The ‘flag test’ in the tonnage tax regime has been disapplied for the 2018 financial year.
Financial year 2018 (from 1 April 2018 to 31 March 2019) is to be an ‘excepted year’ for the tonnage tax regime, meaning that vessels entering service in a tonnage tax group can qualify for tonnage tax regardless of their flagging. They can then continue to be qualifying ships in subsequent periods (whether or not those periods are excepted). This is the first excepted year since 2007, indicating that the UK tonnage tax fleet is on balance flagged in EU Member States registries to at least the same extent as three years ago.
Companies in the UK tonnage tax regime are required to meet the ‘flag test’. The UK introduced this test with effect from 1 July 2005 in response to revised EU guidance. In essence, it requires qualifying new vessels to be EU flagged if the company/group in question has below 60 percent of its tonnage EU flagged and if a new non-EU flagged vessel would take their EU flagged percentage below their EU flagged percentage at 17 January 2004 (or when they entered the regime, if this was later).
When the flag test was introduced the Treasury was granted the ability to waive it (declaring an ‘excepted year’), where the overall flagging trend in the UK tonnage tax fleet was positive or neutral, i.e. where the population of UK tonnage tax companies was on balance using the same amount or more EU flagged vessels over a rolling 3 year test period. As a result the 2005, 2006 and 2007 financial years were ‘excepted’. For the last decade the trend has been negative and we have seen no excepted years.
Companies with no EU flagged vessels have never been affected by these rules as their percentage is always zero and cannot be said to have fallen.
Companies with mixed fleets can now be flag-blind in taking on new vessels in FY18 but should be aware that if as a consequence their EU-flagged percentage drops well below 60 percent they may face problems taking on non-EU flagged vessels in future years if those years are not excepted.
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