Finance Act 2000 (c. 17)

(The document as of February, 2008)

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Page 45

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48 (1) A company's incidental activities means its ship-related activities that--

(a) are incidental to its core qualifying activities, and

(b) are not qualifying secondary activities.

(2) If the turnover in an accounting period of the company from its incidental activities (taken together) does not exceed 0.25% of the company's turnover in that period from--

(a) its core qualifying activities, and

(b) its qualifying secondary activities to the extent that they do not exceed the permitted level,

the company's incidental activities in that period are qualifying incidental activities.

Relevant shipping income: distributions of overseas shipping companies

49 (1) Income of a tonnage tax company consisting in a dividend or other distribution of an overseas company is relevant shipping income if the following conditions are met.

(2) The conditions are--

(a) that the overseas company operates qualifying ships;

(b) that more than 50% of the voting power in the overseas company is held by a company resident in a member State, or that two or more companies each of which is resident in a member State hold in aggregate more than 50% of that voting power;

(c) that the 75% limit is not exceeded in relation to the overseas company in any accounting period in respect of which the distribution is paid;

(d) that all the income of the overseas company is such that, if it were a tonnage tax company, it would be relevant shipping income;

(e) that the distribution is paid entirely out of profits arising at a time when--

(i) the conditions in paragraphs (a) to (d) were met, and

(ii) the tonnage tax company was subject to tonnage tax; and

(f) the profits of the overseas company out of which the distribution is paid are subject to a tax on profits (in the country of residence of the company or elsewhere, or partly in that country and partly elsewhere).

(3) For the purposes of sub-paragraph (2)(c) the "75% limit" is the requirement set out in paragraph 37 (requirement that not more than 75% of tonnage is chartered in) as it applies to a single company.

(4) In this paragraph an "overseas company" means a company that is not resident in the United Kingdom.

Relevant shipping income: certain interest etc.

50 (1) Income to which this paragraph applies is relevant shipping income only to the extent that it would apart from this Schedule fall to be taken into account as trading income from a trade consisting of the company's tonnage tax activities.

(2) This paragraph applies to--

(a) anything giving rise to a credit that would fall to be brought into account for the purposes of Chapter II of Part IV of the [1996 c. 8.] Finance Act 1996 (loan relationships);

(b) any exchange gain under Chapter II of Part II of the [1993 c. 34.] Finance Act 1993 (exchange gains and losses); and

(c) any profit on a qualifying contract under Chapter II of Part IV of the [1994 c. 9.] Finance Act 1994 (interest rate and currency contracts).

General exclusion of investment income

51 (1) Income from investments is not relevant shipping income.

(2) To the extent that an activity gives rise to income from investments it is not regarded as part of a company's tonnage tax activities.

(3) For the purposes of this paragraph "income from investments" includes--

(a) any income chargeable to tax under Schedule A or Case III of Schedule D, and

(b) any equivalent foreign income.

(4) "Equivalent foreign income" means income chargeable under Case V of Schedule D that--

(a) consists in income of an overseas property business, or

(b) is equivalent to a description of income chargeable to tax under Case III of Schedule D but arises from a possession outside the United Kingdom.

(5) Sub-paragraph (1) above does not affect income that is relevant shipping income under--

paragraph 49 (distributions of overseas shipping companies), or

paragraph 50 (certain interest etc.).

Part VII The ring fence: general provisions

Accounting period ends on entry or exit

52 An accounting period ends (if it would not otherwise do so) when a company enters or leaves tonnage tax.

Tonnage tax trade

53 (1) The tonnage tax activities of a tonnage tax company are treated for corporation tax purposes as a separate trade (the company's "tonnage tax trade") distinct from all other activities carried on by the company.

(2) Sub-paragraph (1) shall not be read as requiring a company to be treated--

(a) as setting up and commencing a new trade on entry into tonnage tax, or

(b) as permanently ceasing to carry on a trade on leaving tonnage tax.

Profits of controlled foreign companies

54 (1) A tonnage tax company is not subject to any liability under section 747 of the Taxes Act 1988 in any accounting period in respect of profits of a controlled foreign company if in that period distributions of the controlled foreign company made to the tonnage tax company would be relevant shipping income of the latter (see paragraph 49).

(2) Schedule 24 to that Act (assumptions for calculating chargeable profits of controlled foreign companies) has effect subject to the following provisions.

(3) If a company in relation to which that Schedule applies--

(a) is a member of a tonnage tax group, and

(b) is a tonnage tax company by virtue of the group's tonnage tax election, or would be if it were within the charge to corporation tax,

it shall be assumed for the purposes for which that Schedule applies to be a single company that is a tonnage tax company.

(4) Nothing in paragraph 5(1) of that Schedule (controlled foreign company assumed not to be member of a group) affects sub-paragraph (3) above.

For accounting periods ending before 1st April 2000 the reference to paragraph 5(1) has effect as a reference to paragraph 5 of that Schedule.

(5) Paragraph 20 of that Schedule (provisions for avoiding double charge) does not apply where, or to the extent that, the transaction in question is one any profits from which would be, or would be reflected in, relevant shipping profits of a party to the transaction.

General exclusion of reliefs, deductions and set-offs

55 No relief, deduction or set-off of any description is allowed against the amount of a company's tonnage tax profits.

Exclusion of loss relief

56 (1) When a company enters tonnage tax, any losses that have accrued to it before entry and are attributable--

(a) to activities that under tonnage tax become part of the company's tonnage tax trade, or

(b) to a source of income that under tonnage tax becomes relevant shipping income,

are not available for loss relief in any accounting period beginning on or after the company's entry into tonnage tax.

(2) Any apportionment necessary to determine the losses so attributable shall be made on a just and reasonable basis.

(3) In sub-paragraph (1) "loss relief" includes any means by which a loss might be used to reduce the amount in respect of which that company, or any other company, is chargeable to tax.

Exclusion of relief or set-off against tax liability

57 (1) Any relief or set-off against a company's tax liability for an accounting period does not apply in relation to--

(a) so much of that tax liability as is attributable to the company's tonnage tax profits, or

(b) so much of that tax liability as is attributable to tonnage profits of a controlled foreign company apportioned to the company under section 747(3) of the Taxes Act 1988.

(2) Relief to which this paragraph applies includes, but is not limited to, any relief or set-off under--

(a) section 788 or 790 of the Taxes Act 1988 (double taxation relief), or

(b) regulations under section 32 of the [1998 c. 36.] Finance Act 1998 (unrelieved surplus advance corporation tax).

(3) Sub-paragraph (1)(b) applies whether or not the company to which the profits are apportioned is subject to tonnage tax.

(4) For the purposes of sub-paragraph (1)(b)--

(a) "tonnage profits" means so much of the chargeable profits of the controlled foreign company as, on the assumptions in Schedule 24 to the Taxes Act 1988, are calculated in accordance with paragraph 4 of this Schedule; and

(b) so much of a controlled foreign company's chargeable profits for any accounting period as are tonnage profits shall be treated as apportioned under section 747(3) of that Act in the same proportions as those chargeable profits (taken generally) are apportioned.

(5) For the purposes of any such regulations as are mentioned in sub-paragraph (2)(b), a company's tonnage tax profits shall be left out of account in determining the company's profits charged to corporation tax.

This does not affect the computation under those regulations of shadow ACT on distributions made by a tonnage tax company, whether paid out of tonnage tax profits or other profits.

(6) This paragraph does not affect--

(a) any reduction under section 13(2) of the Taxes Act 1988 (marginal small companies' relief), or

(b) any set off under section 7(2) or 11(3) of the Taxes Act 1988 (set off for income tax borne by deduction).

Transactions not at arm's length: between tonnage tax company and another person

58 (1) In relation to provision made or imposed as between a tonnage tax company and another person by a transaction or series of transactions that--

(a) falls in relation to the tonnage tax company to be regarded as made or imposed in the course of, or with respect to, its tonnage tax trade, and

(b) does not fall in relation to the other person to be regarded as made or imposed in the course of, or with respect to, a tonnage tax trade carried on by that person,

Schedule 28AA to the Taxes Act 1988 (transactions not at arm's length) has effect with the omission of paragraphs 5(2) to (6), 6 and 7 (exclusion of intra-UK transactions).

(2) Expressions used in Schedule 28AA have the same meaning in this paragraph.

(3) Nothing in this paragraph affects the computation of a company's tonnage tax profits.

Transactions not at arm's length: between tonnage tax trade and other activities of same company

59 (1) Schedule 28AA of the Taxes Act 1988 (transactions not at arm's length) applies to provision made or imposed as between a company's tonnage tax trade and other activities carried on by it as if--

(a) that trade and those activities were carried on by two different persons,

(b) the provision were made or imposed between those persons by means of a transaction, and

(2) As applied by sub-paragraph (1), Schedule 28AA has effect with the omission of paragraphs 5(2) to (6), 6 and 7 (exclusion of intra-UK transactions).

(3) Expressions used in Schedule 28AA have the same meaning in this paragraph.

(4) Nothing in this paragraph affects the computation of a company's tonnage tax profits.

Transactions not at arm's length: duty to give notice

60 (1) Not more than 90 days after--

(a) the making of an election under this Schedule, or the occurrence of any other event, as a result of which a company enters, or is taken to have entered, tonnage tax, or

(b) the making of an election under this Schedule as a result of which a company will become a tonnage tax company at a later date,

the company shall give notice under this paragraph to any person whose tax liability may be affected by paragraph 58 (transactions not at arm's length).

(2) The notice must state--

(a) that the company has become a tonnage tax company, or

(b) that an election has been made under this Schedule as a result of which the company will become a tonnage tax company,

and inform the person to whom it is given of the possible application of the provisions of Schedule 28AA in relation to transactions between the company and that person.

Treatment of finance costs: single company

61 (1) This paragraph applies to a tonnage tax company which is a single company carrying on tonnage tax activities and other activities.

(2) An adjustment shall be made if it appears, in relation to an accounting period of the company, that the company's deductible finance costs outside the ring fence exceed a fair proportion of the company's total finance costs.

(3) The company's "deductible finance costs outside the ring fence" means the total of the amounts that may be brought into account in respect of finance costs in calculating for the purposes of corporation tax the company's profits other than relevant shipping profits.

(4) A company's "total finance costs" means so much of the company's finance costs as could, if there were no tonnage tax election, be brought into account in calculating the company's profits for the purposes of corporation tax.

(5) What proportion of the company's total finance costs should be deductible outside the ring fence shall be determined on a just and reasonable basis by reference to the extent to which the funding in relation to which the costs are incurred is applied in such a way that any profits arising, directly or indirectly, would be relevant shipping profits.

(6) Where an adjustment falls to be made under this paragraph, an amount equal to the excess referred to in sub-paragraph (2) shall be brought into account as if it were a non-trading credit falling for the purposes of Chapter II of Part IV of the [1996 c. 8.] Finance Act 1996 (loan relationships) to be brought into account in respect of a loan relationship of the company in respect of non-tonnage tax activities.

Treatment of finance costs: group company

62 (1) This paragraph applies to a tonnage tax company which is a member of a tonnage tax group where the activities carried on by the members of the group include activities other than tonnage tax activities.

(2) An adjustment shall be made if it appears, in relation to an accounting period of the company, that the group's deductible finance costs outside the ring fence exceed a fair proportion of the total finance costs of the group.

(3) A group's "deductible finance costs outside the ring fence" means so much of the group's finance costs as may be brought into account in calculating for the purposes of corporation tax--

(a) in the case of a group member that is a tonnage tax company, the company's profits other than relevant shipping profits, and

(b) in the case of a group member that is not a tonnage tax company, the company's profits.

(4) A group's "total finance costs" means so much of the group's finance costs as could, if there were no tonnage tax election, be brought into account in calculating for the purposes of corporation tax the profits of any member of the group.

(5) What proportion of the group's total finance costs should be deductible outside the ring fence shall be determined on a just and reasonable basis by reference to the extent to which the funding in relation to which the costs are incurred is applied in such a way that any profits arising, directly or indirectly, would be relevant shipping profits.

(6) Where an adjustment falls to be made under this paragraph, an amount equal to the relevant proportion of the excess referred to in sub-paragraph (2) shall be brought into account as if it were a non-trading credit falling for the purposes of Chapter II of Part IV of the [1996 c. 8.] Finance Act 1996 (loan relationships) to be brought into account in respect of a loan relationship of the company in respect of non-tonnage tax activities.

For this purpose "the relevant proportion" is the proportion that the company's tonnage tax profits bear to the tonnage tax profits of all the members of the group.

Meaning of "finance costs"

63 (1) For the purposes of paragraphs 61 and 62 "finance costs" means the costs of debt finance.

(2) In calculating the costs of debt finance, the matters to be taken into account include--

(a) any costs giving rise to a trading or non-trading debit under Chapter II of Part IV of the [1996 c. 8.] Finance Act 1996 (loan relationships);

(b) any trading profit or loss, under Chapter II of Part IV of the [1994 c. 9.] Finance Act 1994 (interest rate and currency contracts), in relation to debt finance;

(c) any exchange gain or loss within the meaning of Chapter II of Part II of the [1993 c. 34.] Finance Act 1993 in relation to debt finance;

(d) the finance cost--

(i) implicit in a payment under a finance lease, or

(ii) payable on debt factoring or any similar transaction; and

(e) any other costs arising from what would be considered on normal accounting principles to be a financing transaction.

(3) No adjustment shall be made under paragraph 61 or 62 if, in calculating for a period the company's, or as the case may be, the group's deductible finance costs outside the ring fence, the amount taken into account in respect of costs and losses is exceeded by the amount taken into account in respect of profits and gains.

Part VIII Chargeable gains and allowable losses on tonnage tax assets

Chargeable gains: tonnage tax assets

64 (1) In this Part of this Schedule a "tonnage tax asset" means an asset that is used wholly and exclusively for the purposes of the tonnage tax activities of a tonnage tax company.

(2) Where for one or more continuous periods of at least a year part of an asset has been used wholly and exclusively for the purposes of the tonnage tax activities of a tonnage tax company and part has not, this Part of this Schedule shall apply as if the part so used were a separate asset.

(3) Where sub-paragraph (2) applies, any necessary apportionment of the gain or loss on the whole asset shall be made on a just and reasonable basis.

Chargeable gains: disposal of tonnage tax asset

65 (1) When an asset is disposed of that is or has been a tonnage tax asset--

(a) any gain or loss on the disposal is a chargeable gain or allowable loss only to the extent (if any) to which it is referable to periods during which the asset was not a tonnage tax asset, and

(b) any such chargeable gain or allowable loss on a disposal by a tonnage tax company is treated as arising otherwise than in the course of the company's tonnage tax trade.

(2) For the purposes of sub-paragraph (1) the amount of the gain or loss on a disposal means what would be the amount of the chargeable gain or allowable loss apart from this paragraph.

(3) The proportion of that gain or loss referable to periods during which the asset was not a tonnage tax asset is given by:

---

where:

P is the total length of the period since the asset was created or, if later, the last third-party disposal, and
PTTA is the length of the period (or the aggregate length of the periods) since--
(a) the asset was created, or
(b) if later, the last third-party disposal,
during which the asset was a tonnage tax asset.

(4) In sub-paragraph (3) a "third-party disposal" means a disposal (or deemed disposal) that is not treated as one on which neither a gain nor a loss accrues to the person making the disposal.

Chargeable gains: losses brought forward

66 A tonnage tax election does not affect the deduction under section 8(1) of the [1992 c. 12.] Taxation of Chargeable Gains Act 1992 (corporation tax: computation of chargeable gains) of allowable losses that accrued to a company before it became a tonnage tax company.

Chargeable gains: roll-over relief for business assets

67 (1) Sections 152 and 153 of the [1992 c. 12.] Taxation of Chargeable Gains Act 1992 (roll-over relief for business assets) do not apply if or to the extent that the new assets are tonnage tax assets.

(2) Where relief under either of those sections is, or has been, claimed in respect of the disposal of an asset ("Asset No.1") and the acquisition of another asset ("Asset No.2") that subsequently becomes a tonnage tax asset, the claimant is not (or, as the case may be, shall cease to be) entitled under that section to--

(a) a reduction of the consideration for the disposal of Asset No.1, and

(b) a corresponding reduction of the expenditure for the acquisition of Asset No.2,

but so much of the chargeable gain arising on the disposal of Asset No.1 as is equal to the amount of the reduction that would have been made is treated as not accruing until Asset No.2 is disposed of.

(3) Any chargeable gain accruing as a result of the rules in sub-paragraph (1) or (2) is treated as arising otherwise than in the course of the company's tonnage tax trade.

Part IX The ring fence: capital allowances: general

Introduction

68 (1) This Part of this Schedule makes provision about capital allowances where a company enters, leaves or is subject to tonnage tax.

(2) The general scheme of this Part of this Schedule is that--

(a) entry of a company into tonnage tax does not of itself give rise to any balancing charges or balancing allowances,

(b) a company subject to tonnage tax is not entitled to capital allowances in respect of expenditure incurred for the purposes of its tonnage tax trade, whether before or after its entry into tonnage tax, and

(c) on leaving tonnage tax a company is put broadly in the position it would have been in if it had never been subject to tonnage tax.

(3) A company's tonnage tax trade is not a qualifying activity for the purposes of determining the company's entitlement to capital allowances.

Entry: plant and machinery: assets to be used wholly for tonnage tax trade

69 (1) On a company's entry into tonnage tax any unrelieved qualifying expenditure attributable to plant or machinery that is to be used wholly for the purposes of the company's tonnage tax trade is taken to a single pool (the company's "tonnage tax pool").

(2) For the purposes of this paragraph "unrelieved qualifying expenditure" means the balance that would otherwise have been carried forward under Part II of the [1990 c. 1.] Capital Allowances Act 1990.

(3) The amount of unrelieved qualifying expenditure attributable to plant or machinery in a class pool, or the main pool, is the proportion of the whole given by:

---

where:

AV is the aggregate market value of the assets concerned immediately before entry into tonnage tax, and
PV is the aggregate market value at that time of all the assets in the pool.

(4) References in this paragraph to unrelieved qualifying expenditure include qualifying expenditure to the extent to which it is unrelieved by virtue of notice having been given under--

(a) section 30(1) of the [1990 c. 1.] Capital Allowances Act 1990 (postponement or reduction of first year allowances), or

(b) section 31(3) of that Act (postponement of writing-down allowance in respect of expenditure in single ship pool).

No allowance may be claimed in respect of any such expenditure taken to the company's tonnage tax pool.

Entry: plant and machinery: assets to be used partly for tonnage tax trade

70 (1) This paragraph applies where, on a company's entry into tonnage tax, plant and machinery is to be used partly for the purposes of the company's tonnage tax trade and partly for the purposes of a qualifying activity carried on by the company.

(2) The provisions of sections 24(6)(c)(iv) and 79(3) to (6) of the [1990 c. 1.] Capital Allowances Act 1990 (effect of use partly for trade and partly for other purposes) apply as follows--

(a) references to a trade shall be read as references to the qualifying activity (and not as including a reference to the tonnage tax trade), and

(b) references to purposes other than those of a trade shall be read as including references to the purposes of the tonnage tax trade.

Entry: ships acquired and disposed of within twelve months

71 (1) This paragraph applies if a company--

(a) acquires a qualifying ship within the period of six months before the company enters tonnage tax, and

(b) disposes of the ship before the end of the period of twelve months beginning with the day on which the ship was acquired.

(2) The aggregate amount of the capital allowances to which the company is entitled for the period or periods before entry into tonnage tax in respect of its expenditure on acquiring the ship is limited to the amount by which that expenditure exceeds the market value of the ship on the company's entry into tonnage tax.

Entry: deferred balancing charge on disposal of ship

72 (1) This paragraph applies where deferment of a balancing charge has been claimed under sections 33A to 33F of the [1990 c. 1.] Capital Allowances Act 1990 (balancing charge on disposal of ship to be deferred and set against new expenditure incurred within six years) by a company that subsequently enters tonnage tax.

(2) Expenditure on new shipping incurred by a company subject to tonnage tax shall not be taken into account for the purposes of those sections unless the company that incurred the balancing charge--

(a) was a qualifying company for the purposes of this Schedule at the time the balancing charge arose, or

(b) would have been such a company had this Schedule been in force at that time.

(3) Subject to sub-paragraph (2)--

(a) the company's entry into tonnage tax does not affect the operation of those sections, and

(b) the expenditure on new shipping that is to be taken into account for the purposes of those sections shall be determined as if the company was not subject to tonnage tax.

During: plant and machinery: new expenditure partly for tonnage tax purposes

73 (1) This paragraph applies where a company subject to tonnage tax incurs expenditure on the provision of plant or machinery partly for the purposes of its tonnage tax trade and partly for the purposes of a qualifying activity.

(2) The provisions of section 79(2) and (4) to (6) of the [1990 c. 1.] Capital Allowances Act 1990 (operation of single asset pool for mixed use assets) apply as follows--

(a) references to a trade shall be read as references to the qualifying activity (and not as including a reference to the tonnage tax trade), and

(b) references to purposes other than those of a trade shall be read as including references to the purposes of the tonnage tax trade.

During: plant and machinery: asset beginning to be used for tonnage tax trade

74 A company's tonnage tax pool is not increased by reason of an asset beginning to be used for the purposes of the company's tonnage tax trade after the company's entry into tonnage tax.

During: plant and machinery: change of use of tonnage tax asset

75 (1) This paragraph applies where, at a time when a company is subject to tonnage tax, plant or machinery used for the purposes of the company's tonnage tax trade begins to be used wholly or partly for purposes other than those of that trade.

(2) If the asset was acquired before entry into tonnage tax, section 24(6)(c)(iv) of the [1990 c. 1.] Capital Allowances Act 1990 applies (disposal value to be brought into account on plant of machinery beginning to be used wholly or partly for purposes other than those of the trade for which it was provided).

The reference to the trade shall be read as a reference to the tonnage tax trade.

(3) If the asset was acquired after entry into tonnage tax and begins to be used wholly or partly for the purposes of a qualifying activity carried on by the company, section 81(1)(a) of the [1990 c. 1.] Capital Allowances Act 1990 (effect of use after user not attracting capital allowances) applies as follows--

(a) the reference to the trade shall be read as a reference to the qualifying activity (and as not including a reference to the tonnage tax trade), and

(b) the reference to purposes such that the expenditure has not been taken into account in computing any capital allowance shall be read as including the purposes of the tonnage tax trade.

During: plant and machinery: change of use of non-tonnage tax asset

76 (1) This paragraph applies where, at a time when a company is subject to tonnage tax, plant or machinery used for the purposes of a qualifying activity carried on by the company begins to be used wholly or partly for the purposes of the company's tonnage tax trade.

(2) The provisions of sections 24(6)(c)(iv) and 79(3) to (6) of the [1990 c. 1.] Capital Allowances Act 1990 (disposal value to be brought into account on plant or machinery beginning to be used wholly or partly for purposes other than those of trade for which it was provided) apply as follows--

(a) references to a trade shall be read as references to the qualifying activity (and not as including a reference to the tonnage tax trade), and

(b) references to purposes other than those of a trade shall be read as including references to the purposes of the tonnage tax trade.

During: plant and machinery: disposals

77 (1) This paragraph applies if when a company is subject to tonnage tax a disposal event occurs in relation to plant or machinery--

(a) in respect of which qualifying expenditure was incurred by the company before its entry into tonnage tax,

(b) some or all of the expenditure on which was carried to the tonnage tax pool on the company's entry into tonnage tax, and

(2) A "disposal event" means an event as a result of which the company is required under Part II of the [1990 c. 1.] Capital Allowances Act 1990 to bring a disposal value into account.

In determining whether such an event has occurred references in that Part of that Act to a trade shall be read as including the company's tonnage tax trade.

(3) Where this paragraph applies--

(a) the disposal value to be brought into account in respect of any plant or machinery is limited to its market value when the company entered tonnage tax, and

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