ICAS ICAS logo

Quicklinks

  1. About Us

    Find out about who we are and what we do here at ICAS.

  2. Find a CA

    Search our directory of individual CAs and Member organisations by name, location and professional criteria.

  3. CA Magazine

    View the latest issues of the dedicated magazine for ICAS Chartered Accountants.

  4. Contact Us

    Get in touch with ICAS by phone, email or post, with dedicated contacts for Members, Students and firms.

Login
  • Annual renewal
  • About us
  • Contact us
  • Find a CA
  1. About us
    1. Governance
  2. Members
    1. Become a member
    2. Newly qualified
    3. Manage my membership
    4. Benefits of membership
    5. Careers support
    6. Mentoring
    7. CA Wellbeing
    8. More for Members
    9. Area networks
    10. International communities
    11. Get involved
    12. Top Young CAs
    13. Career breaks
    14. ICAS podcast
    15. Newly admitted members 2022
    16. Newly admitted members 2023
  3. CA Students
    1. Student information
    2. Student resources
    3. Learning requirements
    4. Learning updates
    5. Learning blog
    6. Totum Pro | Student discount card
    7. CA Student wellbeing
  4. Become a CA
    1. How to become a CA
    2. Routes to becoming a CA
    3. CA Stories
    4. Find a training agreement
    5. Why become a CA
    6. Qualification information
    7. University exemptions
  5. Employers
    1. Become an Authorised Training Office
    2. Resources for Authorised Training Offices
    3. Professional entry
    4. Apprenticeships
  6. Find a CA
  7. ICAS events
    1. CA Summit
  8. CA magazine
  9. Insight
    1. Finance + Trust
    2. Finance + Technology
    3. Finance + EDI
    4. Finance + Mental Fitness
    5. Finance + Leadership
    6. Finance + Sustainability
  10. Professional resources
    1. Anti-money laundering
    2. Audit and assurance
    3. Brexit
    4. Business and governance
    5. Charities
    6. Coronavirus
    7. Corporate and financial reporting
    8. Cyber security
    9. Ethics
    10. Insolvency
    11. ICAS Research
    12. Pensions
    13. Practice
    14. Public sector
    15. Sustainability
    16. Tax
  11. CPD - professional development
    1. CPD courses and qualifications
    2. CPD news and updates
    3. CPD support and advice
  12. Regulation
    1. Complaints and sanctions
    2. Regulatory authorisations
    3. Guidance and help sheets
    4. Regulatory monitoring
  13. CA jobs
    1. CA jobs partner: Rutherford Cross
    2. Resources for your job search
    3. Advertise with CA jobs
    4. Hays | A Trusted ICAS CA Jobs Partner
    5. Azets | What's your ambition?
  14. Work at ICAS
    1. Business centres
    2. Meet our team
    3. Benefits
    4. Vacancies
    5. Imagine your career at ICAS
  15. Contact us
    1. Technical and regulation queries
    2. ICAS logo request

Taxing the unicorn - £12.5 million liability on something never claimed

  • LinkedIn (opens new window)
  • Twitter (opens new window)
Philip McNeil By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)

18 December 2019

Key points

  • HMRC’s literal interpretation of rules produces anomalies
  • Complex tax rules bring interpretive conflict
  • Tribunal restores common sense solution

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…

Look out for HMRC residence corrections – which may not be correct!

By Susan Cattell, Head of Tax Technical Policy

16 December 2019

Result reversed - common sense prevails on appeal in Private Residence off-plan purchase case

By Philip McNeill, Head of Taxation (Tax Practice and Owner Managed Business Taxes)

11 December 2019

2-23-marsh 2-23-marsh
ICAS logo

Footer links

  • Contact us
  • Terms and conditions
  • Modern slavery statement
  • Privacy notice
  • CA magazine

Connect with ICAS

  • Facebook (opens new window) Facebook Icon
  • Twitter (opens new window) Twitter Icon
  • LinkedIn (opens new window) LinkedIn Icon
  • Instagram (opens new window) Instagram Icon

ICAS is a member of the following bodies

  • Consultative Committee of Accountancy Bodies (opens new window) Consultative Committee of Accountancy Bodies logo
  • Chartered Accountants Worldwide (opens new window) Chartered Accountants Worldwide logo
  • Global Accounting Alliance (opens new window) Global Accounting Alliance
  • International Federation of Accountants (opens new window) IFAC
  • Access Accountancy (opens new window) Access Acountancy

Charities

  • ICAS Foundation (opens new window) ICAS Foundation
  • SCABA (opens new window) scaba

Accreditations

  • ISO 9001 - RGB (opens new window)
© ICAS 2022

The mark and designation “CA” is a registered trade mark of The Institute of Chartered Accountants of Scotland (ICAS), and is available for use in the UK and EU only to members of ICAS. If you are not a member of ICAS, you should not use the “CA” mark and designation in the UK or EU in relation to accountancy, tax or insolvency services. The mark and designation “Chartered Accountant” is a registered trade mark of ICAS, the Institute of Chartered Accountants of England and Wales and Chartered Accountants Ireland. If you are not a member of one of these organisations, you should not use the “Chartered Accountant” mark and designation in the UK or EU in relation to these services. Further restrictions on the use of these marks also apply where you are a member.

ICAS logo

Our cookie policy

ICAS.com uses cookies which are essential for our website to work. We would also like to use analytical cookies to help us improve our website and your user experience. Any data collected is anonymised. Please have a look at the further information in our cookie policy and confirm if you are happy for us to use analytical cookies: