On 7 August 2026 the Upper Tribunal released FC Shipping Limited and FB Shipping Limited v HMRC [2026] UKUT 00305 (TCC). Judges Thomas Scott and Amanda Brown KC dismissed the lessors’ appeal. Capital allowances on five ships leased into the tonnage tax regime stay denied.
If you finance ships, lease plant into a ring-fenced regime, or sit on a PE credit committee that prices “bank risk” as if it were “shipping risk,” read this one cold. It is a controls case on how far you can strip non-compliance risk out of a lessor’s book and still keep plant and machinery allowances.
Primary sources: the GOV.UK decision page, the full UT judgment PDF, the FTT note from One Essex Court, the case digest at Academy of Tax Law, and Schedule 22 FA 2000, Part X. HMRC’s view sits in the Tonnage Tax Manual ship-leasing chapter.
What was built — and why CFOs care
The appellants were UK leasing companies in the Alliance & Leicester / Santander asset-finance line. They acquired five qualifying ships (about US$84m on the FB ships and US$79.7m on the FC ships) and put them into 25-year head leases with Fortis Finance (UK) Limited — a bank SPV with no real independent shipping income. FF sub-leased to Vroon operating companies inside tonnage tax. Fortis Bank S.A./N.V. guaranteed FF’s head-lease obligations. The OpCos prepaid a large slab of sub-lease rent — over 50%, and about 80% on the FC ships.
Commercially, that stack converted exposure from shipping credit into bank credit, kept legal ownership with the lessor, and claimed capital allowances while the operators sat in tonnage tax. Tax policy has always hated that outcome when the lessor no longer bears real non-payment risk. Parliament’s knife is paragraphs 89–91 of Schedule 22 FA 2000.
Tonnage tax companies generally cannot claim capital allowances on ships. Lessors can — but only if the lease is not defeased, is not a forbidden sale-and-leaseback, and stays inside the quantitative limits. The 2024 reforms raised those caps (HMRC’s note on the leasing capital-allowance limits; firm reads from KPMG and Reed Smith). Higher limits do not help if paragraph 90 kills the claim.
The statute in one page
Paragraph 89 pulls in any arrangements that make a qualifying ship available, directly or indirectly, to a tonnage tax company. “Lease” is deliberately wide.
Paragraph 90 is the kill switch. No capital allowances if the lease, or any transaction or series of which it forms part, removes the whole or the greater part of any non-compliance risk that would otherwise fall on the lessor. Non-compliance risk is the risk that a loss will be sustained if lease payments are not made. Connected persons are collapsed with the lessor.
Paragraph 91 carves out “excepted forms of security” — ship mortgages, earnings and insurance assignments, certain parent/third-party guarantees that meet tight conditions, and security inherent in the ship. HMRC’s working guidance is in TTM10100, TTM10110, TTM10120 and TTM10130. In practice HMRC treats “greater part” as more than 50% of the risk removed. Paragraph 93 still demands a joint lessor/lessee certificate with the claim.
What the Upper Tribunal decided
The FTT had already dismissed the lessors in FC Shipping Ltd v HMRC [2024] UKFTT 1013 (TC). The UT found no error of law on all four grounds.
SPV identity is a “provision.” Interposing FF between the lessors and the OpCos was not neutral paperwork. Because paragraph 89 looks at arrangements, the identity and credit quality of the head lessee can itself reduce risk. You cannot ignore the bank SPV in the middle.
The bank guarantee was not excepted security. Two failures. First, OpCo prepayments to FF counted as a deposit of money by way of security in a commercial sense — even without a direct proprietary claim for the lessors. Second, the guarantee went beyond rental defaults into warranty and funding-cost territory. The UT refused to sever the over-wide bits. If you need paragraph 91(5), draft the guarantee like a tax instrument, not a relationship-banking comfort blanket.
Risk means probability, not cartoon LGD. The expert approach that assumed total non-payment and measured only quantum was rejected. “Risk that a loss will be sustained” includes likelihood. Shipping credit is not bank credit — that is why the structure existed, and the tribunal will not let you un-say it.
“Greater part” is actual-to-actual, not a fictional 100%. Compare risk with the impugned provisions to risk without them. HMRC’s >50% working rule survived. Start with modest residual shipping risk, engineer it to near-zero bank residual, and you can still lose more than half of what you actually had.
Paragraph 41 is not a soft landing. The UT treated paragraph 90 as the specific tool for defeased leasing. The general tonnage-tax anti-abuse rule does not give lessors a parallel route to keep allowances once paragraph 90 bites.
Why this lands in 2026
UK tonnage tax has been refreshed — election windows, ship-management extension, higher lessor CA limits. More lessors will look at UK-managed fleets again. Quantitative relief got more generous; the qualitative defeasance gate did not loosen.
The broader CA environment is also tighter for lessors. Main-rate writing-down allowances fall from 18% to 14% from April 2026, with a new 40% first-year allowance aimed partly at lessors who cannot use full expensing (Deloitte; TC Group). When baseline WDA is thinner, a paragraph 90 disallowance is the difference between a priced tax-capacity trade and a naked credit lease.
CFO controls cut
- Map every ship lease into tonnage tax. Owner, head lessee, sub-lessee, guarantor, prepaid rent, cash collateral, assignments, back-to-back bank facility. If treasury cannot draw the cash flows on one page, tax cannot defend the claim.
- Stress residual non-compliance risk in plain English. Who still loses money if the operator stops paying? If the answer is “almost nobody above the bank,” expect paragraph 90. Use the UT’s with/without comparison, not a notional 100% baseline.
- Re-read guarantees against paragraph 91(5). No security deposits. No assumption of lessee obligations for a side payment. Payments only on rental default, limited to rent (including termination rent) in default. Over-wide warranty covers poison the exception.
- Stop treating large prepayments as “just rent timing.” Prepaid rent with an SPV is a commercial deposit the UT looked through. Model prepayment percentage as a defeasance dial.
- Do not rely on the SPV label. A thin head lessee whose job is credit substitution is a provision of the arrangements.
- Refresh paragraph 93 certificates and IC papers. If boards price “full CAs” into the IRR, attach a one-page paragraph 90 memo or stop calling the tax capacity certain.
- PE / portfolio angle. Put defeasance on DD for shipping and asset-finance bolt-ons inside tonnage tax. A failed historic CA claim is a CT true-up and possibly a deferred-tax restatement.
What this is not
Not a ban on leveraged leasing — HMRC still accepts laying off risk if the third-party arrangement is not itself defeasance and excepted-security conditions hold. Not authority that every bank guarantee kills allowances — only that guarantees outside paragraph 91 count in full on the greater-part test.
It is authority that composite reading wins. Head lease + sub-lease + guarantee + prepayment stack is one commercial machine. Labels lose.
Bottom line
FC Shipping is simple: sell the shipping risk and keep the capital allowances, and the Upper Tribunal will take the allowances. The SPV is not invisible. The fat prepayment is not neutral. The wide bank guarantee is not automatically excepted. Probability counts. Greater part means more than half of the risk you actually had.
Inventory the book, re-underwrite residual risk, tighten guarantee wording on live deals, and stop booking tax capacity that only works if paragraph 90 is ignored. The judgment is on the Tax and Chancery decisions list as of 7 August 2026 — open files and 2026 CT computations should already be in the review pile.
Mark Hendy is a PE-facing CFO and tax agent. This is practical commentary, not advice on any specific structure.