Finance Act 2003 - Tonnage Tax

Section 62 amends the scheme of tonnage tax introduced by the Finance Act 2002 to conform more fully with EU requirements. Tonnage tax is a scheme whereby as an alternative to charging corporation tax on certain profits of a qualifying shipping company, a tax charge is levied each year instead on the tonnage of the ships operated by the company. On 11 December 2002 the European Commission gave State aid clearance to the scheme of tonnage tax introduced by Section 53 Finance Act 2002. This clearance was given following a commitment to amend certain of the provisions of the legislation as enacted so as to make the scheme conform more closely with the Commission’s tonnage tax policy. The amendments to the scheme made by this section are:

• Confining the tonnage tax regime to profits derived from shipping activities. In the case of profits which are referable to mixed activity (for example, sale of a holiday plus transport by ferry) only the profit on the shipping activity is included in the tonnage tax regime.
• Requiring separate accounting where a company engages in tonnage tax activities and other activities.
• Goods and services provided to a tonnage tax company by an associated non-tonnage tax company and goods and services provided by a tonnage tax company to an associated non-tonnage tax company are to be on an arm’s length basis. Similar pricing rules to apply where a company operates both a tonnage tax trade and other business activities.
• The practice of capitalising a tonnage tax company or a tonnage tax trade through a preponderance of equity (known as “thick’’ capitalisation) rather than debt and capitalising other activities by means of tax deductible borrowings is countered.
• Excluding from tonnage tax any work undertaken by tug-boats in ports and port areas.
• Profits from the sale of goods on board ships to be included in the tonnage tax regime only to the extent that the goods are consumed on board ship. Income from maritime research to be excluded from tonnage tax.
• Excluding from tonnage tax the provision which allows profits from non-tonnage tax activities to be included where such profits do not exceed 0.25% of the total turnover of the company.

The section also amends the way the scheme may be commenced so as to dispense with the need for a Ministerial order and to provide that the scheme begins with effect from the passing of the Finance Act 2003.