FB: Reform of the UK Tonnage Tax regime

The Finance Bill simplifies the administrative requirements of the regime and increases the flexibility of its operation following Brexit.

The Finance Bill simplifies the administrative requirements of the regime and.......

In Autumn Budget 2021, the Government announced a package of measures to reform the UK Tonnage Tax regime from April 2022, with the aim of helping the UK shipping industry grow and remain competitive globally. Draft legislation included in Finance Bill 2022 amends the existing Tonnage Tax legislation in Schedule 22 of Finance Act 2000 to introduce a number of these measures, which provide simplifications to the administrative requirements of the regime and seek to increase the flexibility of its operation following the UK’s departure from the EU. This article sets out further details on these amendments.

Elections

The draft legislation introduces, from 1 April 2022, the following flexibility to the procedure for elections into the Tonnage Tax regime:

  • An extension to the period in which an election into the regime can be made, provided an officer of HMRC gives consent after considering whether there was a reasonable excuse for the failure to make an election within the defined time limits and any further delay;
  • The minimum period an election can remain in place will be reduced from ten to eight years, for elections made on or after 1 April 2022; and
  • The concept of a bridging renewal election will be introduced to permit an officer of HMRC to consent to the renewal of an expired election, where a renewal election has not been submitted prior to the expiry of a previous election. This will be subject to the previous election expiring rather than ceasing to be in force for another reason, and no events occurring in the interim period that would have brought a continuing election to an end. In addition, consent must be requested without delay once it is identified that the previous election has expired, and the group or company’s conduct in relation to Tonnage Tax must not have involved at any time tax avoidance as its main purpose (or one of its main purposes).

Flagging

The legislation defining a qualifying ship for the purposes of the regime will be amended to remove the need to consider whether a vessel is flagged in an EU member state, although the operators of the ships will still need to be strategically and commercially managed in the UK.

Other amendments

The draft legislation also includes other amendments to remove specific references to EU Member States and related terms in relation to the inclusion of certain dividends and other distributions from overseas shipping companies as relevant income for the purposes of the regime, and the requirement to provide compliance with safety, environmental and working conditions on qualifying ships.

Our view

The simplifications and flexibility provided by the draft legislation should be welcomed by groups and companies falling within the Tonnage Tax regime. It remains to be seen how HMRC will apply the discretion introduced to consent to late elections into the Tonnage Tax regime and delayed renewal elections under the bridging renewal election concept.

Groups and companies that qualify for entry into the Tonnage Tax regime but have previously chosen not to make an election, may wish to review whether it would be beneficial to revisit this decision based on their current tax profile, and consider if they have a fact pattern that would represent a reasonable excuse for making an election outside the defined time limits.