The Upper Tribunal’s recent decision in FC Shipping & FB Shipping v HMRC [2026] UKUT 305 (TCC) is a reminder that ship financiers cannot both eliminate most of the commercial risks of a leasing arrangement and retain tax benefits that are intended to reward risk-bearing investment. Where a financing structure is extensively protected from the consequences of non-payment, valuable capital allowances may be lost.

Under the UK’s tonnage tax regime, shipping companies are taxed by reference to fleet tonnage rather than actual earnings. While companies operating within the regime cannot claim capital allowances themselves, lessors may do so in respect of ships leased into the regime. However, those allowances can be denied where the lease, or a wider arrangement of which it forms part, removes “the whole, or the greater part” of the risk of loss arising from non-payment.

The case concerned five ships acquired by two UK shipping companies and leased through a financing structure involving Fortis Finance (UK) Limited, a bank-backed special purpose vehicle (SPV), and Vroon group companies. The arrangements incorporated an intermediary SPV, together with substantial prepayment arrangements and guarantees intended to support the economics of the transaction.

The Upper Tribunal agreed with the First-tier Tribunal that the relevant arrangements had substantially reduced the lessors’ non-payment risk, such that capital allowances were not available. In particular, the tribunal looked beyond the legal form of the contractual arrangements and considered the overall economic effect of the structure when determining whether “the whole, or the greater part” of the relevant risk had been removed. It also confirmed that the test requires consideration of both the likelihood of suffering a loss and the potential extent of that loss.

While the decision turned on its particular facts, its significance is wider, reinforcing the fact that courts will focus on economic substance when analysing complex ship financing arrangements and that there are limits to how far commercial risk can be shifted while preserving tax relief.

Capital allowances have historically formed an important part of the economics of some shipping structures. For lessors and financiers, the case highlights a trade-off: those wishing to retain the benefit of those reliefs may need to accept greater exposure to commercial risk. Conversely, those seeking to minimise non-payment risk may have to accept that capital allowances will not be available and look to generate higher returns elsewhere in the structure, potentially increasing financing costs at a time when the industry faces pressures associated with fleet renewal and decarbonisation.

This article was originally published on TradeWinds.