THE DEFINITIONS: SHIP & SEAFARER
It became clear that the Inland Revenue was allowing the abuse of the '183-day rule' by some non-seafarers working onboard certain types of vessel or installation.
To address the problem, the Inland Revenue introduced new guidance on eligibility following the 1998 Finance Act.
The issues at stake revolved around the definition of the worlds 'seafarers' and 'ship' under the income tax rules.
The word 'seafarer' is given a special meaning for Foreign Earnings Deduction (FED) purposes. 'Employment as a seafarer' is defined as:
'Employment consisting of the performance of duties on a ship (or of such duties and other incidental to them).'
'Ship' does not have a statutory definition. In consequence, a working definition has been derived from case law involving merchant shipping legislation. The situation was less than clear, and so in 1998 the Inland Revenue acted to clarify the meaning of 'ship' as used in the FED rules.
The definition takes no account of the job that a 'seafarer' does nor of any maritime qualifications that they have. So, if someone works on a 'ship' they are classed as a 'seafarer' for SED purposes. But if a seafarer works on a floating structure that is not accepted as a 'ship', then they are excluded from the 'seafarer' rules -- even if they have marine qualifications and perform the duties of a mariner.
The general principles applied in determining if a ship is a 'ship' for the tax rules include that it must be:
- capable of navigation
- used in navigation and
- navigation is more than incidental to its function
('More than incidental' means navigation that is not regular and not limited to adjustments that maintain a drilling location. Movement from a port or site of refit to a drilling location will not be regarded as incidental.)
In March 1998 the law was clarified so that anything that fell within the definition of an 'offshore installation' could not be classed as a 'ship' for FED purposes - even if it satisfies the general conditions set out above. The ruling excluded such things as:
- fixed production platforms
- floating production platforms
- mobile offshore drilling units
The Revenue also argued that the following are not offshore installations and may be accepted as 'ships' for FED purposes if they satisfy the general conditions:
- heavy lifting vessels
- diving support vessels
- shuttle tankers
- well service vessels
- survey vessels
- pipe-laying barges
These stricter rules were challenged in an Appeal Court case in 2001, which overturned a High Court judgement that three men who worked on the jack-up rigs Santa Fe Magellan and Santa Fe Monarch were not entitled to the seafarers' tax concessions as the rigs were not considered to be ships.
In giving the Appeal Court decision, Mr Justice Carnwarth said the rigs 'undoubtedly fulfilled' the key characteristics of the dictionary definition of 'ships' - being both large and seagoing.
Following the judgement, the Union wrote to Treasury ministers to request that the government implement changes to the FED system to reflect the ruling and to recompense those members on similar vessels who had been denied the tax concessions.
The Treasury did not follow this course. Since that judgement, the Inland Revenue (now HMRC) pursued a harder approach to the interpretation of the rules.
Treasury officials sought to argue that the FED arrangements were introduced to provide support for the use of UK crew on strategically useful UK-owned ships - distinctions and qualifications that were never specified in the original rules.
Indeed, this Union argued, the measures were specifically aimed at encouraging the recruitment and retention of seafarers. The sector in which they serve should be immaterial, not least because of the mobility of labour within a highly globalised and diverse international industry.
However, the clampdown continued - with HMRC introducing a stricter interpretation of the qualifying periods - a move that Nautilus challenged and won through a judicial review.