Moore Stephens says capital allowance changes could represent tax blow for shipowners
Ships have traditionally enjoyed significant tax advantages over other types of assets. Prior to 1 January 2011, ships outside tonnage tax were specifically excluded from the long-life asset regime, and the normal rate of writing-down allowances therefore applied. But, following changes to the capital allowance rules, expenditure on ships incurred on or after 1 January 2011 is no longer excluded from the regime, under which the writing-down allowances are considerably lower than those for other assets. Ships acquired prior to 1 January 2011 will continue to be excluded from the long-life asset rules.
The writing-down allowance available on ships outside the long-life asset regime is 20 per cent per annum up to 1 April 2012, and 18 per cent thereafter, on a reducing balance basis. The comparable allowances for long-life assets, meanwhile, are 10 per cent and 8 per cent per annum.
An asset may be regarded as long-life if it is reasonable to expect that it will have a useful economic life of at least 25 years when it is new. Sue Bill, a tax partner with Moore Stephens, says, “Some ships may reasonably be expected to have a useful life of at least 25 years when they are new, and may therefore be regarded as long-life assets. But this will depend on the type of vessel involved.
“Broadly speaking, the date when expenditure is regarded as having been incurred for capital allowance purposes is the date when there is an unconditional obligation to pay. In the case of a shipbuilding contract, although the obligation to pay for that part of the asset that has been completed becomes unconditional when the work is certified, there are exceptions to the general rules.
“The date when expenditure is regarded as having been incurred will also depend on whether or not the company incurring the expenditure is already carrying on an existing trade as a shipowner or operator. Where a company is not yet trading, expenditure is regarded as having been incurred for capital allowance purposes on the date the company starts to trade. This will usually be the date when the ship is delivered. Where the exact date is important, specific advice should be obtained.
“Companies which incur expenditure on ships after 1 January 2011 will now have to consider whether the ships may reasonably be expected to have a useful life of at least 25 years when new when claiming capital allowances. It is likely to be beneficial if this is not the case.”
Moore Stephens LLP is noted for a number of industry specialisations and is widely acknowledged as a leading shipping and insurance adviser. Moore Stephens LLP is a member firm of Moore Stephens International Limited, one of the world's leading accounting and consulting associations, with 630 offices of independent member firms in 98 countries, employing 20,864 people and generating revenues in 2009 of $2,078 million. www.moorestephens.co.uk
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