Tonnage Tax Reform

The measure

The government will legislate in Finance Bill 2021-22 to reduce the lock-in period for tonnage tax participants from ten to eight years, enable HMRC to admit companies into the regime outside of the initial window of opportunity when there is a good reason to do so, and remove the consideration of flags from EU and EEA countries. In addition, existing tonnage tax guidance will be reviewed, to include, amongst other areas, consideration of ‘net zero’ objectives. Three amendments to the Tonnage Tax legislation are proposed:  

  • Reduction from ten to eight years being the period for which a tonnage tax election remains in force .  These elections are optionally renewable on a rolling annual basis. In addition, HMRC will be given the power to admit elections made outside the normal period where there appears to be a good reason to do so. This will not affect the existing power of HM Treasury to provide by order for further periods during which tonnage tax elections may be made. 

  • Removal of the vessel “flagging” (registration) rules requiring consideration of flags from EU/EEA countries which deal with qualifying companies and groups.  

  • Amendments dealing with distributions of overseas shipping companies which define ‘relevant shipping income’. This measure will simplify the rule which, subject to conditions, includes dividends or other distributions of overseas shipping companies in relevant shipping profits. 

In addition to the above legislative changes, HMRC will review their existing guidance to reflect the significance of flagging vessels in the UK and UK investment in decarbonisation and pollution control when they assess which companies can participate in the tonnage tax regime. HMRC will also review their guidance on what vessels and operations qualify for the regime to take account of developments in technology and the shipping market since the tax was introduced. Finally, following a review aimed at smoothing administration, HMRC practice will raise from 10% to 15% the permitted limit for qualifying secondary (ancillary, passenger-related) income.  

In addition, the government will explore how best to make use of existing powers regarding the existing seafarers training commitment, to ensure it works for firms and cadets across the maritime sector. The government will also review whether to include ship management within scope of the tonnage tax regime, and whether the existing limit that can be claimed in capital allowances by organisations leasing ships to tonnage tax participants remains appropriate. 


Who will be affected?

Shipping operators involved in the transportation of goods or people, or in the provision of services at sea, that have elected into the UK Tonnage Tax regime, or are contemplating doing so.


When will the measure come into effect?

The amendments to the legislation and changes to the guidance will apply from 1 April 2022. No timeline has been given in the Autumn Budget documents on the review of the training commitment, ship management or capital allowances limits.

Our view

The proposed reforms of tonnage tax are welcome as they should give greater flexibility to qualify for the tonnage tax regime, simplify the regime, reduce administration and focus on decarbonisation. In particular, the removal of the EU flagging considerations will make the regime more accessible.

In the journey to ‘net zero’, shipping will be one of the hardest sectors of the economy to decarbonise and a focus on this area when assessing the companies that can participate is an important development.

Whilst by HM Treasury’s own assessment the measures are expected to have negligible Exchequer impact and are not expected to have significant economic impact, they represent a positive sign of support of this important sector.