Budget: Additional flexibility in UK tonnage tax regime

The Budget announcements include some significant changes to the UK tonnage tax regime.

Ship management to qualify for tonnage tax

The Spring Budget announcements include some significant changes to the UK tonnage tax regime, bringing welcome flexibility. These include reforms to make it easier to return to tonnage tax having left the regime, an extension of the regime to ship managers and increased entitlement to capital allowances for ship lessors.

Firstly, an ‘election window’ will be opened for the 18-month period 1 June 2023 to 30 November 2024. In that period, qualifying shipping companies will be able to elect into UK tonnage tax despite having previously been within the regime and left it. Normally such companies would not be able to return to tonnage tax. This is the first time such an opportunity has been provided since 2005 when the EU flagging changes occurred. It is not yet clear whether such returning companies would first need to have been outside the regime for 10 years (as is required by Para 140 Sch 22 FA 2000). It is also not yet clear if the ‘election window’ is open to companies which have qualified but never entered tonnage tax – based on the mechanics of the 2005 window this would be the case too.

From 1 April 2024, ship management companies will be able to qualify for the regime. Such companies will not be required to own or operate ships, which is consistent with 2009 changes to EU guidance, however until now, the UK has chosen not to extend its regime to managers. Details are not yet known: we assume ship managers may be taxed on a lower deemed daily profit compared to ship operators.

Businesses which lease ships to tonnage tax companies can already claim capital allowances, albeit not the super-deduction or the new 100 percent allowance. Their claim is subject to meeting conditions (the lease is treated as non-long funding if it would otherwise be long funding). They are, however, not entitled to capital allowances on expenditure in excess of £80 million in respect of any one ship (Para 94(5) Sch 22 FA 2000). The limit has been unchanged since 2000. It is to be increased to £200 million from 1 April 2024.

These changes are all welcome as they give more flexibility for groups to enter tonnage tax and the leasing change should keep rentals lower for affected shipping companies. As the UK tonnage tax management tests are more stringent than the tests for the OECD Pillar 2 international shipping income exemption, we may see more global groups interested in tonnage tax if they wish to remain both (i) low taxed and (ii) within this Pillar 2 exemption.