Independent Enquiry
Into A Tonnage Tax

July 1999

A Report by The Lord Alexander of Weedon QC

Appendices

Appendix I: List of organisations involved in the enquiry

The following organisations and individuals contributed to the enquiry in writing or in person.

Shipping industry

Chamber of Shipping

P&O

OT Africa Line

The Marine Society

Merchant Navy Training Board

In addition, a number of other shipping companies responded confidentially

Maritime-related shore-based industries

Baltic Exchange

Lloyd's Register

Institute of Chartered Shipbrokers

British Marine Equipment Council

Trades unions

TUC

NUMAST

RMT

Government departments

Department of Environment, Transport and Regions

Inland Revenue

Department of Trade and Industry

HM Treasury

Foreign Office

Ministry of Defence

Other organisations and individuals

Eurotunnel

Confederation of British Industry

Hong Kong Port and Maritime Board

Watson, Farley & Williams

Simmons & Simmons

Peter Marlow, University of Wales

Thomassen Krefting Greve Lund AS Advokatfirma

Appendix II: Costs of existing special measures to support the shipping industry

Type of assistance	£million a year (approx)
Fiscal measures i. rollover relief of capital allowance balancing charges ii. exemption from long-life asset regime of 6% capital allowances iii. Foreign Earnings Deduction for seafarers iv. reduction in employers' National Insurance Contributions for seafarers on ships outside Europe	5-40 * 10-20 * 40 negligible
Non-fiscal measures i. Support for Maritime Training (SMarT) ii. Crew Relief Costs Scheme (CRCS) iii. Freight Facilities Grant (FFG) - provisional	6.4 1.5 1.0
Total	approx 65-115 **

* these figures indicate the range of costs in recent years

** the total gives a range of the costs in recent years, which would average at about £85 million a year

Appendix III: Design and success of tonnage regimes in other countries

Within the European Union, Greece and the Netherlands have tonnage tax regimes. Germany is currently introducing a tonnage regime and the Danish Government is said to be examining other countries' regimes and consulting with the shipping industry. Outside the EU, Norway has a tonnage tax.

The Dutch and Norwegian regimes are most frequently quoted as cases where a tonnage tax has been introduced successfully (source: Chamber of Shipping):

Netherlands

Tonnage tax introduced in 1996. Information at end-year.

	1995	1998
Ships on Dutch register - number - million gross t	383 2.8	525 3.9
Employment - in the shipping industry	(1994) 22,781	28,000
Shipbuilding - Dutch orders at Dutch shipyards - number - million dwt	33 0.15	166 0.64

Norway

Tonnage tax introduced in 1996. Information at mid-year 1996 and end-year 1998.

	1996	1998
Norwegian-controlled fleet - number - million dwt	1,393 47.0	1,622 52.5
Employment - number of seafarers	15,600	17,800
Shipbuilding - Norwegian orders at Norwegian shipyards - number - million dwt	15 0.25	32 0.27

Appendix IV: Behavioural decisions by shipping companies

The Chamber of Shipping and some individual companies provided examples of behavioural responses which they believed would occur if a tonnage tax were introduced in the UK. These are in addition to the commitments by P&O, described in paragraphs 33-34. The main examples are given below (company names not given for reasons of commercial confidentiality):

(i) a Bristol-based shipbroking consultancy

The Charter gave evidence that this firm, which ceased to own ships in the 1980s and become a time-charter operator of foreign-flagged vessels, would purchase some of its own small vessels instead and register two new self-unloading barges in the UK;

(ii) a large US operator of ocean tugs and supply vessels

The Chamber believed that this major operator with 3,000 vessels might be persuaded to base itself in the UK rather than the low tax countries, given the additional attractions of culture and language;

(iii) medium-sized UK shipping company

A middle-sized entrepreneurial company believes that because it would become a more attractive investment vehicle it would find it easier to raise capital from UK & foreign investors. It would seek to raise $100m to finance an increase in its fleet;

(iv) a UK shipping company forming part of a major international shipping group

This company indicated confidentially that it would, increase further its investment in its UK fleet;

(v) a large international shipping company with a tax base in the EU

This company has indicated its intention to base itself in the low tax countries to minimise its tax liabilities but would consider the UK as an alternative if a suitable tonnage tax regime were in place.

Appendix V: Implementing the minimum training obligation

The minimum training obligation is an eligibility condition for the tonnage tax. It involves a formal commitment by the shipping company to train UK / EU seafarers to meet its future manpower requirements.

The training obligation on each company will be set out in a training plan ("the plan") which will be subject to prior approval by the DETR.

The plan will identify the total number of sea-going posts in the company's vessels to be entered into the tonnage regime, regardless of the nationality of the seafarers or the country of registration of the ships. This total will be based on the UK safe-manning certificate requirement, including back-up for leave.

For officers, the plan will identify the number of UK / EU cadets required to be recruited each year to meet the minimum training obligation of one cadet for every 15 officer posts, calculated on the above basis.

Companies unable to meet this commitment will be required to make a cash contribution (a levy) to the Maritime Training Trust in respect of each place under the training obligation which is not filled. The amount of this contribution, which will be index-linked, will be determined by the DETR.

For ratings, the plan will require companies to take into account recommendations made by the Ratings Task Force and to review each year whether they can: employ more UK / EU ratings; employ more highly trained UK / EU ratings in some technical posts; recruit UK / EU ratings in a planned stream towards officer qualifications; and assist existing UK / EU ratings to advance towards officer qualifications and posts. DETR considers these ratings development objectives to be an important part of the plan.

The plan is to be reviewed annually at company board level. Companies will be required to adjust annual cadet recruitment targets to take account of wastage during the training of cadets recruited under the training obligation, and to assess whether recruitment levels are adequate to meet the company's requirements for officers and ratings, taking into account changes and projected changes in the size and nature of the company's fleet.

The company's implementation and annual updating of the plan, and its continuing compliance with its obligations under it, will be monitored by the Maritime Training Trust and the DETR.

The formal specification of the training obligation and the training plan will be laid down by the Secretary of State for Environment, Transport and the Regions after consulting the social partners.

Appendix VI: Costs of a tonnage tax regime

Cost breakdown	Costs if the industry remains the same size £m a year	Costs if the industry doubles in size £m a year
Costs excluding leasing (Group relief, CT forgone less TT revenue)	15	15
Cost of the leasing element Capital allowances at 25% capped at £20 million per vessel leased into the tonnage regime *	15	40 **
Total extra costs	20-40	45-65

Notes

All costs are approximate and show the estimated costs of elements of the scheme in current prices after about five years.

Costs excluding leasing include offsetting revenue of about £3 million a year from the tonnage tax.

* Capital allowances with a cap at £30 million would cost approximately £25 million a year in the base case and £55 million a year if investment were to double on the same illustrative scenario. Total costs of the tonnage regime would therefore be £30-50 million in the static case and £60-80 million if investment were to double.

** These costs depend on the form of investment. If all the extra investment were in small and medium-sized vessels, the cost of capital allowances would rise to about £65 million.

Appendix VII: Distribution of ships value in UK ship order book

The diagram below shows the distribution of ship values within the order book of the potential UK fleet (source: Inland Revenue). 117 ships were identified. It stretches forward to 2004. Not all the ships identified would necessarily become part of the UK-based fleet.

The distribution is highly skewed. 108 of the ships are worth up to £56 million, with a tail of nine vessels worth £300-266 million each.

Appendix VIII: Elements of the design specification requiring further work

A design specification for a tonnage tax regime in the UK is provided in paragraph 92. However, even with the hard and constructive efforts of the Inland Revenue and the shipping industry, it has not been possible to specify all aspects of the regime. The following areas will require additional work:

(a) The proportion of profits which would be allocated to shipping activities in the case of cable-laying and similar service providers. It will be important to ensure that ship operators are able to benefit from this regime, but also that, for example, cable-layers which own or operate ships should not be put in a significantly stronger competitive position than those which charter ships for particular work;

(b) Application to the North Sea regime. It remains for decision whether the tonnage tax should include certain types of offshore activities within the North Sea. If this recommendation were followed - which will involve assessing the relative importance of objectives to stimulate shipping and to ensure that the Government receives proper revenue from the North Sea offshore industry - the precise interaction and application of the two regimes will need to be resolved. In addition, the same issues would arise as in (a) and would need resolution;

(c) Levels of ancillary activities. The design specification recommends that ancillary activities within the tonnage regime should be subject to quantitative limits. The limits would be assessed by appropriate normal earnings for particular categories of vessels or patterns of earnings of individual companies. In practice, tax inspectors will want to retain some discretion in this area, but it will also be important to consider the principles that they should follow in exercising that discretion;

(d) Qualifying presence. Further work is required for criteria against which to assess whether a company has a qualifying presence for the purpose of the tonnage tax;

(e) Joining after five years. If this recommendation is followed, it will be important to ensure that companies which qualify for a delayed entry are not able to organise their affairs so as to forestall their tax liabilities;

(f) Capital allowances and leasing:

(i) the treatment of companies exiting the regime after the natural expiry of their election. To make the scheme attractive, there is a good case that a company exiting under these conditions should do so with no deferred tax liability, bringing in assets at book value. However, this would increase the potential costs of the scheme. Such costs have not been included within the overall cost figures quoted in this report. Decisions would also be needed on the value at which assets could be brought back in;

(ii) the need to restrict access to capital allowances via leasing is recognised. It is recommended that there should be a cap of, say, £20 million on the cost per ship which would qualify for capital allowances. This cap should be reviewed over time;

(g) Capital gains. The method for apportioning capital gains to exempt and non-exempt periods remains to be determined;

(h) Foreign profits from shipping. Special rules may be needed to deal with Controlled Foreign Companies where the conditions for foreign shipping dividends to qualify for inclusion within the tonnage regime are not met;

(i) Training link. The rules for fining and ultimately excluding companies which do not comply with their obligations need to be set;

(j) Anti-avoidance measures. The nature and scope of the anti-avoidance "sweep up" provision needs to be settled.