Section 226 — Tonnage tax scheme. Successor to s.115VB, s.115VE, s.115VF of the 1961 Act.
Section 226 is in Chapter XIII — Determination of Tax in Special Cases, which runs from section 190 to section 235.
Sub-section (1) settles what counts as operating a ship or inland vessel for the Part: a company operates one if it operates any ship or inland vessel, owned or chartered, including where only part of it is chartered in under a slot charter, space charter or joint charter; but it does not operate one that it has chartered out on bareboat charter-cum-demise terms, or on bareboat charter terms for a period exceeding three years. Sub-sections (2) to (4) require a tonnage tax company operating qualifying ships to compute the profits of that business under the tonnage tax scheme, treat the tonnage tax business as a separate and distinct business from everything else the company does, and compute its profits separately. Sub-section (5) makes the scheme optional, applying only if an option is exercised under section 231, and sub-section (6) provides that a company operating qualifying ships that is not covered by the scheme, or has not exercised the option, computes its profits under the other provisions of the Act. Sub-section (7) states the effect: tonnage income is computed under section 227 and deemed to be profits chargeable under the head "Profits and gains of business or profession", and the relevant shipping income referred to in section 228(1) is not chargeable to tax.
The section is the gateway to the tonnage tax regime, substituting a notional tonnage-based income for actual shipping profits for companies that elect into it. Ring-fencing the tonnage tax business as a separate business stops shipping results being mixed with other activities, and the charter-out exclusion keeps the benefit with companies that actually operate tonnage rather than those that have parted with the vessel.
| What | Figure | The condition on it | Where |
|---|---|---|---|
| Charter-out period beyond which the company is not regarded as operating the vessel | Exceeding three years | Stated in the text against bareboat charter terms; a charter out on bareboat charter-cum-demise terms takes the company outside the definition in the same clause | 226(1)(b) |
Nothing happens automatically — the scheme applies only if the option under section 231 is exercised, and without it the shipping profits are computed under the ordinary provisions like any other business. Chartering in even part of a vessel by slot, space or joint charter still counts as operating it, so a company without its own tonnage can be within the Part; conversely, chartering a vessel out on bareboat charter-cum-demise terms, or on bareboat terms beyond three years, takes it out. Once in, the tonnage tax business has to be kept as a distinct business with separately computed profits, and the tonnage income computed under section 227 stands in place of the actual relevant shipping income, which section 228(1) income is not chargeable.
A shipping company owns no vessel but moves cargo on slot charters taken on other operators' ships; sub-section (1)(a) still regards it as operating a ship, so it is within the Part even though it chartered in only part of the vessel. The same company charters one of its own vessels out on bareboat terms for four years: because that exceeds three years, sub-section (1)(b) means it is not regarded as operating that vessel at all, and the tonnage on it drops out. None of this happens by itself — sub-section (5) applies the scheme only if the option is exercised as per section 231, and without that option sub-section (6) sends the profits back to computation under the other provisions of the Act. Once in, the tonnage income computed under section 227 is deemed profits chargeable under 'Profits and gains of business or profession', the relevant shipping income referred to in section 228(1) is not chargeable, and the tonnage tax business has to be kept separate from everything else the company does.
You meet it when a shipping company exercises the option under section 231, and thereafter in its return, where the tonnage tax business is computed separately from all its other activities and the section 227 tonnage income is offered as business profits. The section names no form and no authority of its own.
the tonnage income, shall be— (i) computed as per section 227; (ii) deemed to be the profits chargeable under the head "Profits and gains of business or profession"
See the full 1961 to 2025 concordance.
