Ahead of the imminent withdrawal of a concession relating to the application of transfer pricing rules to loans made to companies in the UK tonnage tax scheme, accountant and shipping industry adviser Moore Stephens has urged companies who may be adversely affected to review their financing arrangements and to eliminate where possible any loans from UK companies to connected UK tonnage tax companies.
The UK transfer pricing rules apply to transactions between a UK company and any other entity under common control. They apply to transactions between UK companies, including transactions with UK tonnage tax companies. They also apply to transactions across the tonnage tax ring-fence. However, whether or not they apply will depend on the size of the group. When tonnage tax was first introduced in 2000, it was realised that the effect of applying the transfer pricing rules to transactions involving UK tonnage tax companies could mean that, where a UK resident group company lends money to a tonnage tax company, the lender will be taxable on notional interest receivable with no notional tax deductible interest payable in the hands of the borrower. So, following representations by industry at the time, HMRC agreed that, in most cases, the transfer pricing rules would not be applied in the case of loans to UK tonnage tax companies. Now, however, HMRC is withdrawing this informal concessionary treatment, with effect from 9 December, 2010.
Moore Stephen partner Sue Bill said, “The withdrawal of this informal concessionary treatment may result in taxation liabilities arising on taxable notional interest income in groups, depending on their financing arrangements. This change will potentially apply to all groups where a UK tax-resident company has lent money to a UK tonnage tax company, even where the lender is another UK tonnage tax company.
“The concession for tonnage tax companies was an important one, so the UK government’s conclusion that it is now obsolete and to be withdrawn is a blow for those companies who will be adversely affected. Our information is that, despite representations made on behalf of the shipping industry, HMRC intends to proceed with the withdrawal of the concession with effect from 9 December, 2010. It is therefore important that groups review their financing arrangements and identify any loans from UK companies to connected UK tonnage tax companies. Such loans should be eliminated as far as possible, and no further such loans be contemplated. Specific advice should be obtained, and any necessary restructuring carried out by 9 December this year.”