The taxpayer was not entitled, for the relevant tax years, to the benefit of the foreign earnings deduction for seafarers under ICTA 1988, s. 192A.

Facts

The Revenue disputed whether the vessel or structure on which the taxpayer performed his duties was a ship, and consequently whether the duties of the taxpayer's employment were performed as a seafarer within ICTA 1988, s. 192A(2).

The structure or vessel on which the taxpayer performed his duties was a self-propelled oil drilling rig. The taxpayer served on the rig from May 1999 to the year 2004. That period spanned the construction of the rig in Brest; its sea trials; a period whilst it was moving to Egypt to commence drilling operations; a period of drilling; and then a period during which the rig was renovated because the owners had no immediate contract for further drilling work.

The design of the rig rendered it unsuitable for service in the North Sea, or anywhere in the territorial sea of, and continental shelf surrounding, the UK. The rig was designed only to operate in the calmer waters around Africa.

The Revenue contended that a vessel that was intended to operate under its own power could not rank as a ship until it was capable of operating under its own power. Thus, leaving aside when the vessel might have also ranked as an offshore installation within the meaning of the Mineral Workings (Offshore Installations) Act 1971, it could only rank as a ship under the general meaning of that term when its thrusters had been installed.

The Revenue accepted that once the rig had been used as a drilling rig, then when it was subsequently taken out of use for major refurbishing purposes, and was not for the time being to be used for any of the purposes mentioned in reg. 3(1) of the Offshore Installations and Pipeline Works (Management and Administration) Regulations 1995 (SI 1995/738), then it ceased to be an ‘offshore installation’, because during the refit it ranked as ‘an excluded structure’ under reg. 3(2)(e). It thus dropped back to being regarded as a ship, and for that period, the taxpayer's employment was employment as a seafarer.

Issue

Whether the rig ranked as a ship.

Decision

The special commissioner (Howard M Nowlan) dismissed the taxpayer's appeal. The structure in this case ranked as a ship once it could operate under its own power, Perks v HM Inspector of Taxes [2001] EWCA Civ 1228 applied. A structure or vessel intended to operate under its own power but not yet capable of doing so was not a ship. Section 192A(3)(b) was plainly intended to modify the definition of ‘offshore installation’, by substituting the phrase ‘any waters’ for the phrase ‘relevant waters’, when in fact s. 192A(3)(b) purported to change the different expression ‘controlled waters’. Following the Court of Session decision in the case of Palmer v HM Revenue and Customs [2007] BTC 126 the court would assume that the definition of ‘offshore installation’ in the 1995 Regulations should be read as if the references to ‘relevant waters’ in reg. 3(1) were to ‘all waters’.

On that basis, the rig in this case was an ‘offshore installation’ even before it ranked as a ship and none of the paragraphs of reg. 3(2) could possibly treat the rig as an excepted structure, such that it would cease to be an offshore installation and revert to being treated as a ship, until at least it had first been brought into use as a drilling rig.

Addressing first the opening wording of reg. 3(1), the rig was plainly a structure whenever it was a ship and it was a structure from a date when most of the assembly (bar final fitting out) had been completed, and whilst thus the rig was still in the dry dock. It is equally plain that it was a structure which was to be used, while stationed in any waters for exploitation, or exploration with a view to exploitation, of mineral resources by means of a well. The question was then whether any of the paragraphs of reg. 3(2) could exclude the structure from ranking as an offshore installation, and only para. (d) and (e) were of any conceivable relevance. Paragraph (d) could obviously not apply to the period before the rig had been brought into use as a rig because that paragraph contemplated only a cessation of such use, followed by the commencement of some other use, not covered by reg. 3(1). Neither limb of that test was satisfied.

That left the possible application of para. (e) of reg. 3(2). On a straightforward interpretation of that paragraph it contemplated the structure being taken out of use in one of the ways contemplated by reg. 3(1), and then being in the state that it was ‘not for the time being intended to be used for any of the purposes specified in paragraph (1)’. Thus the situations apparently contemplated by that paragraph were that the structure, having first been in use as a drilling rig, would be renovated, or simply moth-balled for a period on account of the owners being unable to find oil companies wishing to charter and use the rig. Whilst those two periods both appeared to be periods when few seamen would be on board anyway, the paragraph could apply in some situations and indeed it was accepted by the Revenue that part of the taxpayer's service in the tax year 2002–03 did rank as foreign service as a seaman during the refit period after the rig had initially been used.

Thus the structure was an offshore installation and not an excepted structure, and thus precluded from ranking as a ship, throughout the whole period until, having once been used as a rig, it was taken out of use and was then able to satisfy the test contained in reg. 3(2)(e). It followed that the taxpayer's appeal was dismissed in relation to the years of assessment 1999–2000 and 2001–02 and that for the year 2002–03 the foreign earnings deduction would be available to the extent that reg. 3(2)(e) was then satisfied.

(2007) Sp C 642.
Decision released 30 October 2007.