TTM09340 - Capital allowances: Capital allowances after exiting from tonnage tax
After the written down value of qualifying expenditure has been restored in accordance with SI00/2303/REG4 to REG6, capital allowances are computed in the normal way.
Where a former tonnage tax asset is sold then a balancing adjustment may arise. If this results in a balancing charge, then the cap on disposal value in computing that charge is the original actual cost (or market value, if appropriate), and not the restored post-tonnage tax qualifying expenditure, per CAA01/S62 (1).
The interaction between the main capital allowances and tonnage tax legislation can be difficult. In HMRC v Unicorn Tankships (428) Ltd [2021] UKUT 109 (TCC) the Upper Tribunal observed that both parties' interpretations of FA00/SCH22/PARA85 required a degree of 'expansive interpretation'. The taxpayer's argument stretched the wording of PARA85 (2) to read two sub-paragraphs together. HMRC's interpretation read 'qualifying expenditure' as bearing different meanings in different places. The tribunal found in favour of Unicorn Tankships.
Example
Assuming a single ship as the asset; AP year ended 31st December:
| Date or period | Description | Amount £ |
|---|---|---|
| 01 January 2009 |
Cost of ship |
20,000,000 |
| y/e 31 December 2006 |
WDA |
5,000,000 |
| 01 January 2010 |
Entry into tonnage tax and ‘frozen pool |
15,000,000 |
| 31 December 2013 |
Leaves tonnage tax. Qualifying expenditure restored by reg4:- 20,000,000 x 25% |
5,000,000 |
| 31 December 2013 |
Sale price of ship |
6,000,000 |
| y/e 31 December 2013 |
Balancing charge |
1,000,000 |