What is Tonnage Tax? How to Calculate Tax for Shipping Company?

What is Tonnage Tax?

Taxable profit of shipping companies is calculated through Tonnage Tax. It is a taxation mechanism used to calculate shipping related profits for Corporation Tax (CT) of qualifying shipping companies. However, to be considered as a qualified shipping company, it should pay Corporation Tax, operate qualifying ships and should also ‘strategically and commercially manage’ its fleet from the UK. In short, it means real and effective management must take place inthe UK, generating real economic activity. Once an organisation qualifies on all the above mentioned parameters the shipping related profits are calculated onthe tonnage of the ships used in the company’s shipping trade.

Significance of the Tonnage Tax

To encourage shipping groups to locate their business in the UK, the Tonnage tax was introduced as an incentive. Introduced in 2000, the objective was to create a viable business environment for international shipping companies based in the UK. The aim was also to enable the growth and renewal of existing UK-based shipping companies while at the same time attracting investments from investors across the globe. Another impact of the taxation mechanism was that it addressed the decline in the UK merchant fleet. Subsequently, as a result the number of shipping companies based in the UK has not only increased and has also led to an increase in the number of individuals employed by the UK shipping industry.

Application of Tonnage Tax

Tonnage tax is applicable on ship operators who transport goods or people at sea (Say for instance, container lines and ferry/cruise companies) or for services offered at sea (like safety standby vessels). But for qualification companies should be operating ships from the UK. It is a mechanism which excludes vessel financiers and vessels leased out on bareboat charter terms.

The UK tonnage tax rules could be applicable either on the world's largest container and cruise ship operators or also on a company operating a single platform supply vessel. Further, Tax payers are further encouraged to get into a "pre-clearance" process with HMRC, the UK’s tax authority so priorsteps can give a good idea about the level of intervention by UK authorities in each particular case seeking application of tonnage tax.

Calculation of Tonnage Tax profit

• Tonnage tax profit of a company is calculated in 4 steps:
1. 100 net tons up to 1,000 - £0.60
2. 100 net tons from 1,001 to 10,000 - £0.45
3. 100 net tons from 10,001 to 25,000 - £0.30
4. 100 net tons above 25,000 - £0.15

Ship would be 'operated' by a company if it is owned or chartered to it. Please note if ship is laid up, it continues to be operated by company and tonnage tax would be due.

• Profit per day is multiplied with days in accounting period (unless ship was operated by company as a qualifying ship for part of the period in which case it would be multiplied by number of days it was operated for)
• Complete calculations in 1 and 2 above for each ship operated.
• All amounts to be added and the total for all ships is the company’s tonnage tax profit for the accounting period.

Conditions to qualify for Tonnage Tax

For any ship looking to qualify for Tonnage tax it must be:

• Seaworthy - A ship qualifies as seaworthy when it is certified for navigation at sea by any competent authority of a country. Secondly, a part of the normal commercial operations of the ship are carried out at sea;
• Should weigh at least 100 gross tons
• Used for carrying either passengers, cargo or should be involved in operations like Towing, Salvaging or in any services to be provided at sea

However, the following ships are not entitled for Qualification:

• Pleasure craft (Barring Cruise Liners)
• Factory ships or Fishing vessels
• Tankers belonging to a particular oil field
• Certain tugs and dredgers
• River or Harbor ferries
• A vessel which could provide goods or services on land (e.g. floating supermarket or accommodation)

Comparing UK Tonnage Tax with Other Taxes

In spite of so many tonnage tax regimes across Europe, the basic qualification rules and how the systems operate fundamentally the same across Europe. However, the UK is the only system which obliges tonnage tax companies for training of cadets and this adds a cost to operating in the Tonnage Tax. While this also acts as a barrier to many of the largest shipping fleets entering UK tonnage tax because not only due to the cost but also the practical limits of just how many candidates want to be seafarers.

Also UK tonnage tax companies need not fly UK flags neither do they need to employ UK officers or crew. While there is sufficient commercial management activity in the UK technical management does not need totake place in the UK. Since moving into UK tonnage tax is only concerned with moving management level employees into the UK. Now this is where, UK tonnage tax has been able to score over other regimes as international employees are willing to move to the UK than other European countries.

Conclusion

Objectives of those who introduced tonnage tax have been achieved and in the current scenario the positive economic impact of tonnage tax continues to justify its existence. Application of the tonnage tax has also led to the renewal and growth of existing UK-based shipping companies, while at the same time also attracting investments. What’s more, the number of shipping companies based in the UK has increased and it in effect has also led to an increase in the number of individuals employed by the UK shipping industry.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.