Moore Stephens has warned that an announcement made this week by the U.K. Government could mean that shipowners within the U.K. tonnage tax regime will find that some vessels owned or operated after 1st April, 2008, and not registered under an EU flag, are outside the tonnage tax regime. Sue Bill, a tax partner at Moore Stephens, said that the Finance Act 2005 included rules whereby, when a UK tonnage tax company or group starts to operate a new vessel, the vessel must be flagged under an EU flag if the following conditions are satisfied: The financial year has been specified by the Government as a financial year where the proportion of vessels within the UK tonnage tax regime registered under an EU flag has reduced on average in the preceding three calendar years, and Less than 60% of the tonnage tax company or group’s fleet is already flagged under an EU flag, and The tonnage tax group or company’s fleet contains a lower proportion of EU Member State- registered tonnage than on 17th January 2004 or, if later, the end of the first period when it entered tonnage tax. The Government has now announced that the financial year 2008 will be specified as a financial year where the proportion of vessels within the UK tonnage tax regime registered under an EU flag has reduced on average in the preceding three calendar years, with the effect that these rules will now apply from 1st April 2008. If all of the above conditions apply, then the new ship will need to be registered under an EU flag within three months, otherwise the ship will not be within tonnage tax. If the flagging requirement applies, a company may be able to re-flag an existing vessel under an EU flag instead of the new ship. Concerns have previously been expressed that these changes are likely to cause problems in practice where the tonnage tax company or group time-charters in vessels, as it will be difficult to enforce the flag requirement. Matters yet to be determined include which vessels should be included in these calculations, particularly in relation to vessels not owned by the ship operator. HMRC have announced that they will shortly be publishing draft guidance on the application of these rules.