TTM01030 - Introduction to tonnage tax: Legislative changes in 2005, 2022 and 2024

The combination of the joint Inland Revenue/Department for Transport Post Implementation Review of Tonnage Tax and the European Commission’s revised guidelines on State aid to maritime transport led to changes to the tonnage tax regime in 2005.  These changes were implemented by FA 2005 and two subsequent Statutory Instruments.

Following subsequent shipping industry proposals, and withdrawal from the EU/EEA, further changes were implemented by FA 2022 and FA 2024.

The FA 2005 changes, supported by regulations, were:

  • A new window of opportunity for elections into tonnage tax running from 1 July 2005 to 31 December 2006 (see TTM02190);
  • The exclusion of certain tugs from tonnage tax unless they spend more than 50 per cent of their operational time engaged in activities at sea.  This effectively excludes port and harbour tugs, and therefore inshore activity.  Companies, not just those required to leave tonnage tax, were given a window in which to make an election to withdraw without incurring the usual penalties related to a premature withdrawal from tonnage tax.  See TTM03560;
  • Clarification that a ship is only a qualifying ship if it performs its activities “at sea”.  This followed the Commission Decision ("Dutch Tugs", C(2002) 2158) which also led to the previous change. See TTM03500;
  • Allowing dredgers into tonnage tax if they are registered in an EU/EEA Member State but only then in respect of their transport activity at sea, i.e. travelling to the dredge site and taking the dredged material to its place of unloading, and only then if the transport activity exceeds 50 per cent of operational time.  See TTM03670;
  • Refocusing of change of use (FA00/SCH22/PARA22) on type of activity the vessel is engaged in, in place of the particular type of vessel.  A qualifying ship ceases to qualify if it begins to be used for activities other than those listed in FA00/SCH22/PARA19 (1)(a) to (d), or as a type of vessel excluded by FA00/SCH22/PARA20.  See TTM03710;
  • Providing that the special provisions for offshore activities refer to types of activities rather than to types of vessels. This permitted multi-function vessels to enter the regime.  In addition safety/standby vessels (sometimes called Emergency Response and Rescue Vessels, ERRV's) were allowed in tonnage tax.  See TTM11126;
  • That, in years that are not ”excepted” (TTM03905), where a ship was registered or "flagged" could affect whether or not it was a qualifying ship for tonnage tax purposes (TTM03910). This rule did not apply to qualifying tugs and dredgers because these had to be registered in the UK (or an EU/EEA Member State) at all times;
  • The introduction of a power for regulations to be made requiring companies to provide evidence of their compliance with prescribed health and safety  standards for vessels not registered in an EEA Member State. It also provides for a range of possible penalties for non-compliance. Regulations under this provision are the responsibility of the Department for Transport.

 The FA 2022 changes, supported by regulations, were:

  • A new window of opportunity for elections into tonnage tax running from 1 June 2023 to 30 November 2024.
  • Increased administrative flexibility.
  • Reduction in tonnage tax election period from ten years to eight.
  • Withdrawal of the registration and flagging rules introduced in 2005 (see above) as an EU/EEA requirement.
  • Other amendments reflecting United Kingdom withdrawal from the EU/EEA, for example substitution of UK for EU/EEA registers in relation to health and safety standards.

FA 2024 made the following changes:

  • Companies managing (but not operating) ships became able to elect into tonnage tax provided the managed ship is a qualifying ship operated by a tonnage tax company.
  • The capital allowance limits for leasing into tonnage tax were raised.