Schedule 32 - Tonnage tax: restrictions on capital allowances for lessors of ships

Finance Bill – in a Public Bill Committee at 7:30 pm on 20 May 2003.

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Question proposed, That this schedule be the Thirty-Second schedule to the Bill.

Photo of Michael Jack Michael Jack Conservative, Fylde 7:45, 20 May 2003

I am intrigued that the schedule makes changes to the tonnage tax, because we were told when it was introduced that it was one the most consulted on measures. Can the Minister enlighten me as to why, if all aspects that should have been covered were so closely gone over, the problems encountered with operating leases, for which the measure now seeks to curtail tax relief, were not noticed at the time?

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

When the tonnage tax was established, certain shipping, particularly luxury cruise liners and large gas tankers, should not have had access to tonnage tax relief. The Standing Committee discussed the question of tax authorities going too far or being too draconian in trying to cover every possible avoidance. However, a new device was developed, which would have led to a massive loss of tax, which we did not intend, and the Government announced last year that we would move to prevent that. We consulted with the industry to ensure that we were closing only that device and not weakening the tonnage tax, and that is what we have done.

Photo of Michael Jack Michael Jack Conservative, Fylde

Is the Paymaster General putting on the record that the Inland Revenue was unaware that vessels of the types that she described could be operated under an operating rather than a finance lease? My information is that that was known.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

No, I am not saying that we did not have knowledge of that. I am referring to the specific avoidance mechanism that the provision seeks to deal with and only that. That is the point of the provision. I was not suggesting that the leases are devices; I was saying that the mechanism that gave a route for payment through the tonnage tax was a new tax planning device, which we have now closed.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

That demonstrates yet again the inevitability of measures such as the original tonnage tax, which create a major cliff edge between fully taxable activities outside the regime and those within the rules, opening opportunities for taxpayers.

I want to raise a couple of matters that the Law Society has raised. The schedule inserts new paragraph 89A into schedule 22 of the Finance Act 2000 which sets out exceptions to the quantitative restriction on capital allowances for lessors of ships in paragraphs 94 to 102 of that schedule. Clarification is sought concerning the operation of paragraph 89A(4) in two circumstances. First, leases commonly contain sales agency provisions allowing the lessee to sell the ship at the end of the period of charter as agent for the lessor. Confirmation is sought that such arrangements do not fall within paragraph 89A(4)(c) in respect of whether they expressly preclude the lessee or person connected with the lessee from acquiring the vessel. Secondly, confirmation is sought that the condition in paragraph 89A(4)(c) will be satisfied provided there are no relevant arrangements when the charter is entered

into and that the conditions would not be breached if arrangements came into existence subsequent to the charter being entered into.

The Paymaster General may not be able to answer those questions now, but they are outstanding technical issues.

Photo of Dawn Primarolo Dawn Primarolo Paymaster General (HM Treasury)

With regard to paragraph 89A(4)(c), unless there is an express preclusion of the ship being sold to the lessor or any connected party, the existence of such a clause would amount to arrangements under which they might acquire the ship. New paragraph 89A(4)(c) will apply, but there is no problem in paragraph 89A(4)(c) applying where the lessee acts as sales agent for the ship's lessor in a sale to a third party at open market value who receives an arm's length commission for his or her actions as agent. The hon. Gentleman might want to study that in the record.

The second question on paragraph 89A(4)(c) relates to whether a charter is entered into. The answer is no. The condition must apply throughout the term of the lease if paragraph 89A or C is to be satisfied. With that clarification I hope that the hon. Gentleman's questions have been dealt with.

Question put and agreed to.

Schedule 32 agreed to.