Western Ferries, the independent Clyde ferry operator, is embroiled in a dispute with the tax authorities that could end up costing it £1.5m - more than its latest annual profits, The Herald can reveal.

The long-running dispute centres on Western's contention that it should be allowed to pay a £1000 tonnage tax in lieu of the significantly more costly corporation tax.

According to the HMRC's 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".

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Gordon Ross, the company's managing director, last night confirmed: "This dispute has been going on for about four years now."

He added: "We are very confident, as are our accountants, that our election to pay the tonnage tax instead of corporation tax complies with the regulations. The Inland Revenue, however, have insisted we pay corporation tax.

"We are hopeful this will be resolved this year."

According to the Hunter's Quay, Dunoon-based company's latest set of accounts, Western said it was "electing to be taxed under the tonnage tax regime and the taxation liability has been calculated accordingly".

It adds: "The total corporation tax payable should the tonnage tax election not be accepted would be £1,507,000 at March 31, 2007."

At the same time, the company unveiled a pre-tax profit of £1.4m for the year to the end of March 2007, compared with £1.25m the year before.

Asked about the impact on the company, if the taxation dispute were to go against it, Ross reiterated: "We remain extremely confident of our position."

Meanwhile, turnover during the year increased to £5.6m, against £5.4m last time, which Ross said was the result of "increased patronage and giving customers the type of service they want".

He said that during the year, Western Ferries, which has operated its service between Gourock and Dunoon since 1972, carried 1.3 million passengers, 580,000 cars and 33,000 commercial vehicles and coaches, around 2% better than the previous year.

Meanwhile, Ross also said he would continue to press the Scottish Government to "eliminate" what he described as "the uneven playing field" between Gourock and Dunoon - but added that he believed Western Ferries' longer hours of service on the route was its prime competitive advantage.

Western has remained locked in a protracted battle with state-subsidised Caledonian-MacBrayne over the Dunoon-Gourock route, and has continued to harass the Scottish Government for a solution.

Ross said: "We are hoping that the current Scottish Government will establish a level playing field.

"However, we are pleased that we are continuing to grow, in spite of the fact that we are competing on this unfair basis."

Since the early-1980s, CalMac has received a subsidy to carry pedestrians between Gourock and Dunoon piers, but not for vehicles.

However, CalMac last year revealed it would increase its fare levels by 1.8% across the network from April 2008, which would also apply to the theoretically unsubsidised vehicles using the service.

At the same time, Ross has been accused of trying to obtain a monopoly on the route.

He yesterday insisted: "We have never sought a monopoly. We are simply seeking a competitive level playing field.

"It is very clear to us that CalMac is acting out of kilter with European regulations."

Meanwhile, the latest Western accounts also reveal that the highest-paid director - assumed to be Ross - reaped £102,000 in salary and "fees", compared with £98,000 the year before.