FC Shipping Ltd & Anor v The Commissioners for HMRC

For the defeased-leasing rules in Schedule 22, the tribunal must assess the actual arrangements as a whole, including their structural features, and compare the lessor’s actual non-compliance risk with and without the risk-reducing provisions. That risk concerns the probability or uncertainty of some loss when payments are not made; it is not measured by assuming total loss against a hypothetical 100% exposure. “The greater part” means more than half of the actual risk absent the provisions. A third-party security exception is functional: a deposit serving as security and received by a lessor or third party defeats the relevant condition. The Tribunal also observed that contractual labels and severability cannot bring a guarantee within the exception if it covers non-rental liabilities.

FB Shipping Ltd and FC Shipping Ltd acquired five ships and leased them through head leases to Fortis Finance (UK) Ltd, which sub-leased them to Vroon operating companies within the tonnage tax regime. Fortis Bank guaranteed the head lessee’s obligations, and the operating companies made substantial rental prepayments. The appellants claimed capital allowances on their expenditure; HMRC disallowed the claims under the defeased-leasing rules in Schedule 22 to the Finance Act 2000.

The First-tier Tribunal dismissed the appellants’ appeals in FC Shipping Ltd and FB Shipping Ltd v HMRC, [2024] UKFTT 1013 (TC). On appeal, the appellants challenged how the Tribunal identified the relevant provisions, measured the reduction in non-compliance risk and interpreted the exception for third-party security. The central issue was whether the arrangements removed the whole or the greater part of the lessors’ non-compliance risk.

1. Appeal dismissed. The First-tier Tribunal made no error of law in concluding that the appellants were denied capital allowances under paragraphs 89–91 of Schedule 22.
2. For arrangements of this kind, paragraph 41 of Schedule 22 was not an alternative, let alone the primary, mechanism for challenging the lessor’s capital-allowance claim. Paragraph 41(4) provides that a lease is not abusive merely because the lessor obtains capital allowances. The Tribunal left open whether paragraphs 41 and 90 are mutually exclusive in every conceivable case.
3. The statutory lease comprised the actual arrangements by which the ships were made available to the tonnage-tax companies, including the head leases, sub-leases and the interposition of Fortis Finance. The statutory inquiry required examination of those arrangements as implemented. Treating the intermediary structure as a provision affecting risk did not rewrite the agreements or substitute a hypothetical direct lease.
4. “Non-compliance risk” under paragraph 90(2) entails assessing the uncertainty or probability that some loss will be sustained when payments are not made in accordance with the lease. It is not confined to the amount lost under a scenario that assumes insolvency and total non-recovery. Temporary or partial non-payment may also be relevant.
5. “The greater part” requires a quantitative comparison between the actual risk absent the relevant provisions and the risk once they are in place. The statutory baseline is not a hypothetical 100% risk. The Tribunal did not decide whether excepted securities must be taken into account when setting that baseline in a case where the point affects the outcome. On the evidence before the First-tier Tribunal, the provisions reduced the appellants’ risk by more than half.
6. Paragraph 91(5) exempts third-party security only if all four conditions are met. Under paragraph 91(5)(a), whether money is deposited “by way of security” is a functional question. The prepayments served as security and were deposited with a third party; the condition did not require the deposit to be security specifically for the appellants. Its failure was sufficient to defeat the exception.
7. As an additional observation, the Tribunal agreed that the guarantee also failed paragraph 91(5)(d): it covered non-rental liabilities, and contractual descriptions or severability provisions could not confine it to defaulted rental payments.

• Upper Tribunal (Tax and Chancery Chamber): dismissed the appellants’ appeal, holding that the First-tier Tribunal had made no error of law.
• First-tier Tribunal (Tax Chamber): dismissed the appellants’ appeal against HMRC’s disallowance of capital allowances in FC Shipping Ltd and FB Shipping Ltd v HMRC, [2024] UKFTT 1013 (TC).