A special commissioner decided that five taxpayers were not entitled to foreign earnings deduction for seafarers in years when they were working aboard a vessel carrying out well-workover operations in the South Atlantic.

Facts

These five appeals concerned the entitlement of the taxpayers to the foreign earnings deduction for seafarers in years when they were employed aboard a vessel carrying out well-workover operations in Brazilian territorial waters. The first three appeals related to 2002-03 when the relevant legislation was (ICTA 1988, s. 192A and reg. 3 of the Offshore Installation and Pipeline Works (Management and Administration) Regulations 1995 (‘the 1995 Regulations’). The other two appeals related to 2003-04 and 2004-05 when the relevant legislation was contained in ITEPA 2003, s. 384 and coupled with reg. 3 of the 1995 Regulations for 2003-04 and s. 837C(1) of ICTA 1988 for 2004-05.

The vessel was a self-propelled, dynamically positioned, semi-submersible vessel, originally designed as an offshore drilling unit but in the periods in question operated as a workover/support vessel carrying out well-workover operations in the South Atlantic. The vessel was built in Holland in 1987 when a condition survey report stated that the vessel was suitable for workover and support operations in accordance with her original design concept for pipeline and other sub-sea installations; it stated that in her present condition the vessel could not be used for drilling. It was accepted by the Revenue that, apart from the exclusion of offshore installations by ICTA 1988, s. 192A(3) and ITEPA 2003, s. 385(a), the vessel in question was a ship.

It was agreed that all the taxpayers had qualifying periods for the purposes of s. 192A and that the ship was an excepted structure (and therefore not an offshore installation) in the period 21 April 2002 to 28 June 2002 whilst undergoing repairs. A certificate issued by Lloyd's Register of Shipping on 24 February 1999 gave the gross tonnage as 12,314. The certificate gave the class as workover/support vessel. The definition in Lloyd's regulations of ‘workover’ was that the vessel could install, refurbish and perform sub-sea completion work on wells but could not enter the pressure confines of the well due to the limitations of its equipment. The designation ‘support vessel’ indicated that the vessel had functions other than workover, i.e. diving, crane operations, including heavy lifts, construction and pipe laying.

The taxpayers argued that the vessel was not used while standing or stationed in relevant waters. ‘Stationed’ meant wholly static or anchored; a degree of permanence was needed. The vessel was not engaged in the exploitation of minerals resources. It neither made use of the oil nor benefited from the exploitation. The ship was purely a service vessel. It was only involved in low risk work which was carried out when the well was ‘killed’. When a well was killed it was not being exploited but rather was being repaired.

The Revenue said that there were two key questions: whether the vessel was used for the purposes of mineral exploitation by means of a well and, if so, whether it did so while stationed. They accepted that there was a border-line beyond which a ship was not used for exploitation, but said that the vessel in this case was not beyond that line. The words ‘by means of a well’ appeared to add nothing, merely reflecting the fact that oil was extracted via a well whereas some other minerals might be dredged. The activities of the vessel were an integral part of the exploitation. In order to be stationed a vessel did not have to be totally static: here the vessel was kept in position by dynamic positioning when work was being carried out. When in transit to a site, although not then stationed, it was ‘to be used’.

Issue

The issue under the 1995 Regulations was whether the ship was a structure used while standing or stationed in relevant waters for the exploitation of mineral resources.

Decision

The special commissioner (Theodore Wallace) (dismissing the appeals) said that in the context of reg. 3 of the 1995 Regulations, ‘exploitation’ clearly referred to physical rather than economic exploitation, particularly since the exploitation was ‘by means of a well’. It did not cover sale of mineral rights for a capital sum or royalties. It clearly involved extraction of the crude oil from under the sea bed. Furthermore it involved use of a structure.

The real question was how far the concept of use of a structure for exploitation of mineral resources by means of a well extended. In the context of the 1995 Regulations it involved a structure on or from which persons were working or near which persons were working, the enabling provisions being concerned with health and safety at work. It was clear from reg. 3(2)(e) that the structure might be mobile.

Regulation 3(1)(a) distinguished ‘exploration with a view to exploitation’ from ‘exploitation’ and suggested that pure exploration would not otherwise be covered.

The paradigm example of a structure within reg. 3(1)(a) was a platform. In this case the platforms had over 100 persons working on them. Those working on the platform were concerned to ensure continuity of production from the wells. Long periods of time occurred with no problem. However when there was a problem the well sometimes had to be killed temporarily to enable remedial action to be taken. The mineral resources did not cease to be exploited merely because a well was killed to enable corrective action to be taken. Although exploitation did not encompass work after the oilfield had ceased production, it did cover repair work when the field was in production notwithstanding the fact that the field had to be temporarily killed. There was no logic in the 1995 Regulations, which were directed to health and safety, applying if the structure was only in use during normal production when there was no problem but not applying if the structure was used to remedy a problem. In all the circumstances, the vessel in this case was used for the exploitation of mineral resources, notwithstanding that the wells were killed or shut down while it was being used.

The use was while standing or stationed. It would be absurd to suggest that a ship could only be stationed if it was either secured by anchors or hawsers. A ship could clearly be stationed in deep water. While the context in which the word ‘stationed’ was used was as an alternative to ‘standing’, the word clearly envisaged the ship being substantially stationery. When dynamically positioned the vessel in question was stationed.

For 2003-04, ICTA 1988, s. 192A(2) and (3) were replaced by ITEPA 2003, s. 384 and 385. There was no change in the law as it applied to the circumstances under appeal. For 2004-05, ICTA 1988, s. 837C(1) replaced the reference to reg. 3 of the 1995 Regulations. No substantive change was effected as regards the taxpayers. While the logic of applying health and safety legislation to persons employed on offshore structures in British waters or the Continental Shelf was clear, the logic of denying foreign earnings deduction to seafarers working on offshore structures in the South Atlantic was not apparent. However the tribunal was under a duty to interpret the law as enacted and the appeals were dismissed.

(2008) Sp C 679.

Decision released 14 January 2008.