Corporates 4

Autumn Budget 2021: Flying the UK Flag

Reform of the tonnage tax regime

Simon Crookston, Partner, Corporate Tax
Corporates 4

The Chancellor in his autumn Budget announced that, post-Brexit, he would reform the UK’s 20 year old tonnage tax regime to encourage more businesses to base their headquarters in the UK, using the UK’s world leading maritime services industry.

What is the tonnage tax regime?

Tonnage tax is an alternative form of corporation tax for companies that operate ships and was introduced in 2000. The regime is elective and taxes shipping businesses based on the net tonnage of the vessels operated during the accounting period, rather than based on the commercial profits of the organisation. An election must be made within 12 months of a company first qualifying. Once elected into the tonnage tax regime it applies for 10 years, at which point it will lapse or a new election can be made for additional periods.

The tonnage tax regime is a lower tax regime than the normal corporate tax regime. This will provide even more benefit to profitable shipping businesses, as the UK’s corporation tax increases to 25% in 2023. Not only that, it also provides those in the regime some certainty as to how much taxation they will pay year on year.

Those businesses that are in the regime are considered to be ‘ring-fenced’ from any wider activities a group may undertake. Companies within the ring fence are taxed on their ‘relevant shipping profits’ based on a daily charge for the ships operated during their accounting period. This daily charge is on a reducing tiered scale between £0.60 and £0.15 per 100 tons, depending on the size of each vessel.

One downside to electing into the tonnage tax regime is that the tonnage tax charge is paid, even in periods when the business is loss making.

Applying for tonnage tax – Main conditions

To be able to apply for the tonnage tax regime there are a number of conditions that must be met. Broadly, a qualifying company must:

  • operate qualify ships or undertake qualifying offshore activities
  • be within the charge to UK corporation tax
  • strategically and commercially manage those ships from the UK, such that the UK derives economic benefit from the activities
  • provide appropriate training for seafarers.

What's changing?

The Chancellor is proposing the following changes to the regime from April 2022.

  • The requirement for ships to only fly the UK flag. There is no longer a requirement for the EU flag to also be flown. This will encourage more ship owners to register their vessels in the UK.
  • The 10-year lock-in period is going to be reduced from 10 years to eight years to align more closely to shipping cycles. HMRC will also allow companies to be admitted into the regime outside the initial 12-month qualifying window where there is good reason.
  • HMRC will revise the list of eligible vessels to consider advances in technology and other developments which have taken place since the regime was introduced in 2000.
  • The permitted limit for qualifying secondary income will be raised from 10% to 15%.
  • Training commitment obligations are to be updated.
  • A review of whether ship management should be included within the scope of the tonnage tax regime and, whether capital allowance limits for leasing to tonnage tax participants remain appropriate.

Overall, these changes are seen as positive changes to the regime and have been campaigned for by the shipping industry since the UK left the EU at the beginning of the year. In particular, if businesses can enter into the regime outside of the existing initial 12-month application window, and if more shipping organisations can be encouraged to relocate their headquarters to the UK, this will be a positive move for the UK economy, international trade and the transport sector.

Autumn Budget 2021

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Simon Crookston
Simon Crookston
Partner, Corporate Tax