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Moore Stephens Warns of New Trap for UK Tonnage Tax Groups

Advisory from leading accountant and shipping industry adviser.

Moore Stephens has warned that companies in the UK tonnage tax scheme should urgently review their financing arrangements following the decision by Her Majesty’s Revenue & Customs to withdraw, from December 2010, a concession on the application of transfer pricing rules to loans made to UK companies under the scheme.

The UK transfer pricing rules apply to transactions between a UK company and any other person under common control. They apply to transactions between UK companies, including transactions with UK tonnage tax companies. They also apply to transactions across the tonnage tax ring-fence. When tonnage tax was first introduced in 2000, it was realised that the effect of applying the transfer pricing rules to transactions involving UK tonnage tax companies could lead to a trap for the unwary. For example, where a UK resident company had lent money to a UK tonnage tax company under common control, the application of the transfer pricing rules meant that there was taxable notional interest income for the lender. The borrower would have notional taxable interest payable but, because of its tonnage tax status, no tax relief was available, and a tax liability was therefore likely to arise. This applied even where the lender was another UK tonnage tax company, because the lending of money is not considered to be a tonnage tax activity.

Moore Stephens tax partner Sue Bill explains, “Following representations by industry at the time, HMRC agreed that, in most cases, the transfer pricing rules would not be applied in the case of loans to UK tonnage tax companies. Now, following recent developments, it recognises that it doesn’t have the authority to agree to any informal concessionary treatment for taxpayers. It is therefore withdrawing or legislating against all informal concessions, and has announced that the concessionary treatment previously granted will be withdrawn with effect from 9 December, 2010. The result is a different trap for the unwary, unless HMRC reconsiders the position, which seems highly unlikely

“It is therefore important that all UK tonnage tax companies or groups review their financing arrangements and identify any loans from UK companies to UK tonnage tax companies where the companies are under common control, even where the lender is another UK tonnage tax company. The group should eliminate such loans, and ensure that no further loans arise. Specific advice should be obtained, and any restructuring will need to be carried out by 9 December 2010.”

? Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 630 offices of independent member firms in 98 countries, employing 20,864 people and generating revenues in 2009 of $2,078 million.