Revenue & Customs Brief 07/11

Tonnage Tax – qualifying ships

Readership:

Companies that have elected to compute their Corporation Tax profits from maritime transport activities under Tonnage Tax rules.

Action required

If:

  • a company in Tonnage Tax
  • starts to operate a ship that is not registered in a European Union (EU) or European Economic Area (EEA) Member State
  • during financial year 2011 (the year starting 1 April 2011)
  • then they must carry out a 'flagging' test to determine whether the ship qualifies for Tonnage Tax

Background: Registration of ships

Where a newly operated ship is registered ('flagged') outside the EU/EEA this may affect whether it is a qualifying ship for Tonnage Tax purposes, unless the year is an 'excepted year'.

Tugs and dredgers, however, must always be registered in an EU/EEA Member State to qualify for Tonnage Tax.

'Excepted year' and the flagging test

Each year HM Revenue & Customs tests the tonnage of Tonnage Tax ships on EU/EEA Member states’ registers, as a proportion of Tonnage Tax ships registered worldwide.

So long as this proportion has not fallen from the previous year’s calculation, the Treasury may make an Order that the financial year is an 'excepted year'.

If the Treasury has not designated a year an excepted year, companies and groups must apply a flagging test when they start to operate a non-EU/EEA-registered ship for the first time to determine if the ship qualifies for Tonnage Tax. Details of the flagging test are in the Tonnage Tax manual at TT03910.

If the conditions set out in the flagging test are met, the ship will not be a qualifying ship for Tonnage Tax purposes. The profits from a non-qualifying ship are taxed under the normal rules of Corporation Tax.

Financial year 2011

The number and tonnage of ships in Tonnage Tax have changed very little in the last twelve months. But companies have increased the number of ships in Tonnage Tax that are on the registers of countries that are not EU/EEA Member States. The proportion of EU/EEA tonnage has therefore declined on average over a three year period.

Consequently, the Treasury is unable to designate the financial year 2011 an excepted year.

Companies and groups must apply the test described above when they start to operate a non-EU/EEA-registered ship during financial year 2011.

Member States’ registers

For the purposes of the flagging test 'Member States' registers' means registers governed by the law of a Member State applying to their territories forming part of the European Union, and also those of the three EEA EFTA States: Norway, Iceland and Liechtenstein.

In addition, the following registers are Member States' registers for the purposes of the flagging test:

  • the Danish International Register of Shipping (DIS)
  • the German International Shipping Register (ISR)
  • the Italian International Shipping Register
  • the Madeira International Ship Register (MAR)
  • the Canary Islands register
  • the Norwegian International Ship register (NIS)
  • the Gibraltar register

The following registers are not considered to be Member States' registers:

  • the Kerguelen register
  • the Dutch Antilles' register
  • the Isle of Man register
  • the Bermuda register
  • the Cayman Islands register

Issued 3 March 2011