Changes to UK tonnage Tax Unwelcome for Some

Shipping accountant Moore Stephens has warned that new EC requirements will lead to unwelcome changes to the UK tonnage tax regime from April 2008.

Sue Bill, a tax partner with Moore Stephens, said, “The good news is that UK tonnage tax will remain as a stable and robust regime, as the changes will affect relatively few shipowners. Also, the UK government seems to be trying to ensure that the required amendments will be implemented as reasonably as possible.

“But the changes will nevertheless be very disappointing for affected shipowners who have made a ten-year commitment to tonnage tax. The timing is unfortunate, too, as shipowners are likely to still be feeling jittery following recent tonnage tax developments in Norway.”

The UK Inland Revenue (HMRC) has issued draft legislation setting out changes to the tonnage tax regime, as required under ruling by the Commission, as follows:

· vessels providing transport in connection with services at sea such as cable laying, diving support, research vessels etc will no longer qualify for tonnage tax. Safety standby vessels will however continue to qualify for tonnage tax as they are considered to be providing marine assistance carried out at sea;

· profits by passenger vessels from gambling, certain retail sales, recreational activities off the ship, shore excursions, and certain transport off the ship will no longer be within tonnage tax;

· incidental activities of less than 0.25 per cent of the turnover from qualifying activities will no longer be within tonnage tax;

· the exemption from the transfer pricing rules which applies to small or medium-sized enterprises will no longer apply to transactions involving a tonnage tax trade.

Following these changes, companies or groups have been given an opportunity to withdraw their tonnage tax elections by giving notice between 1 April 2008 and 30 September 2008. Sue Bill said “Withdrawal will involve some careful planning, as it will not just be a case of giving notice. Various factors will need to be considered depending on circumstances.”

The changes will broadly apply from 1 April 2008. HMRC and the Department for Transport will be writing jointly to those companies or groups that they consider are likely to be significantly affected, offering an opportunity to have a one-to-one meeting to discuss the changes. Companies who consider that they will be seriously affected but are not offered a one-to-one meeting and who wish to discuss their situation should contact their Tax Office. Any comments on the draft legislation should be made to HMRC by 29 February 2008.

l A new tonnage tax regime came into effect in Norway on 1 January 2008. Norwegian owners are now faced with the prospect of either opting out of the old regime, which operated on a tax deferral basis, and being taxed immediately, or else entering the new regime and paying the previously deferred taxes over a period of ten years.