Taxing the unicorn - £12.5 million liability on something never claimed
By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)
18 December 2019
Philip McNeill discusses a recent case - Unicorn Tankships (428) Limited – concerning tonnage tax and whether a shipping company was liable to a balancing charge on the sale of an asset. Of interest was the notion that HMRC thought to charge a balancing charge when there had been no earlier claim to capital allowances!
Literal interpretation of tax rules can produce surprising results. A company recently faced a tax bill for over £12.5 million for a capital allowance balancing charge on allowances it had never claimed. What happened?
Tax avoidance and unreality
Following the Ramsay principle, it’s routine for HMRC to argue that a transaction which does not reflect reality should be set aside.
But in Unicorn Tankships, HMRC argued for a tax world where claims which have never been made, are treated as if they had been.
When tax rules collide
In what may become an increasingly common scenario, given devolution and complex anti-avoidance provisions, tax rules don’t always align.
In Unicorn, the boundary was between the normal capital allowance rules and the special, potentially tax advantageous, Tonnage Tax Regime (TTR).
Tonnage tax
TTR was introduced to provide a boost to the UK maritime fleet.
It constitutes approved state aid under EU rules. Companies and groups can elect into the regime and be taxed on the basis of a ship’s tonnage, rather than actual trading profits.
Taxing the boundaries
The problem in Unicorn, was the anti-avoidance rules. In particular, rules which modified the capital allowance position where a company leaves the TTR, other than at expiry of the TTR election (10 years) or waiver.
In HMRC’s view, there were ‘good leavers’ of TTR and ‘bad leavers’. And the ‘bad leavers’ got different treatment.
‘Bad leavers’ were any companies leaving other than on expiry or waiver of the TTR election.
Hypothetical universe
To create a situation where ‘bad leavers’ are taxed more harshly, the TTR rules (particularly paragraph 85 of schedule 22 Finance Act 2009) must be read to create a ‘hypothesised world’ in which a company ‘is then deemed to have …… claimed capital allowances’.
Even when this never happened.
The company pointed out that HMRC’s interpretation sits oddly with the capital allowance rule that it’s necessary to make a specific claim before allowances can be given.
Calculating the charge
The Tribunal bravely set out calculations for a variety of different scenarios.
There was consensus between the company, HMRC and the Tribunal on a number of these. But on Unicorn’s circumstances, there was still disagreement.
Unicorn had acquired a ship in June 2004. It had been part of a tonnage tax group election since 2001. It never claimed capital allowances on the ship. By 2010, the ship was on bareboat charter.
At this stage, the bareboat charter was extended. As a result, the charter then exceeded three years and the ship was no longer a qualifying vessel for Tonnage Tax.
Unicorn therefore ceased to be a qualifying company and left TTR in June 2010.
In December 2010, Unicorn sold the ship. Proceeds of sale were $23,250,000.
On HMRC’s figures, there was then a balancing charge, calculated as the difference between the written down value of the ship on the basis that hypothetical capital allowances had been claimed, and disposal proceeds.
On Unicorn’s figures, there was neither balancing allowance nor balancing charge.
Gordian knot
Tribunal sliced through the Gordian knot, declaring:
‘there is no basis, by reference to either the statutory language or the integral logic of the relationship between and interaction of the TTR and the capital allowance regime, which requires an assumption that the TTR itself constitutes a substitute for a claim to WDAs’
Furthermore, ‘HMRC’s case requires such an assumption limited only to the circumstances where a company leaves the TTR in the circumstances envisaged in paragraph 85(2). The Tribunal considers that the language of the statute and the formulaic nature of the capital allowance regime does not support such a conclusion’.
Common sense prevailed, and Unicorn was not required to account for a balancing charge on fictional allowances claims.
Conclusion
Anyone involved in shipping will know that it is inherently complex.
From tonnage tax to bareboat charter, there are decisions unique to the industry. With world-wide group structures, the everyday life of a shipping company assumes cross-border dimensions unheard of elsewhere.
Thankfully, the Unicorn won…