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In two perceptive articles in Taxation (17 February 1994, 'Seafarers: Life on the Ocean Wave' at page 421, and 16 May 1996, 'Seafarers Revisited' at page 175) Gary Axe considered, at length, the effect of 100 per cent foreign earnings deduction on seafarers in general and oil rig workers in particular. In the later article, Gary Axe gave considerable thought to what constituted a ship.
In two perceptive articles in Taxation (17 February 1994, 'Seafarers: Life on the Ocean Wave' at page 421, and 16 May 1996, 'Seafarers Revisited' at page 175) Gary Axe considered, at length, the effect of 100 per cent foreign earnings deduction on seafarers in general and oil rig workers in particular. In the later article, Gary Axe gave considerable thought to what constituted a ship.
The matter has now become one of considerable importance to a substantial number of taxpayers, i.e., workers employed on mobile offshore drilling units, more familiarly known as jack-up rigs, and with at least £100 million in income tax involved (part of the Revenue argument in Clark v Perks [2000] STC 1080, etc.). There are, in fact, three types of vessel used in offshore drilling activities:
- a drilling ship, comprising a drilling rig, usually mounted midships, on a conventional marine hull – either a converted super tanker or a custom-built ship;
- a semi-submersible rig which floats, usually has dynamic positioning thrusters and is tethered to the sea bed by anchors;
- a jack-up rig which is towed from location to location or can be carried piggy-back or towed for long distances and then jacks itself up and down for drilling and movement.
The Revenue has accepted that drilling ships and, with some reluctance, semi-submersible rigs, are ships, but not jack-up rigs. With the introduction of section 192A(3), Taxes Act 1988 on 17 March 1998 the status of semi-submersibles and jack-ups became academic, although the status of drilling ships may well cause problems in the future.
Jack-up rig appeals
Between April 1998 and January 1999, four appeals were heard concerning claims for 100 per cent foreign earnings deduction by workers on three jack-up rigs, the sister ships 'Santa Fe Magellan' and 'Santa Fe Monarch' and the 'Transocean Nordic'. Without exception, the General Commissioners found for the taxpayers. The Revenue, not unnaturally, expressed dissatisfaction and made application for a case to be stated arguing that the General Commissioners had misdirected themselves in deciding that jack-up rigs were ships for the purpose of a successful claim.
When the General Commissioners arrived at their decisions, they had the benefit of a substantial bundle of documents including Memorandum of Understanding between the Health and Safety Executive and the Department of Transport, plans and photographs, builder's certificate, certificate of registration, international tonnage certificate, minimum safe manning certificate, international oil pollution prevention certificate, international load line certificate, ship's radio licence, Marine Safety Agency's revised requirements for certificates of competency for marine engineer officers, as well as the usual plethora of leading cases to be cited. These ranged from 'The Mac' (1882 7PD126) via 'The Mudlark' (1911 – 80LJP117:27TLR385), 'The Harlow' (1922 – P175) and Polpen Shipping Company Ltd v Commercial Union [1943] 1 KB 161, and finished with Cook v Dredging and Construction Limited [1958] LLLR Vol 1 p334 to 342). Yet the Revenue argued that the General Commissioners read these documents incorrectly when arriving at their decision.
Expert witnesses
In Lavery v Macleod, which was heard before the Special Commissioners on 8 and 9 December 1999, a similar range of documents were submitted, but more importantly, an expert witness report prepared by Professor Chengi Kuo BSc, PhD, CEng., FRINA, FRSA, FRSH was also submitted. Although the Revenue also had an expert witness, the Special Commissioners preferred the evidence of Professor Kuo. The Special Commissioners had no difficulty in finding for Mr Lavery. In their decision, the Special Commissioners made two important points.
Appearance: The Special Commissioners agreed that the jack-up rig in question did not look like a ship, could not propel itself through the water and did not even possess a rudder. However, when counsel for the Revenue was asked if the Revenue would accept a lightship as a ship, the answer was no. The Special Commissioners' view was that as a lightship looks like a ship but was not, yet a jack-up did not but could be, the question of appearance could be disregarded.
Semi-submersibles: The Special Commissioners found it somewhat difficult to distinguish between the particular jack-up unit, 'Glomar Adriatic IX', in the appeal and a semi-submersible unit. As the latter had been accepted by the Revenue as a ship, it was the Special Commissioners' considered opinion that the Revenue should take the extra step and concede the status of this particular jack-up rig.
Since jack-up rigs are usually built to the same general specifications, the Special Commissioners' remarks could equally apply to 'Santa Fe Magellan' and 'Santa Fe Monarch' as to 'Glomar Adriatic IX'.
On to the High Court
The matter then progressed to the High Court by way of cases stated, the taxpayers involved being J Perks, D Newrick and J Granger, serving on the jack-up rigs 'Santa Fe Magellan' and 'Santa Fe Monarch'. The case was heard by Mr Justice Ferris on 23 February 2000. In his judgment, handed down on 19 April 2000, Mr Justice Ferris found for the Revenue. He decided that the General Commissioners were not entitled to conclude, on the basis of the facts before them, that jack-up rigs were ships, and that he was entitled to substitute his own view for those of the General Commissioners. The judge also decided to leave out of account the documentation used by the General Commissioners in arriving at their original decision. He decided that navigation was incidental to their 'real' functions and, finally, that jack-up rigs were not ships because most of their features were not characteristic of ships.
Costly appeal
Advice on an appeal has been received and due notice of appeal has been given, with it listed for hearing in June 2001 in the Court of Appeal. The three taxpayers, having expended considerable sums in funding the hearing before the High Court, can no longer afford to fund the appeal, particularly as the Revenue has adopted an intransigent attitude towards costs.
In the hearing before the High Court, the Revenue originally agreed that if it was successful it would not seek costs from the taxpayers. The Revenue's counsel stated, 'The issue affects a number of individuals employed in the offshore oil industry. Some £100 million of tax is likely to turn on the result', and the judge also stated that, 'These cases are examples of a much larger range of cases affecting individuals engaged in the offshore oil industry'.
However, later the Revenue made a volte-face arguing that in fact only a few individuals were involved, the tax was not significant, and therefore if it were successful, it would pursue the taxpayer for costs.
The taxpayers thus have two alternatives:
- drop the appeal and let the Revenue succeed by default;
- proceed on the basis of launching an appeal for a fighting fund to finance the projected costs of £35,000, which is the estimated liability if the Revenue were to succeed.
Fighting fund
At present, all jack-up rigs in the various sectors of the North Sea, and numerous oil rig workers (at least 600 individuals) have been contacted and asked to help. We are also asking any firm that has oil rig workers in a similar position to contact the solicitors acting for details of the fighting fund and how to contribute. They are: Andrew M Jackson & Co, Essex House, Manor Street, Hull, HU1 1XH, tel: 01482 325242, fax: 01482 212974.
Whose opinion counts?
So when is a ship not a ship? Evidently, this is when a High Court judge decides to impose his own views in preference to those of three differing bodies of General Commissioners who had ample opportunity to consider all the facts and documents laid before them.
For the Revenue to triumph, it is only necessary for good men to do nothing!
T M Thomas and R Jordan, M Hoose & Co, Chartered Accountants, 18/19 South Quay, Great Yarmouth, Norfolk, NR30 2RG, tel: 01493 842637, fax: 01493 331343, e-mail: m.hoose.coy@diall.pipex.com.
