First-tier Tribunal (Tax)

[2010] UKFTT 373 (TC)

TC00655

Reference No. SC/3220-22/2008

Income Tax – Foreign Earnings deduction for Seafarers – Whether a vessel, accepted to be a ship on ordinary principles was an “offshore installation” such that it was precluded from being classed as a “ship”, with the result that employees engaged on it were not entitled to the Foreign Earnings Deduction for Seafarers under s.192A ICTA 1988, and s.378 ITEPA 2003 – Appeal dismissed

FIRST-TIER TRIBUNAL

TAX

Mr. T WRIGHT

Mr. V A WHITTLE

                                      Mr. I G KENRICK (deceased)                   Appellants

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

                                                TRIBUNAL: HOWARD M NOWLAN (Judge)

Sitting in public in London on 23 July 2010

Mr G F Robertson of Diss Accounting and Taxation Services (European) Limited on behalf of the Appellants

Mr Colin Williams, Inspector of Taxes,  on behalf of the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction

1.         This was a simple case where HMRC accepted that the Appellants satisfied every requirement to be entitled to the Foreign Earnings Deduction for Seafarers, save for the question of whether they satisfied the requirement that their employment was on “a ship”.  They were employed on a movable, but un-powered, platform that was moved and anchored close to drilling platforms, and then used in connection with those platforms.  Whilst it seems slightly odd that such a vessel should rang as a “ship” within the general meaning of that terms, this was accepted by HMRC.  The only point in contention was that if the vessel also ranked as an “offshore installation”, then it was deemed not to count as a ship.  The question for us therefore was whether this vessel was an “offshore installation”, it being clear that it would be if it was “a structure which is, is to be, or has been, put to use for the purposes of exploiting mineral resources by means of a well”, or “for the purposes of exploration with a view to exploiting mineral resources by means of a well”.

2.         The function of this platform was explained, and I was unable to reach any conclusion other than that the platform was an offshore installation, and so not a ship, such that the claimed tax deduction was not available.

3.         There were three slightly unhappy features about this decision.  It seems unfortunate that the relevant deduction is not available to the Appellants because certainly Mr Wright who gave evidence in person, was a mariner, attending entirely to seafaring functions and not remotely an oil worker.  It seems somewhat perverse that the hairdresser on a cruise ship may qualify for the deduction whilst some mariners do not.  Secondly Mr Wright had specifically made enquiries to check that the deduction would be available, and it is unfortunate that they were wrong. Thirdly, whether the enquiries were entirely related to employment on an almost identical vessel that other HMRC officers had confirmed did rank, and was not removed from the classification, as a ship, it was unfortunate that there were these examples of conflicting treatment.  I was told that the ruling in relation to the other vessel had subsequently been changed, and that it was accepted that it had been wrong, but in any event the question for me was whether, on the facts, this vessel was used for exploring for or exploiting mineral resources.  It plainly was.

The facts

4,         The vessel is technically called a Semi-Submersible Self-Erecting Tender Rig.  This one was called “West Menang”.  I was shown several pictures of it and my amateur description of it is that it is a massive platform stretched across various hollow pontoons.  On the platform there are cranes, an accommodation block, facilities for mooring supply ships adjacent to the platform, and facilities for landing helicopters.  It is capable of being raised or lowered (presumably as the pontoons are flooded or partially flooded).  It is not powered, though it does have 4 Caterpillar diesel-powered generators to operate its various functions.  Since it is not powered, it is towed to location, generally within say a few hundred yards of a static drilling platform.  Eight anchors are then used to anchor the vessel, and as some are hauled in and others played out, the structure is brought in to much closer proximity (about 10 metres distance) with the drilling rig.  The vessel can then swing a gantry, or bridge, over to the fixed rig, so that men can easily move between the vessel and the rig.  In addition to the bridge enabling workers to move between the vessel and the rig, there are other connections between the two.  The facilities on the platform can generate the power that will operate the drilling machinery on the platform.  The platform will also pump the mud, cement and cooling water that are required whilst drilling to the rig.  There is also a connection for fire-fighting equipment.  As additional drills hafts are required, these are stored on the vessel and swung across by the cranes on the Bessel to the drilling rig, where they are then attached to the previous shaft.

5.         The reference in the technical name to the fact that the vessel is “Self-Erecting” refers to its cranes and to the feature that it can shift the helideck from one place to another, and move things between the vessel itself and the adjacent rig.

6.         The economic explanation of the vessel appears to be that it enables fixed drilling rigs to be smaller and simpler than they would have to be were they required to work without the assistance of a vessel such as the West Menang.  Were they required to work in that manner, they would have to be sufficiently large to accommodate the power for the drilling, and all the supplies and accommodation that are located on the West Menang.  Some production rigs are obviously enormous but exploration rigs can be relatively small and simple.  The thinking presumably is that since drilling rigs themselves may only be in operation for fairly short periods, it is far more economic to locate all the ancillary equipment, other than just the drilling machinery itself, on a separate platform that can move from rig to rig.

The law

7.         This appeal related to assessments both when the provisions in ICTA 1988 were the material provisions, and when the provisions of the re-written Income Tax Earnings & Pensions Act 2003 were in force.  There was no material difference between the two sets of provisions.  As regards the crucial wording referring to what the anchored platform was used for, the ICTA wording had referred slightly more shortly to “use … for the exploitation, or exploration with a view to exploitation, of mineral resources by means of a well”, whilst the later Act broke that combined phrase down into two phrases (as indicated towards the end of paragraph 1, above) but the meaning is identical.

The argument on behalf of the Appellants

8.         The argument on behalf of the Appellants was essentially that the West Menang was not a drilling rig itself, and could not function as a drilling rig.

My decision

9.         The Appellant’s argument that the West Menang was not a drilling rig, and that it could not function as such, was true but not particularly relevant.  It seemed to me that the Appeal could only succeed if some description could be given to the intended use of the West Menang that made sense, and that divorced the use from a use for the purposes of exploring for or exploring mineral resources by means of a well.  If for instance it could be said that the West Menang was just a storage vessel, and if on the facts it could be used for storing equipment for off-shoe drilling and countless other quite different items, one might say that it was a “ship used for storage”.  Even then there would be considerable doubt on the occasions when the vessel was actually being used in conjunction with drilling rigs.  It might however be argued that just as a ship used to transport food and provisions to a drilling rig, and to other destinations, might not be said to be being used “for the purposes of exploration drilling” even when bringing provisions to a fixed rig, it might just be argued that if the “West Menang” could be described as having a “storage” function, one might reach the conclusion that it could fall outside the relevant definition.

10.       That speculation is, however, far from the reality if this case.  The West Menang is not simply a storage vessel, and if it were it would anyway seem that it was used and intended to be used almost exclusively to support exploration drilling in any event.  But it is much more than a storage vessel.  It has an active function entirely in connection with drilling wells for exploring for and exploiting mineral resources.  I was told that some fixed rigs might have their own power, but certainly the West Menang was designed to provide the electric power to power the machinery on those rigs that had no power source.  It was also used for providing all the ancillary services, such as water, mud, cement etc, and by accommodating the drilling personnel and enabling them to go on and off the rig itself, it had the additional function of accommodating and providing access to the rig for the workforce.

11.       I accept the point that the West Menang was not a drilling rig, and that without a static rig, the West Menang could not drill an exploration well.  Nor, however, could the static rig.  The truth of the matter is that the West Menang is in reality “the other half of the combined equipment, required for the drilling of exploration and production wells.”  I thus find it absolutely impossible to say that it is not a structure in use “for the exploitation, or exploration with a view to exploitation, of mineral resources by means of a well”.

12.       I should add that I was entirely satisfied that Mr Wright who provided evidence in writing and in person was very much a mariner, and not an “oil man”, but this regrettably has nothing to do with the definition of the use of the vessel.  And it is the use of the vessel that is crucial to this one point of dispute between the parties.

13.       I must accordingly dismiss this Appeal.

14.      This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

HOWARD M NOWLAN  (Tribunal Judge)

Released: 11 August 2010