Bank-backed ship leases fail the capital allowances risk test

FC Shipping and FB Shipping have lost their Upper Tribunal appeal over capital allowances on five shipsNationalarchives. In its 7 August 2026 decisionNationalarchives, the tribunal upheld the finding that the intermediate bank counterparty and parent-bank guarantee together removed the greater part of the lessors’ non-compliance risk.

The companies leased the ships to Fortis Finance (UK)Nationalarchives, which subleased them to Vroon operating companies taxed under the tonnage tax regime. Fortis Bank guaranteed the head lessee’s obligations. On appeal, the companies accepted that the statutory lease comprised the head lease and sublease togetherNationalarchives. The tribunal held that inserting Fortis Finance into those arrangements was itself a provision whose effect on risk had to be assessedNationalarchives.

Paragraph 90 denies a lessor capital allowances for expenditure on a qualifying ship provided directly or indirectly to a tonnage tax company where the lease or associated transactions remove all or the greater part of the non-compliance risk otherwise falling on the lessorNationalarchives. That risk concerns the possibility of loss if lease payments are not made according to their terms, subject to the security exceptions in paragraph 91Legislation.

The tribunal rejected an approach assuming insolvency and total lossNationalarchives. The test requires assessing the probability of some loss, including temporary or partial non-paymentNationalarchives, and comparing actual risk with and without the relevant provisionsNationalarchives. A reduction of more than half of that starting risk can satisfy the test even when the initial risk is below 50%. The expert evidence established such a reduction hereNationalarchives.

The guarantee also failed the third-party security exception in paragraph 91(5)Nationalarchives. All four statutory conditions must be metNationalarchives. The lessor or any third party must not obtain a deposit of money or other property by way of securityNationalarchives. The security must not involve assuming the lessee’s lease obligations in return for a payment made directly or indirectly by the lessee or a connected person. It must not produce payments to the lessor unless the lessee defaults on rental paymentsNationalarchives. Payments under the security must be limited to the rental payments in defaultNationalarchives.

The tribunal held that the substantial rental prepayments were deposits functioning as security for Fortis Finance. That failed the deposit conditionNationalarchives. A deposit need not provide security to the lessors themselves: the condition also covers security obtained by a third partyNationalarchives. The tribunal also rejected the argument that contractual descriptions of non-rental liabilities as rent, or severability clauses, could satisfy the rental-payment limitNationalarchives. The guarantee covered obligations beyond unpaid rentalsNationalarchives.

The tribunal left open whether otherwise excepted securities should affect the risk baselineNationalarchives, because that question did not determine this appealNationalarchives. It also expressed no view on HMRC’s separate contention that the prepayments independently reduced the lessors’ risk.

The decision is FC Shipping Ltd & Anor v HMRC [2026] UKUT 305 (TCC)Nationalarchives, applying Finance Act 2000, Schedule 22, paragraphs 89–91Nationalarchives.