Memorandum by the Department for Transport
(TT 07)
TONNAGE TAX
ORIGIN OF
TONNAGE TAX
1. The December 1998 shipping White Paper,
British Shipping: Charting a new course, set out a comprehensive
strategy to reverse the long decline of British shipping. It recognised
the importance of an appropriate fiscal environment for retaining
a significant shipping sector in the UK. It committed the Government
to "discuss fiscal options for shipping, including tonnage
based systems of corporation tax, with the shipping industry in
the context of the forthcoming pre-Budget consultation and without
any commitment on implementation."
2. In his 1999 Budget, the Chancellor announced
that Lord Alexander of Weedon would conduct a study of the case
for introducing tonnage tax. Lord Alexander's Report, published
in August 1999 recommended the introduction of tonnage tax, and
the Government accepted this. The tax was introduced as part of
the Finance Act 2000.
HOW THE
SCHEME WORKS
3. Shipping companies can opt into tonnage
tax, or stay in the current corporate tax regime. Tonnage tax
calculates profits chargeable to corporation tax by reference
to tonnage instead of commercial profits. It brings certainty
because it fixes the amount of corporation tax relative to the
size and number of ships and is not affected by financial profitability
or tax allowances. A company electing to enter tonnage tax does
so for a minimum of 10 years.
4. To qualify for the tonnage tax scheme
ships must be seagoing, at least 100 gross tons, and used for:
— carriage of passengers; or
— towage, salvage or other marine assistance;
or
— transport in connection with other
services of a kind necessarily provided at sea.
Tonnage tax is "flag neutral"—ie
there is no requirement for ships in tonnage tax to be linked
to any particular flag.
5. They must also be operated by companies
within corporation tax and be "strategically and commercially"
managed in the UK. As there is no standard guidance available
on the meaning of "strategically and commercially managed",
the Government adopts a common sense interpretation, taking into
account the various different strands of management activity that
can be carried out in respect of a ship. Companies must demonstrate
elements of both types of management. Amongst the indicators that
might be considered are:
Strategic management
— Location of HQ, including senior
management staff.
— Where the board of directors makes
its decisions.
Commercial management
— Taking bookings for passengers and
cargo.
— Managing bunkers, provisioning and
victualling requirements.
Inland Revenue officials consider the number
and weight of the various indicators exhibited for both types
of management and expect to see real economic activity from ship
operations in the UK. Greater weight is given to the higher levels
of decision making and management as opposed to day to day management.
TRAINING COMMITMENT
6. A unique feature of the UK tonnage tax
is that it imposes a minimum training obligation on companies
entering the scheme. This is to train one officer trainee per
year for every 15 officer posts in the company's effective officer
complement, and to give consideration to employment and training
opportunities for ratings (1:15 formula).
7. The training commitment was adopted to
try to ensure an increase in UK seafarers to meet both present
needs at sea, as well as future jobs onshore in the maritime services
sector; a recent study by the University of Wales identified around
16,000 jobs in the maritime services sector which employers would
prefer to fill with ex-seafarers.
8. Lord Alexander did not make a similar
recommendation for training ratings as for officers (1:15 formula).
He concluded that "ready access for the deep sea shipping
industry to low-cost world labour markets means that, in the absence
of any EU action to `protect' its seafarers, the employment of
European ratings in essentially unskilled roles is simply unviable".
However, he went on to say that "opportunities might exist
for training ratings for more skilled roles and to become officers".
9. The minimum training obligation is cumulative
and covers each trainee for a course lasting up to three years.
Before electing to enter Tonnage Tax, each company or group must
first obtain approval from the Department for Transport for a
Core Training Commitment (CTC) which shows how they intend to
meet the minimum training obligation.
10. Achievement of the CTC is monitored
from reports submitted to DfT every four months. Where the CTC
has not been achieved, Payments In Lieu of Training (PILOT) are
made to the Maritime Training Trust. This can arise when a company
or group has not been able to recruit the number of trainees required
to meet the CTC, where trainees who have started a course drop
out or fail to meet the required standard, or when additional
vessels have been chartered into the company fleet during the
period. The Maritime Training Trust (MTT) allocates the monies
received to promote UK seafarer training. If a company has failed
to achieve 50% of its CTC during a year, any PILOT payments during
the next year are subject to a surcharge.
ELIGIBLE OFFICE
TRAINEES
11. To be eligible to be counted against
the training commitment, trainees must meet the criteria set out
below on nationality and residence, and on the type of training
undertaken[1]
Trainees shall be:
— a UK national, a national of another
EEA State or a British citizen from the Channel Islands or, Isle
of Man; and
— ordinarily resident in the UK.
The following categories of trainees undertaking
a Merchant Navy Training Board (MNTB) approved course of training
towards a first certificate of competency (FCC) can be counted
against the CTC:
— Ratings-to-officer apprentices.
— Conversion trainees (rating to officer).
NUMBER OF
COMPANY/GROUPS
AND SHIPS
12. Since the scheme was introduced in 2000-01,
74 company groups have received DfT approval for their CTC. Three
companies have merged with other Tonnage Tax groups and one has
withdrawn, leaving 67 with an active CTC in the scheme. Three
other companies are due to commence their first training year
in October 2004.
13. The following chart shows cumulatively
the number of company groups and ships for each year that
the scheme has operated.
| Year | Company/groups
| No of ships | % UK flagged
|
| | |
|
| 2000-01 | 15 | 187
| 46% |
| 2001-02 | 42 | 521
| 58% |
| 2002-03 | 64 | 718
| 48% |
| 2003-04 | 67 | 750 *
| 53% * |
| | |
|
* The number of ships for 2003-04 includes estimates for three
companies who have yet to submit correctly completed CTCs for
approval.
TONNAGE TAX
TRAINING COMMITMENT
14. The following chart shows the approved cumulative
training commitment for each year that the scheme has operated.
These totals were approved at the beginning of each training year.
The CTC can vary if additional ships are added to the group fleet
during a particular period. If this is the case, the CTC increases
for that specific period but these temporary increases are not
shown in the table.
| 2000-01 | 70 |
| 2001-02 | 365 |
| 2002-03 | 762 |
| 2003-04 | 1,040 * |
* There are outstanding queries on four returns so this figure is likely to increase.
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TRACKING ACHIEVEMENT
OF THE
TRAINING COMMITMENT
15. Achievement of the CTC is determined by comparing
the actual number of trainee months achieved during each period
with the number of months that would be achieved if the company-group
met its training commitment in full. Administration of the scheme
was intended to be flexible and so all trainee months achieved
during a period may be counted. Our experience is that the number
of trainees varies due to wastage or recruitment during each four
month period and does not remain constant throughout each training
year. However, it is possible to show the trend for each year
by dividing the number of trainee months achieved by 12. The following
table shows the average number of trainees in training for
each year that the scheme has operated.
| Year | Average no of trainees
|
| |
| 2000-01 | 61 |
| 2001-02 | 350 * |
| 2002-03 | 678 ** |
| 2003-04 | 905 *** |
* One return with outstanding queries;
** two returns with outstanding queries; and
*** Period 1 only (October 2003-January 2004) and
12 returns are outstanding.
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INCREASE IN
UK REGISTERED FLEET
16. There has been a substantial increase in the UK registered
fleet over the last few years. In the period from June 2000 to
December 2003, the number of all vessels on the UK registered
fleet (trading and non-trading) increased from 1,470 to 1,799,
and deadweight tonnage from 5 million to 11.5 million. ("Trading"
vessels are those which carry cargo or passengers for commercial
purposes. The remainder of the fleet consists of vessels which
are deemed to be "non trading").
17. The introduction of tonnage tax has been a major
factor in this revival together with the MCA registration reforms.
However it is important to remember that it is only one of a package
of measures that were introduced to create a favourable environment
for shipping in the UK.
MARITIME EMPLOYMENT
18. Although the training commitment is monitored, there
is no equivalent monitoring of employment of seafarers after they
have completed training. This is something that the Shipping Task
Force will be considering over the next few months. The Department,
as a result of work commissioned by the Shipping Task Force, plans
to publish a comprehensive annual assessment of the number of
UK active seafarers. This will include, although not separately,
cadets recruited as part of the training commitment under tonnage
tax, after they have completed training. The first annual UK seafarers
report is expected to be published next year.
19. In the meantime, the best available estimates of
the number of UK seafarers are produced by London Metropolitan
University (LMU) and their results for 2003 have just been published.
They report that the number of UK active seafarers declined from
around 30,000 in 1997 to 25,000 in 2001, but has increased thereafter
to 28,000 in 2003. Of these, around 25,000 are employed at sea.
At least part of this increase, however, may have resulted from
changes in statistical coverage following implementation of STCW
95, rather than real increases. LMU report that there were approximately
17,000 UK officers in 2003, 10,000 ratings and 1,000 cadets in
training. In 2003, cadet numbers rose to an annual intake of over
600, a 20% increase in annual intake compared with the intake
before tonnage tax was introduced. They also estimate that a cadet
intake of around 1,000 per year is needed if the number of officers
is to stabilise at current levels.
MARITIME STATE
AID GUIDELINES
20. Tonnage tax schemes require EU state aid approval,
not as issues of taxation which remain outside Community competence,
but as schemes for financial intervention in a single, commercial
market. The UK scheme, which is flag neutral, was approved in
July 2000 under the maritime state aid guidelines published in
1997.
21. The European Commission published revised maritime
state aid guidelines in January 2004. As in the previous guidelines,
state aid may generally only be granted in respect of ships registered
in an EC State. However, the conditions for allowing derogation
from the flag link have been strengthened. The guidelines state
that before tonnage tax schemes are approved for fleets which
include non-EC flagged ships, beneficiary companies must "commit
themselves to increasing or at least maintaining under the flag
of one of the Member States the share of tonnage that they will
be operating under such flags".
22. The guidelines also state that tugs will only be
allowed to enter tonnage tax if more than 50% of towage activity
during a given year constitutes "maritime transport".
No flag link derogation is allowed.
23. The UK, along with other Member States, is required
to confirm acceptance of the proposals by 30 June 2004, and to
amend its existing aid schemes covered by the guidelines so as
to comply with them by 30 June 2005.
24. Under state aids guidelines the UK and other EU countries
can only subsidise employment of seafarers up to the amount of
tax and National Insurance paid. Most UK seafarers in deep sea
trades (and some in short sea trades) have already reached that
limit.
EXCLUSIONS
25. Aggregate carriers were excluded from the original
tonnage tax regime only because the EU state aid guidelines for
maritime transport did not permit them to be included. Following
the recent revisions to the guidelines, Inland Revenue will be
advising Ministers on the measures that would be needed to bring
these vessels into tonnage tax. If Ministers are happy with the
proposals, then those measures will be taken forward as soon as
possible.
26. Ministers decided not to include North Sea specialist
vessels when tonnage tax was introduced. A number of correspondents
to the tonnage tax review have supported the inclusion of these
vessels in the regime. These representations will be passed to
Ministers for their consideration, in due course, as part of the
review process.
CONCLUSION
27. The introduction of tonnage tax has delivered an
increase in the UK registered fleet and in training. The Government
recognises that there are concerns that it has not delivered the
increase in UK seafarer employment that studies have identified
as being required to guarantee the supply of ex-seafarers to the
maritime services sector. We are currently considering whether
or not to include additional measures to enhance UK seafarer employment
opportunities within the scheme and have invited proposals from
our social partners.
David Jamieson
Parliamentary Under Secretary of State for Transport
June 2004
1
A fuller explanation of these criteria is included in the Guidance
Notes. Back
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