Tonnage Tax – proposed change of HMRC practice

Tonnage Tax – proposed change of HMRC practice

HMRC have proposed to change the way in which they notify taxpayers whether the flagging test applies each year.


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A recent update from the Chamber of Shipping has suggested that HMRC is proposing to change the way in which they notify taxpayers whether the tonnage tax flagging test applies for a particular financial year. Previously, HMRC notified tonnage tax companies by publishing a Revenue & Customs Brief for each affected financial year. Under the new proposals, HMRC would include in their Tonnage Tax Manual a list of financial years in which the flagging test applies, and would update this list annually.

As background, the flagging test was introduced by FA 2005 but it can be waived if HM Treasury ‘excepts’ a financial year when the three year trend of community flagged shipping has been positive. In the non-excepted years when the flagging test applies, a tonnage tax company that wishes to acquire a vessel that is already flagged on an EU or EEA registry may do so without restriction but if it wishes to acquire a vessel that is flagged outside the EU/EEA it will need to consider three questions:

  1. Is the company/group operating the ship for the first time?
  2. Is the average proportion of the company/group’s total tonnage that is
    community flagged less than 60 percent over a period beginning with the
    start of that financial year and ending on the day the company begins to
    operate the new ship?
  3. Is the average percentage of the company/group’s total tonnage which is registered in a member state in the period in bullet two above lower than the
    percentage that was registered in member states on the later of 17 January
    2004 or the end of the accounting period in which the company became a tonnage tax company?

If the answer to all three questions is ‘yes’, the company must either re-flag the vessel onto an EU/EEA registry or must flag a substitute vessel onto such a registry. Failure to do so would lead to the profits of the ship in question falling outside tonnage tax.

For further information please contact :

Michael Everett

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