TTM01010 - Introduction to tonnage tax: a brief guide

What is tonnage tax?

Tonnage tax is an alternative method of calculating Corporation Tax profits by reference to the net tonnage of the ship operated. The tonnage tax profit replaces both the tax-adjusted commercial profit/loss on a shipping trade and the chargeable gains/losses made on tonnage tax assets. Other profits of a tonnage tax company are taxable in the normal way.

What businesses qualify?

Companies within Corporation Tax, which operate or manage qualifying ships that are “strategically and commercially managed in the UK”, can take advantage of the tonnage tax regime. All qualifying members of a group have to come in together.

What is “operating a ship”?

A company is regarded as operating a ship owned by it or chartered* to it, if it is:

  • Used by the company, or
  • Time or voyage chartered-out, or
  • Bareboat chartered-out to another UK group member or, in some circumstances, bareboat chartered-out to a third party where there is short-term over-capacity and the charter does not exceed three years.

*A singleton company or group cannot enter tonnage tax if more than 75 per cent of its net tonnage is time or voyage chartered-in from outside the group.

What types of ship qualify?

A qualifying ship must be seagoing**, at least 100 gross tons, and used for:

  • Carriage by sea of passengers, or
  • Carriage by sea of cargo, or
  • Towage, salvage or other marine assistance carried out at sea, or
  • Transport by sea in connection with other services of a kind necessarily provided at sea.

**A ship is regarded as “seagoing” if certificated for navigation at sea by a competent authority of any country, and part of the normal commercial operations of the ship is carried out at sea.

What types of ship do not qualify?

The following types of ship are excluded:

  • Fishing vessels or factory ships
  • Pleasure craft (this does not mean cruise liners, which do qualify)
  • Harbour or river ferries
  • Offshore installations
  • Tankers dedicated to a particular oil field
  • Certain tugs
  • Certain dredgers
  • A vessel the main purpose of which is to provide goods or services normally provided on land (e.g. floating hotel or supermarket).

How is tonnage tax profit computed?

A profit for each day a ship is operated or managed* by a company is calculated by reference to the following table:

Net tonnage Operated Ship Managed Ship

For each complete 100 net tons up to 1,000

£0.60

 £0.12

For each complete 100 net tons from 1,001 to 10,000

£0.45

 £0.09

For each complete 100 net tons from 10,001 to 25,000

£0.30
£0.06

For each complete 100 net tons above 25,000

£0.15

 £0.03

* Operated means owned by or chartered to the company. Managed means carrying on activities that would be tonnage tax activities if an operator carried them on, and the activites carrie on by the ship managment company represent a significant contribution to the operation of the ship. 


The daily profit is multiplied by the number of days operated (for a normal year 365).

A similar calculation is undertaken for each ship operated or managed.

The total for all ships is the company’s tonnage tax profit for the accounting period.

Example 1: For 365 days the tonnage tax profit of a singleton company operating a 30,000 net ton bulk carrier would be £36,135.

If the rate of Corporation Tax is 20%, tax payable would be £7227.

Example 2: For 365 days the tonnage tax profit of a singleton company managing a 250 net ton supply vessel would be £87.60.

If the rate of Corporation Tax of 20%, tax payable would be £17.52.

(Rates of tax  may vary, and Example 1 has been modified compared with the original leaflet. Example 2 has been changed for a managed ship.)

What profits are included?

The actual profits covered by a tonnage tax profit include those from:

  • Core qualifying activities in operating its own ships.
  • Other necessary ship-related activities integral to the above.
  • Qualifying secondary activities.
  • Qualifying incidental activities, not exceeding 0.25 per cent of turnover from qualifying core and secondary activities.
  • Distributions from overseas shipping companies (which only operate qualifying ships).
  • Loan relationship profits and foreign exchange gains, which would otherwise be trading income.
  • Gains on disposal of tonnage tax assets.

What are qualifying secondary activities?

These are ship-related activities which are not the direct operation of the company’s own ships but have a substantial connection with the company’s or a fellow group member’s core qualifying activities. These include:

  • Support services to fellow group members’ ships that would be qualifying core or secondary activities if carried out for own ships.
  • Carriage of passengers or cargo beyond the sea-leg of an inclusively priced journey where the transport is bought in from a third party.
  • Administration and insurance services.
  • Embarkation and disembarkation of passengers.*
  • Loading and unloading cargo.*
  • Excursions for passengers where cabins remain available to them.
  • Normal sales and services to, and entertainment of, passengers.
  • Similar services to third parties where use of surplus capacity.
  • Reciprocal arrangements with third parties.

* Not being part of the operation of a port.

What is “strategic and commercial management in the UK”?

HMRC will adopt a common-sense interpretation, taking into account the various strands of activity carried out in the UK, including:

Strategic

Location of headquarters, including senior management staff.

Decision-making of the company board of directors.

Decision-making of operational board (if it exists).

UK stock exchange listing.

Commercial

Route planning.

Taking bookings for cargo or passengers.

Managing the bunkers, provisioning and victualling requirements.

Personnel management.

Training organisation.

Technical management of vessels.


Extent to which foreign offices/branches work under the direction of UK-based personnel.

Support facilities in the UK (e.g. training centre, terminal).


Other factors

Extent to which work is carried out in UK compared with elsewhere.

Nature and extent of accommodation in UK.

Number of employees in UK.

Residence of key staff, including directors, in the UK.

For an international group, a reasonable balance between UK activities and tonnage in the UK.

Flagging, classifying, insuring or financing of vessels in UK.

Are there any special rules?

There are special rules applying to:

  • Vessels operating in the UK Sector of the North Sea on “offshore activities” (but not supply vessels, tugs, anchor-handlers or tankers, which are subject to normal tonnage tax rules).
  • Transitional provisions on capital allowances (allowances for depreciation).
  • Transitional provisions on chargeable gains.
  • Ring-fencing of tonnage profits from non-tonnage tax profits or losses, particularly finance costs.
  • Leasing companies owning vessels, which cannot make an election, and to which a special regime of capital allowances applies.
  • Corporate partnerships.
  • Legal avoidance.

How does a company enter tonnage tax?

A company can enter tonnage tax by electing for an initial period of eight years.  For elections made before 1 April 2022 the period was ten years.  Elections are renewable.

For existing UK companies operating ships the election had to be made by 27th July 2001 (“window of opportunity”). For existing UK companies eligible for tonnage tax new windows of opportunity to elect run from 1 July 2005 to 31 December 2006 and from 1 June 2023 to 30 November 2024. For those new elections the regime applies to the accounting period in which election is made, commencing no earlier than 1st January 2005, and for the later opportunity 1st January 2023; but entry may have been backdated, or postponed for up to two years, in certain circumstances. A tonnage tax election may be renewed for a further eight years at any time prior to its expiry.

From 1 April 2024 companies managing ships may enter tonnage tax.

Companies newly qualifying for tonnage tax have one year from beginning to operate qualifying ships in the UK to elect into the regime.

A company may use the non-statutory advance clearance procedure if it requires certainty that the company is a qualifying company for tonnage tax. See TTM02010.  Guidance on non-statutory business clearances more generally can be found at ONSCG2100 onwards.

What is the training link?

A condition of entering into the tonnage tax regime is that the company or group must enter into a “minimum training obligation” with the Department for Transport (DfT). Broadly, this requires:

  • The training of one trainee per year for each 15 officers, or
  • Payment in lieu to the Maritime Training Trust ("PILOT");
  • The trainees must be British or EEA nationals and ordinarily resident in the UK.

From 1 October 2015 tonnage tax companies and groups have the option to recruit and train three able seafarer ratings for each year in place of one officer trainee.

The training obligation should have received approval from the DfT by the 1st October in the accounting period for which it is intended to first elect for tonnage tax. But, as it is a requirement to have received approval before electing into tonnage tax, the application of an existing shipping operator to the DfT should be made in good time to allow an election by the deadline for election.

Further information

Further information may be found in Schedule 22 Finance Act 2000, and in the paragraphs of this Tonnage Tax Manual.

Further advice may be obtained from

Tonnage Tax Technical Adviser

HM Revenue & Customs Large Businesses, S1755, Newcastle NE98 1ZZ.

Telephone: 03000 585490

or e-mail: [email protected]. Companies with  their own Customer Compliance Manager should correspond using the correct Large Business Mailbox address.

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