Sunak looks to rejuvenate presence of UK flag in global shipping

UK Chancellor of the Exchequer Rishi Sunak has introduced the first changes for more than 20 years in the Shipping Tonnage Tax system. His avowed aim was to get more shipping companies operating out of the UK to choose also to “fly the Red Ensign”.

Companies that take this route, as well as those who help the UK in its aim to reach net-zero carbon emissions will be more likely to be accepted if applying to the UK’s tonnage tax regime. Alternatively, those that do not, could find it harder to be accepted.

Finance Minister Sunak said that, now the UK was no longer part of the EU, it was possible to move away from the system under which there was no recognition of the difference between a ship flying the Red Ensign and those selecting other EU flags.

Sunak said that “the UK has always been a proud and pre-eminent maritime nation, with 95% of our trade in goods carried out by sea. Now we have left the EU, it’s time for us to do even more to help the UK shipping industry to grow and compete in the global market.”

The rules regarding the type of vessels that could qualify would also be expanded from April 2022 in order to reflect the UK’s net zero ambitions and its interests in science and technology. Ships that lay cables to help create wind farms and scientific research vessels would now qualify. Companies that were adjudged to be bringing value to the UK, for example by investing in decarbonization, would also be more likely to be accepted.

Cruise companies would also benefit if they chose to be UK-flagged and applied the Shipping Tonnage Tax system, as they would not have to audit their finances after every voyage.

The UK Chamber of Shipping welcomed the Chancellor’s decision. Gavin Simmonds, Policy Director Commercial at the UK Chamber of Shipping, said that “the Chamber congratulates the Chancellor on responding to the needs of our industry and we welcome this package which will immediately strengthen the UK Flag shipping, encourage innovation in the offshore energy sector and attract international investment. It will be important to maintain positive momentum and deliver improvements to the training commitment and to find ways of opening the regime to other shipping businesses in the next year.”

Tonnage Tax is an optional alternative method of calculating the corporation tax of shipping companies based in the UK.

The tonnage tax regime was introduced in the UK in 2000 with the aim of creating a positive economic environment for international shipping companies that were based in the UK. The aim was to enable the renewal and growth of existing UK-based shipping companies, whilst also attracting inward investment.

In part this has been a success. The number of shipping companies based in the UK has increased, and subsequently this has increased the number of individuals employed in the UK shipping industry. However, with the reduction in the UK Navy size and global presence, one of the attractions of the UK flag – the protection of the UK Navy if needed – had declined. The tonnage of vessels that chose to be UK flagged has been declining.

Tonnage Tax Profit is calculated by reference to the net tonnage of ships operated by such companies. It replaced both the tax-adjusted commercial profit/loss on a shipping trade and chargeable gains/losses made on tonnage tax assets. Other profits of companies electing to apply the tonnage tax regime are taxed in the usual way.

Depending on a shipping company’s/ group’s particular tax profile, the tonnage tax regime can offer a more favourable effective rate of corporation tax for shipping companies based in the UK.

Before yesterday’s announcement, companies that were liable to pay corporation tax and which operated ‘qualifying ships’ that were ‘strategically and commercially managed in the UK’ were qualifying companies and could elect to apply the Tonnage Tax regime. All qualifying companies in a group must elect to apply the regime together. The announcement yesterday would appear to add an additional hurdle. While this would be welcomed by UK-based shipping organizations, it is less certain how effective it will be. The obvious danger is that companies, instead of choosing a UK-flag for their vessels so as to qualify for the Shipping Tonnage Tax system, might choose to operate and manage their vessels from a different geographical base instead.