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Gales later

27 January 2009 / Graeme Lindsay , Mike Truman
Issue: 4191 / Categories: Comment & Analysis , Seafarers , Income Tax
First GRAEME LINDSAY warns of changes to seafarers’ earnings deduction, and then MIKE TRUMAN spots a problem in the current legislation


  • Torr reclassifies many oil industry vessels as outside the definition of ‘ships’.
  • Consultation on guidance is not being held publicly.
  • Guidance cannot overturn the clear meaning of the legislation as shown by the case.
  • The legislation is in any case now faulty when dealing with cases such as Langley.

Since the 1970s, seafarers have enjoyed a special UK tax deduction to encourage them to work on vessels which could be called upon in times of conflict.

The legislation is currently found at ITEPA 2003, ss 378-385. HMRC’s guidance is in SA Help Sheet IR205 and at EIM 33000 onwards.

To qualify for a 100% seafarers’ earnings deduction (SED) all of the following conditions have to be met:

  • the taxpayer must be resident and ordinarily resident in the UK and employed as a ‘seafarer’ – employment consisting of the performance of duties on a ship;
  • the duties must be performed wholly or partly outside the UK;
  • the duties must be performed in the course of an ‘eligible period’ of 365 days or more (which can include days outside the tax year concerned).

The latest case in this area is the Special Commissioner’s decision in Torr and Others v CIR  [2008] STC (SCD) 772 concerning the appellants’ entitlement to SED while employed on board the vessel Pride South America.

The hearing took place on 17 and 18 December 2007 in front of Special Commissioner Theodore Wallace and covered the SED claims for the tax years 2002-03 to 2004-05 inclusive.

Before considering the case, it is probably best to provide some background information. The seafarers’ SED had been ‘steaming along’ quite nicely for a number of years, when oil rig workers realised they were missing out.

Since many oil rigs were either towed out, or could even propel themselves out, to sea and into location before they were stationed for drilling to start, surely they were ships?

This point was covered in some detail in earlier Taxation articles by Gary Axe (16 May 1996, page 175) and by TM Thomas and AR Jordan (29 March 2001, page 636).

Subsequently the oil rig workers achieved a victory on 27 July 2001, when the Court of Appeal gave a judgment in favour of the taxpayers in the cases of Perks v Clark [2001] STC 1254.

Legislative change

However, by the time these cases had been won, Finance Act 1998 had introduced legislation, tied to health and safety laws (the Mineral Workings (Offshore Installations) Act 1971, as amended) to define a ship for SED purposes.

The main effect of this was to exclude vessels used for the exploitation of mineral resources by means of a well, while standing or stationed in water.

This meant that employees who performed the duties of their employment on jack-up rigs or similar structures in the offshore oil and gas industry could no longer be regarded as seafarers and therefore were not entitled to SED.

This view was reflected in practice since at least 1998, and HMRC set out a list of qualifying and non-qualifying vessels in EIM33104. The only legislative change since then was in FA 2004, when the Revenue introduced TA 1988, s 837C, since rewritten as ITA 2007, s 1001.

This included a free-standing definition, although still based on the provisions of the Mineral Workings Act, to avoid problems caused by changes to that legislation in the future.

Interestingly, the explanatory note to the 2004 Finance Bill states ‘the same types of vessel will continue to be categorised as offshore installations as now’.

The Torr case

It was against this historical background that Torr was heard.

It was accepted that the appellants met all the qualifying conditions for SED, apart from the question of whether the maintenance vessel, Pride South America (a semi-submersible vessel from which the drilling equipment had been removed) was a non-qualifying offshore installation.

The appellants claimed that Pride South America was not engaged in the exploitation of mineral resources (the oil well was shut down when Pride South America was working), and that it was not stationary when working since it used dynamic positioning rather than any form of physical anchor.

HMRC countered that the definition of ‘exploitation’ in the New Oxford English Dictionary (2nd Edition) was wide enough to include the whole process from drilling a well, through production, to eventual close-down when the well is exhausted.

They also said that in order to be stationed, the vessel did not have to be totally static.

The Special Commissioner found in favour of the Revenue and stated that exploitation clearly referred to physical rather than economic exploitation and, using the meaning in the New Shorter Oxford English Dictionary, concluded that ‘stationary and/or standing’ clearly envisages the ship to be substantially stationary.

Therefore, as the Pride South America was both involved in the exploitation of mineral resources and stationed when doing so, it was a non-qualifying offshore installation, and the appellants’ claims to SED for the relevant years were dismissed.

He did add that ‘the logic denying SED to seafarers working on offshore structures in the South Atlantic is not apparent. However, while I have considerable sympathy with the appellants, my duty is to interpret the law as enacted’.

The aftermath

Surprisingly, there was silence after the Special Commissioners’ case was released on 14 January 2008. From the profession’s viewpoint this was perhaps as much due to the timing of the release and the lack of publicity regarding the case on the part of the appellants.

In early October 2008 HMRC issued a standard letter, stating, ‘Construction/construction support/well service and dive support vessels will no longer be considered to be ships for the purposes of 100% SED’.

This was effective for self assessment purposes from 14 January 2008.

To assist us in preparing our client’s 2008 tax returns, HMRC said that guidance would be issued in December 2008.

Consequently, a cross-party group of MPs met on 15 October 2008 with Stephen Timms, Financial Secretary to the Treasury, who reassured them that the case ruling was ‘confusing’ and that ‘those [taxpayers] currently working on what are presently classified as ships would NOT be affected by the [Revenue’s] recent ruling’.

Unfortunately, a further standard letter from Centre 1 dated 27 October 2008 appeared, which stated ‘[SED] has never been available for people working on offshore installations … and [there] are two tests to be met [mineral resources and standing/stationary]. Construction, construction support, well service and dive support vessels that [fail] either of these tests will [not be ships] for the purposes of [SED]’.

Revised guidance was promised for February 2009 and there was a reference to the Revenue having discussions with stakeholders about the interpretation of the ruling.

The wording of the HMRC press release of 16 December 2008 mirrors the letter’s wording and does not appear to match the earlier statement by the Financial Secretary.

The right response?

In my opinion, in seeking to apply the Special Commissioners’ ruling, HMRC have been too enthusiastic.

Although I accept the Special Commissioners’ ruling is persuasive when looking at similar cases, it does not have the force of law. It seems clear that Parliament did intend in 1998 that workers on platforms and semi-submersible rigs and the like would not qualify for the SED relief.

However, for example, it was not intended that workers on well service and diving vessels would not be able to claim the relief and this was reflected in HMRC’s own internal guidance (EIM33104) and their SA help sheets over the years.

In the Demibourne case (SpC 486), HMRC consulted with the profession to introduce legislation which addressed the difficulties highlighted in the ruling.

In this case, guidance will be issued in February 2009 after the filing date for the 2008 tax returns and consultation is apparently by invitation only.

We appear to be sleepwalking into a tax change which will affect our clients’ livelihoods. What can be done?

Even though we are all under time pressures at this time of year, I urge you to contact your MPs to voice your concerns and encourage your clients to do the same.

In addition, you can write to Paul Thomas of HMRC, Room 1E.09, 100 Parliament Street, London SW1A 2BQ with your comments, as apparently he is handling the informal consultation/discussions on this point.

By working together, let’s try and change the tax system for the better for all stakeholders.

Graeme Lindsay is a senior tax consultant with Atholl Scott in Aberdeen. His part of this article expresses his personal views, which are not necessarily those of his employer.

Guidance change

On 23 December 2008 (when readers may be forgiven for not having noticed) HMRC changed the guidance at EIM33000 onwards.

Does this mean that the informal consultation referred to by Graeme is now over and a decision reached?

Not at all.

The guidance has merely been updated to refer to Torr and also to another case, which I will look at below, Langley.

EIM33106 sets out the facts and the decision in Torr, notes that it has implications for vessels previously treated as ships, and now promises new guidance ‘in or before March 2009’ which will ensure that ‘the implications are applied in a fair and practical manner’.

We appear, yet again, to be heading for a situation where taxpayers will be overtaxed by statute and then relieved by guidance.

The implications of the decision are perfectly clear – a vessel which carries out its duties while it is substantially stationary, and which is involved in any part of the process of exploiting oil from a well (including repairs carried out while the well is temporarily killed) cannot be a ‘ship’ for SED.

So, for example, a diving support vessel which has to be stationary over the well in order for the divers to descend to it is clearly carrying out its duties while substantially stationary.

That would be the case even if the divers were only underwater for a few hours.

It is hard, therefore, to see how a diving support vessel can be a ship at all under this definition, but it is still listed in EIM33104 as a vessel which can be accepted as a ship, even though Torr might have ‘some implications’ in categorisation.

Why not simply say that diving vessels can no longer be accepted as ships, since that is clearly the implication of the decision?

Presumably the intention is to provide some minimum period during which a vessel can be stationary – a few days, perhaps – but there is no justification for that in the statute as interpreted by the case.

Guidance is not enough; if the full effects of this decision are to be avoided, we need new legislation.


The other case reflected in the December update is Langley [2008] STC (SCD) 298.

In this case, the vessel (Sedco Express) was a self-propelled drilling rig, constructed in a French shipyard. After sea trials it moved to a site off Egypt where it had its first drilling period.

 After that it was renovated during a time when there was no further contract for drilling. The taxpayer claimed that it was a ship up to the point at which it started drilling.

The case was based on the legislation prior to 2004-05, which included the references to the Mineral Workings legislation. The key provision of this defined an offshore installation (and therefore ‘not a ship’) as:

‘a structure which is, or is to be, or has been used, while standing or stationed in [any waters]… for the exploitation, or exploration with a view to exploitation, of mineral resources by means of a well.’

The Special Commissioner held that the rig was ‘to be used’ for exploitation etc, and therefore from the point that it was a ship at all it was within the definition of an offshore installation.

However, once it ceased to be used for drilling, it became a ship again. This is because it came within the definition of an ‘excluded structure’:

‘a mobile structure which has been taken out of use and is not for the time being intended to be used for any of the purposes specified in [the paragraph quoted above].’

Unintended consequences

Would the same decision be arrived at if the history of the Sedco Express had been considered under the current legislation?

The legislation introduced in Finance Act 2004 (referred to earlier) was intended to make one change, described in EIM33103 as follows:

‘The effect of this provision is that a structure that satisfies the definition of offshore installation remained within the definition unless it had permanently ceased to be used as an offshore installation with no prospect of resuming such use and it had been put to an entirely new use.’

Unfortunately it appears on closer analysis that it does rather more than that.

Assume that Sedco Express had permanently ceased to be a drilling rig after the refit, and had become a pipe-laying ship.

This is still part of ‘exploiting mineral resources by means of a well’, but let’s further assume that it was not stationary when it performed its duties, it was continually moving as it laid down more pipe.

It would no longer be an ‘offshore installation’, because it fails the test of being stationary, so you would think that SED should now be available to the seafarers that crew it.

However, since it has been an offshore installation it needs to fall within what is now ITA 2007, s 1001(2).

This refers to the structure having permanently ceased being put to a ‘relevant use’, and not being put to any other ‘relevant use’.

Relevant use is then defined in subsection 3, as including exploiting mineral resources by means of a well.

Unfortunately, and unlike the original Mineral Workings legislation quoted above, the reference to being put to such a use while stationary are in subsection 4 … So as the Sedco Express would still, on our assumptions, be engaged in a relevant use (albeit not while stationary), it would not therefore be an excluded structure, and the crew would not be entitled to SED.

The HMRC guidance dealing with the case, at EIM33105, does not appear to recognise the effect of the change, originally made by the 2004 legislation, and implies that the case would still be decided the same way.

Next steps

It’s a mess. The Torr case clearly outlaws many vessels from being ships which rightly should be, and it is not acceptable to ‘correct’ that by guidance.

In any case, when properly examined, the legislation does not actually have the effect that it was meant to when a structure permanently ceases to be an offshore installation.

Since the legislation needs changing anyway, why not change it so it provides that a vessel is only excluded when it stays stationary for more than a given number of days in order to carry out its duties?

Mike Truman

Issue: 4191 / Categories: Comment & Analysis , Seafarers , Income Tax
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