 10,001 to 25,000||£0.30|
|For each complete 100 net tons above 25,000||£0.15|
(A ship is treated as 'operated' by a company if it is owned or chartered to the company. N.B. If a ship is laid up it continues to be operated by the company and tonnage tax will be due.)
2) The profit per day or daily profit is multiplied by the number of days in the accounting period (unless the ship was only operated by the company as a qualifying ship for part of the period, in which case multiply it by the number of days it was operated for in that part).
3) Complete calculations in 1 and 2 above for each ship operated.
4) Add all of the amounts together and the total for all of the ships is the company’s tonnage tax profit for the accounting period.
Which profits are relevant?
The profits covered by the tonnage tax profit include those from:
1) core qualifying activities in operating its own ships;
2) other necessary ship-related activities integral to the above;
3) qualifying secondary activities;
4) qualifying incidental activities, not exceeding 0.25% turnover from qualifying core and secondary activities;
5) distributions from overseas shipping companies (which only operate qualifying ships);
6) loan relationship profits and foreign exchange gains, which would otherwise be trading income; and
7) gains on the disposal of tonnage tax assets.
What count as qualifying secondary activities (as above)?
Qualifying secondary activities are ship-related activities which are not the direct operation of the company’s own ships but have a substantial connection with the company’s or a fellow group member’s core qualifying activities.
1) support services to fellow group member’s ships that would be qualifying core or secondary activities if carried out for their own ships;
2) carriage of passengers or cargo beyond the sea-leg of an inclusively priced journey where the transport is bought in from a third party;
3) administration and insurance services;
4) embarkation and disembarkation of passengers (if not part of the operation of a port);
5) loading and unloading cargo (if not part of the operation of a port);
6) excursions for passengers where a cabin remains available to those passengers;
7) normal sales and services to and entertainment of passengers;
8) similar services to third parties where use of surplus capacity; and
9) reciprocal arrangements with third parties.
How does a company elect to apply it?
If a 'qualifying company' wishes to elect to apply the tonnage tax regime, they must do so within a specified time period.
A company that is new to the regime, as it has just become a qualifying company, must make the election, '[…] before the end of the period of twelve months beginning with the day on which the company became a qualifying company'.
Any company that wishes to join the tonnage tax regime that has been a qualifying company since 28 July 2000 may not elect to apply this alternative regime, unless the Treasury allow this by making an order which stipulates that, for further periods of time qualifying companies may elect to apply the tonnage tax regime, or a member of a group has just become a qualifying company, allowing a group to become a qualifying group.
This alternative regime is, therefore, only readily available to those companies that have just become qualifying companies and also satisfy all of the criteria.
If a company elects to apply the tonnage tax regime, this election will be for a period of ten years. If the company wishes to re-elect to continue applying the regime they can do so at any point during the ten year period, at which point the clock will start running again, for another ten years.