WESTERN Ferries has lost its long-running war with HM Revenue and Customs and has now been landed with a £3 million-plus tax bill, more than double its annual profit last year, The Herald has learned.

The company yesterday insisted that the decision will have no bearing on its tender for the Gourock-to-Dunoon ferry route.

Meanwhile, Western’s critics expressed concern at the tribunal’s ruling that the Clyde crossing does not qualify as a river or estuary route, but is technically a sea-crossing, thereby leaving the door open for the company to revisit the issue in the future.

The long-running dispute, in which Western has been embroiled with the tax authorities since 2004, centred on its contention that it should be allowed to pay a £1000 tonnage tax in lieu of the significantly more costly corporation tax.

Western has paid no corporation tax since 2003 – but it will now be forced to pay a total of £3.1m, plus interest.

According to HM Revenue & Customs’ website, tonnage tax is “an optional regime for shipping companies” and was introduced in 2000 as part of Government policy “to bring about a reversal in the decline of the UK fleet”.

However, while the tribunal conceded that the route plied by Western between McInroy’s Point, south of Gourock to Hunter’s Quay in north Dunoon, is technically the sea – because the River Clyde begins to the east at “Tail of the Bank” at “Number 1 buoy at Greenock” – the appeal was dismissed on grounds that its ferries did not have full certification “for navigation at sea”.

According to the Finance Act 2000, on which the tribunal based its judgment, a ship that qualifies for tonnage tax must be a “seagoing ship” that is “certificated for navigation at sea”.

The tribunal judgment, which has been seen by The Herald, states: “The phrase certificated for navigation at sea cannot mean certificated for navigation at sea on an occasional basis, or only a few months or even one day a year... Rather, we consider that it means certificated for navigation at sea without any significant restrictions or limitations.”

At the time of its tonnage tax application, Western’s vessels were not fully certified, but rather had partial certification limited to 12 months.

The tribunal also said tonnage tax “may constitute a state aid and thus may be contrary” to European Union law.

In conclusion, the judgment noted: “The appeal is dismissed.” The company has until June 8 to lodge an appeal against the decision.

Gordon Ross, Western’s chief executive, yesterday declined to comment on the judgment or whether the company would be making an appeal.

Nonetheless, Professor Neil Kay, a specialist on business economics at Strathclyde University and an outspoken proponent of Cal-Mac’s public subsidy, yesterday told The Herald he was “surprised” by the tribunal’s confirmation that Western operates beyond the estuary of the Clyde, which had been one of the cornerstones of HMRC’s case.

Theoretically, if Western is able to obtain full certification for navigation at sea in the future, it will thus be eligible to pay tonnage tax in lieu of corporation tax.

The tax authorities had also claimed that the route between Hunter’s Quay and McInroy’s Point constituted a crossing between one part of a harbour to another, which also would have disqualified an application for tonnage tax.

Referring to the harbour issue, the judgment noted: “In our view, HMRC’s arguments have no merit.”

Meanwhile, Western was last year shortlisted in the Scottish Government’s tendering process for the Gourock-to-Dunoon route currently operated by Cowal Ferries, a subsidiary of state-owned Caledonian MacBrayne, which is also in the running for the route, along with Greenock-based Clyde Marine Services.

Mr Kay said: “Western Ferries’s £3m tax bill raises public interest questions about its part in this tender.

“If they become the preferred bidder and have to pull out for financial reason, there will be no replacement.”

However, Mr Ross remained defiant, saying: “The tribunal decision will have no effect at all on our tender.

“We have been open with the Government’s procurement department all through the process.

“They were fully aware of the tonnage tax appeal and how the appeal went, and as far as I am aware they have no issue.”