December 2, 2021

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Tonnage Tax reform

Tonnage Tax reform
Who is likely to be affected Companies and groups that have elected into the Tonnage Tax regime, or are contemplating doing so. General description of the measure This measure will make reforms to the Tonnage Tax, a special elective Corporation Tax regime for operators of qualifying ships. Policy objective At Autumn Budget 2021, the government…

Who is likely to be affected

Companies and groups that have elected into the Tonnage Tax regime, or are contemplating doing so.

General description of the measure

This measure will make reforms to the Tonnage Tax, a special elective Corporation Tax regime for operators of qualifying ships.

Policy objective

At Autumn Budget 2021, the government announced that it will be reforming the UK’s Tonnage Tax regime to ensure that the UK shipping industry remains highly competitive in the global market. These reforms are planned to have a positive impact on the UK shipping industry through changes to make it easier to join the regime and boost the use of the UK flag.

Background to the measure

The Tonnage Tax regime was introduced in 2000 to improve the competitiveness of the UK’s shipping industry. This followed the publication by Lord Alexander of Weedon QC in August 1999 of his “Independent Enquiry into a Tonnage Tax”. The legislation is at Schedule 22 to the Finance Act (FA) 2000 and has been materially amended only once, by FA 2005, to reflect changes required by the European Commission in its role as state aid regulator when the UK was a member of the European Union (EU).

Now that the UK has left the EU, the government will make substantive reforms to the Tonnage Tax regime for the first time since it was introduced to help the UK shipping industry grow and compete in the global market. This measure will enact provisions designed to make it easier for shipping companies to move to the UK, ensure they are not disadvantaged compared with firms operating in other countries, and reduce unnecessary administrative burdens. Provisions which are no longer relevant following the UK’s departure from the EU will be removed.

Detailed proposal

Operative date

The amendments will apply with effect from 1 April 2022.

Current law

Three amendments are proposed to current law. First, to the provisions governing Tonnage Tax elections at Part 2 of Schedule 22 to FA 2000. These elections are optionally renewable on a rolling annual basis. Secondly, to the vessel “flagging” (registration) rules at paragraphs 22A to 22F of Part 3, which deal with with qualifying companies and groups. Thirdly, to paragraph 49 dealing with distributions of overseas shipping companies at Part 6, which defines relevant shipping profits. This paragraph contains a reference to control by companies resident in EU member states of the subsidiaries making distributions to the company within Tonnage Tax.

These dividends and other distributions are now in any event subject to a (slightly qualified) “foreign distributions exemption” in Part 9A of the Corporation Tax Act 2009.

Proposed revisions

Legislation will be introduced in Finance Bill 2021-22 to reduce from ten years to eight years the period for which a Tonnage Tax election remains in force from the beginning of the accounting period in which it is made. In addition, HMRC will be given the power to admit elections made outside the normal period allowed for election where there appears to be a good reason to do so. This will not affect the existing power of HM Treasury to provide by order for further periods during which Tonnage Tax elections may be made.

The proposed legislation will remove the flagging rules introduced in 2005 and simplify the rule which, subject to conditions, includes dividends or other distributions of overseas shipping companies in relevant shipping profits.

Summary of impacts

Exchequer impact (£m)

2021 to 2022 2022 to 2023 2023 to 2024 2024 to 2025 2025 to 2026 2026 to 2027
Negligible Negligible Negligible Negligible Negligible Negligible

This measure is expected to have a negligible impact on the Exchequer.

Economic impact

This measure is not expected to have any significant economic impacts.

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

There is expected to be no impact on individuals and there is expected to be no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that this measure will impact on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure increases the flexibility of the provisions governing elections into the Tonnage Tax regime, creating the ability to flag ships with registers internationally (including “open” registers) without restriction according to strategic managers’ wishes. There are expected to be no administrative or customer experience impacts on ships or any other businesses as they will not be expected to do anything differently compared with what they do now. There will be no familiarisation required as there is no change to what they currently do. This measure is not expected to impact civil society organisations.

Operational impact (£m) (HMRC or other)

The operational impact of this measure is negligible, since it simplifies the system. The impact of the additional HMRC discretion in relation to elections will be negligible.

HMRC guidance pages will be updated to reflect the changes.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns and through communication with relevant stakeholders across government and in industry, including the affected taxpayer population.

Further advice

If you have any questions about this change, please contact Victor Baker of HMRC. Telephone: 03000 585490 or email: victor.j.baker@hmrc.gov.uk.

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