It is an important part of the package of measures being introduced to encourage the resurgence of the UK shipping industry. There has been public consultation at each stage of the development of the regime, in particular with the shipping industry and other interested parties. Most of the amendments tabled today are the result of comments made in response to that consultation process.
1. Joint ventures in the shipping industry may be operated through the vehicle of a corporate partnership. A number of the Government amendments tabled today will clarify how qualifying corporate members of shipping partnerships may bring their share of shipping profits within the tonnage tax regime.
2. These amendments relax restrictions on the availability of capital allowances to lessors who provide ships to tonnage tax companies on finance lease terms. The amendments deal with “defeased leasing” arrangements, allowing certain types of securities provided to the lessor or to a third party guarantor to be disregarded when ascertaining whether a finance lessor is entitled to claim capital allowances
3. There are limits on the capital allowances available on ships finance-leased into tonnage tax. When a ship enters or leaves tonnage tax, there has to be a transition between the normal capital allowances regime and the limited version available within tonnage tax. The method originally set out for that transition would have affected the capital allowances available on other assets held by the leasing company, not just the leased ship in question. The amendments now tabled set out a replacement method.
Sale and Leaseback
4. Finance lessors can get no capital allowances on a ship that they buy from and lease back to a tonnage tax company (such arrangements are known as `sale and leaseback’ arrangements). The amendments tabled today mean that the sale and leaseback rules will not apply in the case of a newly built ship.
5. This amendment builds in flexibility for companies that are new to shipping, allowing them three years to come within the limit set on the proportion of tonnage that they time-charter. The change matches the flexibility available to existing shipping companies under the tonnage tax regime.
6. These amendments allow the Secretary of State to include in the regulations that deal with the operation of the tonnage tax training obligation rules to deal with two situations not catered for in the current wording of the Finance Bill.
7. Under European law, tonnage tax is a state aid and as such clearance has to be obtained from the European Commission that it is not contrary to the interests of the common market before it can be implemented. Whilst there is agreement on most aspects of the regime, discussions with the Commission on the merits of including dredgers within tonnage tax are likely to be protracted. To improve the prospect of timely clearance of the regime by the Commission, the Government has tabled amendments to remove dredgers from the scope of the tonnage tax.
8. The amendments will apply broadly the same rules that apply to tonnage tax companies in determining whether the corporate members of a shipping partnership carry out qualifying activities and can qualify for the tonnage tax regime.
9. The amendments will provide for Regulations to be made which will deal with ships that may not be the property of a partnership but are used by the partnership for its business or vice versa. For example, where one or more than one member of a partnership owns or charters a ship that is used by the partnership for its business, the ship is treated as though it is owned or chartered by each and every member of the partnership. This rule effectively `looks through’ the partner/partnership divide. Likewise, the `look through’ concept applies to a reverse situation, for instance, where the partner company does not qualify but the partnership does. Thus, a corporate partner will be able to make a single company tonnage tax election or become party to a group tonnage tax election even if it only operates qualifying ships through the partnership.
10. The amendments also provide for Regulations to be made dealing with transactions carried out between the partnership and connected parties otherwise than at arm’s length. The Regulations will be based on the existing transfer pricing rules found in Schedule 28AA Income Corporation Taxes Act 1988 which provide that a partnership is a person for the purposes of transfer pricing. So the partnership will be treated as a separate and distinct entity from the members of the partnership and as if it were a tonnage tax company.
11. The tonnage tax provisions in Schedule 22 to the Finance Bill include special rules for capital allowances available to lessors in respect of ships provided by them on finance lease terms to tonnage tax companies. One of the restrictions is that a finance lessor may not claim capital allowances in respect of the cost of a ship which is provided to a tonnage tax company under a defeased leasing arrangement. For this purpose, a defeased leasing arrangement is one where more than 50 percent of the non- compliance risk associated with the lease is removed from the lessor (or a person connected with the lessor). The residual value of a ship is taken into account in measuring this risk.
12. Tonnage tax companies themselves cannot claim capital allowances, so the rule on `defeased’ leasing is there to prevent such companies indirectly putting up the money to buy ships while the lessor claims the capital allowances. The amendment details the types of securities provided to the lessor or to a third party guarantor that can be disregarded when ascertaining whether a finance lessor is entitled to claim capital allowances. The amendment recognises the particular factors present in normal commercial ship leasing, is specifically restricted to the tonnage tax regime and will apply only to qualifying ships that are leased into the tonnage tax regime.
13. Amendments have also been tabled to change the way in which finance lessors should work out their capital allowances in the event that a leased ship starts or stops being subject to the special quantitative restrictions on ships leased to tonnage tax companies. The current method of dealing with such a transition would have affected the capital allowances available on other assets held by the leasing company, not just the leased ship in question. Such a consequence was not intended. The amendments remove this unintended side effect and provide a new method for finance lessors to work out their capital allowances in the event that a leased ship starts or stops being subject to the quantitative restrictions on ships leased to tonnage tax companies.
Sale and Leaseback 14. The amendments relax the restrictions on sale and leaseback in the case of new ships. Elsewhere in the Finance Bill – Clause 76, the existing restrictions on sale and leaseback are being changed so that they do not apply to new machinery or plant (less than 4 months old). The amendments tabled today apply a similar relaxation in the case of newly built ships acquired for use by tonnage tax companies.
15. To come into tonnage tax a company must have effective manning control over at least 25% of the ships that it operates. In other words, no more than 75% of the fleet tonnage may be time-chartered in (a time charter provides a vessel complete with crew). A tonnage tax election is therefore not effective if this 75% test is not passed.
16. For existing companies, there is flexibility within the regime to enable them to reduce their levels of time chartering and so qualify for the regime. However, companies that elect in after the initial window of entry to tonnage tax on the grounds that they are newly qualifying companies do not have similar flexibility under the Bill as drafted. In response to comments received from the industry, amendments have now been tabled to put such companies on a par with companies that qualify during the initial window of entry.
17. The tonnage tax election of such a company (or group) will not be deemed to be ineffective if the 75% limit is exceeded in the first accounting period following the election. The election will only be deemed to be ineffective if the 75% limit is exceeded for three accounting periods following the election. During this three year period, the effective date of the election is the beginning of the first accounting period when the company does come within the 75% limit.
18. To come into tonnage tax, companies have to satisfy a minimum training obligation (MTO), administered by DETR on the basis of annual training plans submitted by companies. Election for tonnage tax requires a formal commitment by the company to train sufficient UK/European Economic Area seafarers to meet its future manpower requirements and the meeting of the MTO.
19. To implement the MTO, companies will produce a Core Training Commitment setting out their known training obligation and how it is to be met, and report on their performance against that commitment at four-monthly intervals.
20. The amendments now tabled will allow the Secretary of State to make regulations to say what should happen in the event that a training plan submitted under Part IV is not agreed by the Secretary of State and also allow a company’s training plans to be amended part way through their duration in certain circumstances.
21. As a tonnage tax is a form of State Aid to the shipping industry European Commission consent must be obtained before the regime may be implemented. The UK has had extensive discussions with the Commission, over many months, but discussions continue as to whether transport at sea by dredgers ought to be allowed within the scope of the regime. The point is unlikely to be resolved quickly. In order not to jeopardise timely Commission approval of tonnage tax as a whole, an amendment has been tabled to remove dredgers from the regime for now. Once the Commission has given approval to the main regime, a fresh notification may be made to the Commission regarding the inclusion of dredgers. The amendment to remove dredgers from the scope of the regime also includes a means for them to be re-included (if the Commission so agrees) as it gives the Treasury a power to change the list of excluded vessels by Order.
NOTES FOR EDITORS
1. In August 1999 the Deputy Prime Minister announced the Government’s intention to introduce a tonnage tax in the UK, following the publication of an independent report in the case for, and design of, a tonnage tax regime by Lord Alexander of Weedon QC.
2. Draft legislation for the regime was first published on 23 December, and can now be found at Schedule 22 to the Finance Bill. The Inland Revenue has also published, on 17 May 2000, draft Regulations including on the training link, and a Statement of Practice.
3. Subject to EC and Parliamentary approval, it is intended that the regime will be available for accounting periods commencing on or after 1 January 2000.
4. The regime has been developed with the benefit of on- going full public consultation, in particular with the shipping industry and other interested parties. The latest consultation pack, containing drafts of the secondary legislation and Inland Revenue Statement of Practice, was published on 17 May 2000 and the consultation period closes on 30 June.
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