Budget 2021: shipping firms that fly red ensign flag to be offered tax breaks

Global shipping companies will from April 2022 be offered tax breaks if they fly the UK’s historic merchant shipping flag, the red ensign.

The chancellor, Rishi Sunak, announced in the budget on Wednesday that shipping companies which fly the red flag with the union jack would have a greater chance of being able to join the UK tonnage tax break scheme.

The arrangement, which was introduced in 2000, allows shipping companies access to an “alternative method of calculating corporation tax profits by reference to the net tonnage of the ship operated”. The tonnage tax scheme allows shipping firms to pay predictable, much lower taxes, which one expert said created a “close to zero tax environment”.

Sunak said Brexit had allowed the UK to offer the new red ensign tax incentive. As well as making it easier for overseas companies to access the tonnage tax scheme, it was also designed to increase the use of the ensign, which has fallen out of favour as shipping companies have switched to the flags of other nations.

“Now that we’ve left the EU, today we start reforming our tonnage tax regime to make it simpler and more competitive,” Sunak said in his budget speech. “When we were in the old EU system, ships in tonnage tax regime were required to fly the flag of an EU state. But that doesn’t make sense for an independent nation.

“So I can announce today that our tonnage tax will – for the first time ever – reward companies for adopting the UK’s merchant shipping flag, the red ensign. That is entirely fitting for a country with such a proud maritime history as ours.”

Richard Stephens, a partner at maritime specialist law firm Watson Farley & Williams, said the complicated scheme allowed shipping companies’ profits and costs to be “wrapped up in a tonnage tax ringfence” and “disregarded for tax purposes”.

Instead the companies are “deemed to earn a daily profit based on the tonnage of its fleet”, Stephens said. “The deemed profit figure is low, such that tonnage tax creates a close to zero tax environment.”

Stephens said the scheme also allowed members to reduce their tax bills still further by allowing access to further tax breaks. “Importantly, UK-incorporated tonnage tax companies can benefit from the UK’s huge range of double tax treaties,” he added.

The red ensign, also known as the red duster, has been flown by British merchant or passenger ships since 1707. Locally adapted versions with emblems of UK overseas territories are used by ships registered in Bermuda, the British Virgin Islands, the Cayman Islands, Falkland Islands, Gibraltar, Guernsey, Jersey and the Isle of Man.

From next year HM Revenue and Customs will now consider tonnage tax regime from companies whose ships fly the UK flag as an important factor. Ships that are working to help the UK’s net zero carbon emissions are also more likely to be accepted to the scheme. This includes scientific research vessels and ships that lay cables to help create windfarms.

Gavin Simmonds, policy director commercial at the UK Chamber of Shipping, said his organisation welcomed the changes that he said would “immediately strengthen the UK Flag shipping, encourage innovation in the offshore energy sector and attract international investment.”

Caroline Lucas, the MP for Brighton Pavilion and former leader of the Green party, said on Twitter: “Is the only advantage from Brexit the chancellor can find the chance for UK ships to fly the red ensign and cut tax on booze? You couldn’t make it up.”