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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
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Lord Abernethy
Lord Johnston
Lord Penrose
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[2006] CSIH 8
XA39/05
OPINION OF THE COURT
delivered by LORD PENROSE
in
APPEAL
by
BEN R. PALMER
Appellant;
against
THE COMMISSIONERS OF HER
MAJESTY'S REVENUE AND CUSTOMS
Respondents:
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Act: Party (Appellant)
Alt: Paterson, Solicitor for
Revenue & Customs (Respondents)
16 February 2006
[1] The taxpayer
Mr Palmer, worked offshore on a number of vessels in
the year of assessment 1998-1999 and 2000-2001.
In the earlier of those years he worked on board an Earl and Wright
Sedco 700 semi-submersible vessel. In
2000 - 2001 he worked on board the Pride Africa. He was at all material times resident and
ordinarily resident in the United Kingdom.
He claimed relief from income tax under section 192 A of the Income and
Corporation Taxes Act 1988, as amended by Finance Act 1998 in respect of
periods beginning on or after 17 March 1998.
That section provides for relief by deduction from assessable income of
a proportion of a seafarer's Schedule E income where the duties of the
employment are performed wholly or partly outside the United Kingdom.
The sole issue is whether Mr Parker's service on the two particular
vessels qualified for relief. The
respondents refused relief. Mr Palmer
appealed to the General Commissioners. They
in turn refused his appeal in respect of each of the years in question.
[2] Section 192 A
provides definitions in these terms:
"(2) In subsection (1) employment "as a seafarer" means an
employment consisting of the performance of duties on a ship (or of such duties
and others incidental to them).
(3) For
the purposes of this section a "ship" does not include:
(a) any offshore installation within the meaning of the Mineral
Workings (Offshore Installations) Act
1971, or
(b) what would be such an installation if the references in that
Act
to controlled waters were to any
waters."
[3] Each of the
vessels on which Mr Palmer served would qualify as 'ships' for some purposes. The Pride Africa would be a ship in ordinary
language. It is a self-propelled
monohull vessel constructed for use as a drilling vessel. The Sedco semi-submersible is less obviously
a 'ship' in the common usage of that term.
But it was not in dispute between parties that each vessel could in
general terms be described as a ship. The
dispute focused on the words of exclusion in sub-section (3).
[4] The
incorporation of the provisions of the Mineral Workings (Offshore
Installations) Act 1971 as the measure of the installations excluded from the
meaning of the term "ship" has proved to be singularly inappropriate. Amendment of the primary legislation in the
changing environment of the offshore extraction industry resulted in a
provision of some complexity when applied for taxation purposes. Schedule 27 to the Finance Act 2004
recognised that, and enacted a definition particularly adapted to the
requirements of the Taxes Acts. This
appeal has to be dealt with on the terms of the 1971 Act as amended at the
material time.
[5] It was
decided in the joined cases of Perks v Clark, Perks v Macleod and Newrick
& Granger v Guild [2001] STC 1254 that jack-up rigs were ships for the
purposes of the foreign earnings deduction, and that the earnings from
employment on such vessels were 'emoluments from employment as a seafarer' for
the purpose of paragraph 3(2A) of Schedule 12 to the Taxes Act 1988, the
predecessor of section 192 A. The court
considered that in most cases, the categorization of a structure should be
governed by its design and capability rather than by its actual use at any time. That view had been reflected in practice
since at least 1998.
[6] The 1971 Act
was extensively amended by the Oil and Gas (Enterprise) Act 1982 and by the Offshore
Installations and Pipeline Works (Management and Administration) Regulations
1995. Section 24 of the 1982 Act
substituted a new definition of the scope of the principal Act. Among other amendments, the 1995 Regulations
introduced new definitions of 'relevant waters' and 'controlled waters', in
identical terms, into the definition of the scope of the 1971 Act. In general terms, these restricted the scope
of that Act to the territorial waters of Great Britain.
Sub-section (3) (b) of Section 192 A then excluded these terms by
requiring the amended 1971 Act provisions to be read as if they applied to any
waters, without territorial restriction.
[7] The
cumulative effect of these amendments on section 192 A (3) was helpfully summarised by Miss Paterson, counsel for the
respondents. So far as material, section
192 A (3), reflecting the amendments of the 1971 Act, had to be expanded to
read:
"For the purposes of this section a 'ship'
does not include -
Any structure which is, or is to be,
or has been used, while standing or stationed in any waters or on the foreshore
or other land intermittently covered by water (a) for the exploitation, or
exploration with a view to exploitation, of mineral resources by means of a
well; (b) for the storage of gas in or under the shore or bed of any waters or
the recovery of gas so stored; (c) for the conveyance of things by means of a
pipe; or (d) mainly for the provision of accommodation for persons who work on
or from a structure falling within any of the provisions of this paragraph and
which is not an excepted structure".
[8] Mr Palmer
argued that the amendments of the 1971 Act were inept, and produced a
meaningless reference for the purposes of the Income and Corporation Taxes Act
because they failed to provide a definition of the term 'controlled waters' as
that expression was used in section 192 A (3) (b). But his analysis was flawed. He had failed to take account of the terms of
Part II of Schedule 1 to the 1995 Regulations where the term was defined for
the purposes of the 1971 Act. That he
should have erred in this way is not difficult to understand. The processes of amendment and adaptation of
the 1971 Act provisions were tortuous in the extreme. But we are satisfied that Miss Paterson's
analysis is accurate, and that the expanded version of the provision set out in
paragraph [7] provides the appropriate test for present purposes. Of the four paragraphs
categorizing structures according to design and capacity, only (a) is material
for the purposes of this case.
[9] In order to
deal with Mr Palmer's submissions, it is necessary to discuss some of the terms
of the 1971 Act in the context of their application for Schedule E purposes. Section 192 A, as set out in paragraph [2]
above, excluded "offshore installations" from the definition of "ship". Mr Palmer argued that neither of the vessels
on which he served was an "offshore installation". He submitted that they were not installations
at all. Typically, an installation in
the off-shore industry was an assembly of components put together on location
after being transported by sea. He
referred to forms of steel and concrete structures that required to be towed to site, sunk, fixed to the seabed by one means of
another, and then fitted out on top with a variety of modules suitable
for the function for which the installation was designed. Further, he submitted that paragraph (a)
applied only where the installation had been, was or was intended to be, used
for exploitation, or for both exploration and exploitation of mineral resources
by means of a well. That is,
exploitation was an essential element of the purpose to be served by an
excluded structure. He submitted that
the findings in this case did not support the inference drawn by the General
Commissioners that the two vessels were excluded.
[10] As amended by
the 1982 Act and the 1995 Regulations, section 1 of the 1971 Act applied inter alia to "installations" which were
maintained in controlled waters and which were not permanently connected by
access structures to the dry land. The
term "offshore installation" was defined by section 1 (4) of the 1971 Act, as
amended by the 1982 Act, as meaning any installation which is or has been
maintained or is intended to be established for the carrying on of any activity
to which the Act applied. In terms of
section 1(2) these activities included exploitation or exploration of mineral
resources in or under the bed of controlled waters. "Installation" was defined by section 1 (5)
as including, inter alia, "any
floating structure or device maintained on a station by whatever means".
[11] Article 3 of
the 1995 Regulations substituted a new definition of "offshore installation". The original section 1 of the 1971 Act was
repealed as a whole by Part I of schedule 1 to the 1995 Regulations. Article 3 (1) of the 1995 Regulations
provided:
" ... in these Regulations the expression 'offshore
installation' means a structure which is, or is to be, or has been used, while
standing or stationed in relevant waters ... "
for a specified purpose. Article 2 defines a number of terms and
expressions. It distinguishes fixed and
mobile installations. With the exception
of floating production platforms, which are treated as fixed installations
whatever their other characteristics, mobile installations are identified as
those that can be moved from place to place without major dismantling or
modification, whether or not they have their own motive power.
[12] As a matter of
general usage, it is beyond argument that the vessels in question are
"structures". The definition of
'structure' found in Hobday v Nicol [1944] 1 All ER 302 and referred
to in the case, as anything which is constructed, involving the notion of
something which is put together, consisting of a number of different things
which are so put together or built together or constructed as to make one
whole, is consistent with ordinary usage.
It is enough to note that major relevant components of the Sedco are its
pontoons, caissons, deck and the drilling rig mounted on top. In the case of the Pride Africa, they are the
hull and the drilling rig. But it is
equally clear that vessels generally are treated as structures in terms of the
Regulations. Regulation 2 defines
"vessel" as including "any floating structure which is capable of being
staffed". In that way, it excludes buoys and other
unmanned structures. But it leaves
little doubt that, within the terms of the Regulations, a ship is a structure. The expression "associated structure" is defined
as including a vessel.
[13] Mr Palmer's
argument that the vessels were not structures because they floated complete on
the sea from launch and throughout their working lives, and were not assembled
or erected on location cannot be sustained.
While there are many structures of that nature, the examples cannot
define exhaustively the scope of the Regulations. There was no issue between the parties
whether the vessels were used "while standing or stationed" in relevant waters. The Sedco specification which is incorporated
into the case shows that it was moored on station. The Pride Africa was held on station by
dynamic positioning.
[14] It was Mr
Palmer's submission before the General Commissioners that the purpose of the
vessels was exploration for mineral resources.
He contended, however, that the vessels were not carrying out
exploration work with a view to exploitation.
Neither vessel would ever be involved in drilling a production well. Before the court that argument depended on
the submission that the expression "exploitation, or exploration with a view to
exploitation" identified classes of use that must, in the case of any
structure, involve past, current or future use that includes exploitation of
mineral resources. In our view that is
not a tenable construction of the regulation.
In the case of exploration, subsequent exploitation is clearly a
requirement. Academic research carried
out to increase knowledge of the nature and extent of sub-sea mineral deposits
might have as its object the prohibition of exploitation by others. What is envisaged here is exploration in
anticipation that workable deposits will be exploited after discovery. But there is no discernible requirement
within these regulations that the same installation should be involved in the
successive stages. We reject Mr Palmer's
submissions on this issue.
[15] Against this
background, the narrow question for the court is whether the General
Commissioners were entitled to hold in fact, as they did in paragraph 5 of
their findings, that the two vessels were offshore installations used for the
purpose of exploitation or exploration with a view to exploitation of mineral
resources by means of a well. In our
view their decision on that question was one that they were fully entitled to
reach on the evidence before them.
[16] Mr Palmer
repeated before the court the arguments he had advanced before the General
Commissioners that the vessels were ships for other statutory and regulatory
purposes. He pointed out that neither
vessel was registered as an oil or gas floating installation by the Department
of Trade and Industry. He argued that
the Offshore Installations (Safety Case) Regulations 1992 had not applied to
either vessel, and indeed that the time limits for notification of movements
under those regulations would be incompatible with the requirements actually
applicable to vessels such as the two in question. It is undoubtedly the case that different
regulations classify structures in different ways according to their purpose,
and on occasion depending on the department of government sponsoring their
promulgation. But the regulatory point
of reference in this case is clear and specific and nothing can turn on the
possible application of provisions that have not been incorporated for tax
purposes.
[17] We therefore
answer Questions 1 and 2(a) in the affirmative and find it unnecessary to
answer Question 2(b).
