Capital allowance position on disposal of an asset previously subject to the Tonnage Tax regime

Mon 23 Dec 2019

The First tier Tribunal (FTT) case of Unicorn Tankships (428) Ltd (UT428) held that HMRC were not entitled to adjust the disposal value of a ship for the period during which it had been within the tonnage tax regime.

HMRC argued that the favourable rates under the tonnage tax regime meant that capital allowances had effectively been treated as claimed (even though no formal claims had been made), so that a balancing charge was due on disposal. The company argued that there should be no balancing charge, as no allowances had ever been claimed and balancing charges were there to take account of excess allowances claimed.

The FTT held that there was no basis in legislation for HMRC’s view and found for the taxpayer. The case is interesting from the point of view of HMRC seeking to claw back the benefit of a preferential regime once the conditions for that regime cease. The case summary also analyses the capital allowance position in a range of scenarios that are relevant to the tonnage tax regime.

Capital allowances can present a number of intricate tax issues where preferential regimes, contributions and grants are involved. For a further discussion of the issues involved, please get in touch with a member of the Mazars corporate tax or personal tax team.

Further background to the UT428 case

In 2004 UT428 had acquired a ship for $25m from another group and became subject to the tonnage tax regime. It operated the ship under a charter until 2007 and under a bareboat charter after that. The tonnage tax regime provides that it is possible to meet the requirement to ‘operate a ship’ under a bareboat charter if it can be shown that the ship is surplus to capacity and bareboat charter lasts for no longer than three years. The bareboat charter UT428 entered into had an initial three year period with an option to extend for a further period. At the end of the initial three year period, the customer exercised its option, so the company left the tonnage tax regime at that point (2010). Shortly after that the company sold the ship and the bareboat charter to a third party, with the disposal value for the ship being £23m. The company had claimed no capital allowances at all.

Once out of the tonnage tax regime, the tonnage tax rules provided that UT428 was only entitled to the balance of allowances as if it had been subject to capital allowances during the tonnage tax regime. However, the percentage value of the original cost that is taken to be its available qualifying expenditure for capital allowances from that point, is set by regulation. In this case (from 2010) it was 15% of the original expenditure.