Income tax-employment -foreign income deduction -duties performed wholly or partly outside UK-ships -seafarers-taxpayer working on vessels offshore-tax relief claimed for proportion of Sch. E income-Revenue taking view that taxpayer's service on particular vessels not qualifying for relief- general commissioners holding in fact that vessels were offshore installations not eligible for relief-Court of Session dismissing appeal-general commissioners entitled to reach conclusion they did -Income and Corporation Taxes Act 1988, s. 192A(3).

Court of Session (Inner House).

Judgment delivered 16 February 2006.

The Scottish Court of Session held that the general commissioners were fully entitled to decide in fact that two vessels on which the taxpayer worked were offshore installations and not ships and that accordingly the taxpayer's service on those vessels did not qualify for relief under s. 192A of the Income and Corporation Taxes Act 1988.

Facts

The taxpayer worked offshore on a number of vessels in the years of assessment 1998-99 and 2000-01. In the earlier of those years he worked on board an Earl and Wright Sedco 700 semi-submersible vessel. In 2000-01 he worked on board the Pride Africa. He was at all material times resident and ordinarily resident in the UK. He claimed relief from income tax under s. 192A of the Income and Corporation Taxes Act 1988 (‘ICTA 1988’), as amended by the Finance Act 1998 in respect of periods beginning on or after 17 March 1998. That section provided for relief by deduction from assessable income of a proportion of a seafarer's Sch. E income where the duties of the employment were performed wholly or partly outside the UK.

The Revenue refused relief and the general commissioners, in turn, refused his appeal in respect of each of the years in question. The taxpayer appealed to the Court of Session.

Issue

Whether the taxpayer was performing duties on a ship which qualified for relief.

Decision

Lord Penrose (delivering the opinion of the court with Lords Abernethy and Johnston) (dismissing the appeal) said that each of the vessels on which the taxpayer served would qualify as ‘ships’ for some purposes. The Pride Africa would be a ship in ordinary language. It was a self-propelled monohull vessel constructed for use as a drilling vessel. The Sedco semi-submersible was 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 ICTA 1988, s. 192(3) which provided that a ‘ship’ did 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.

It was decided in Clark (HMIT) v Perks [2001] BTC 336 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 ICTA 1988, Sch. 12, para. 3(2A) (the predecessor of s. 192A). The court considered that in most cases, the categorisation 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.

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, those restricted the scope of that Act to the territorial waters of Great Britain. Section 192A(3)(b) then excluded those terms by requiring the amended 1971 Act provisions to be read as if they applied to any waters, without territorial restriction.

The cumulative effect of those amendments on s. 192A(3) was that for the purposes of the section a ‘ship’ did not include any structure which was 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 worked on or from a structure falling within any of the provisions of that paragraph and which was not an excepted structure.

Section 192A excluded ‘offshore installations’ from the definition of ‘ship’. The 1995 Regulations substituted a new definition of ‘offshore installation’ as a structure which was used ‘while standing or stationed in relevant waters ^’ for a specified purpose. They also distinguished between fixed and mobile installations. With the exception of floating production platforms, which were treated as fixed installations whatever their other characteristics, mobile installations were identified as those that could be moved from place to place without major dismantling or modification, whether or not they had their own motive power.

As a matter of general usage, the vessels in question were undoubtedly ‘structures’. It was equally clear that vessels generally were treated as structures in terms of the 1995 Regulations. The taxpayer had sought to argue that the purpose of the vessels was exploration for mineral resources but 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. However that was not a tenable construction of the regulation. In the case of exploration, subsequent exploitation was 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 was envisaged here was exploration in anticipation that workable deposits would be exploited after discovery. But there was no discernible requirement within the regulations that the same installation should be involved in the successive stages.

Finally, the taxpayer had argued that the vessels were ships for other statutory and regulatory purposes. Neither vessel was registered as an oil or gas floating installation by the Department of Trade and Industry, the Offshore Installations (Safety Case) Regulations 1992 had not applied to either vessel, and 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 was undoubtedly the case that different regulations classified 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 was clear and specific and nothing turned on the possible application of provisions that had not been incorporated for tax purposes.