HMRC publishes draft legislation on reforms to UK tonnage tax regime

Commenting on draft legislation published for Finance Bill 2023-24, James Bailey, a corporate tax director at accountancy and business advisory firm BDO said:

“As announced in the Spring budget, details of the inclusion of ship management activities within UK tonnage tax have now been released, along with the proposed increase to the limit on capital allowances for lessors of ships.

Extension of tonnage tax to ship management activities

“The proposed changes will allow the inclusion of ship managers, who manage qualifying tonnage tax vessels, to elect in the UK tonnage tax regime from 1 April 2024. This measure is aimed at making the UK tonnage tax regime more internationally competitive and encourage the growth of UK based ship management. However, given that the regime will only apply to the management of vessels within UK tonnage tax, it may have limited impact particularly for ship managers who manage vessels not within the UK tonnage tax regime.

“The calculation of the tonnage tax profits of a ship manager will be broadly 1/5th of the equivalent tonnage tax profits of the vessel operator. Ship managers will therefore need to evaluate the benefits of the UK tonnage tax regime and determine whether this alternative method of calculating the taxable profits of these activities represents a valuable relief.

“There will be no associated cadet training requirement imposed on ship managers electing into tonnage tax, which would otherwise be the case for UK tonnage tax vessel operators. This exclusion is helpful, with the rationale being that any training requirement is already being met by the vessel operator.”

Capital allowances for vessel leasing companies

“Historically there has been a restriction on capital allowances relief for a lessor that leases vessels to operators within the UK tonnage tax regime. The purpose of this restriction was to prevent the intended benefits of the tonnage tax regime being transferred to the providers of finance of vessels. The legislation increases the limit on expenditure to which capital allowances can be claimed by the lessor to £200 million (from £80 million). This limit has not changed since 2000 and the increase has been introduced with the aim of maintaining competitiveness and also as a recognition of general price movements and changes in vessel designs and costs.”
Source: BDO