I Saw Three Ships…

The Court of Appeal restored the General Commissioners' decision upholding the taxpayers' appeal in Clark v Perks and other appeals.

The taxpayers all worked on jack-up rigs, and claimed 100 per cent foreign earnings deduction on the basis that they were seafarers. The Revenue refused the claim saying that jack-up rigs were not ships. The Appeal Court confirmed the General Commissioners' findings of fact that jack-up rigs fell within the definition of ships, and said that it was a question of fact rather than of law. The taxpayers won their appeal.

Background

The taxpayers in each of the three related appeals worked aboard similar jack-up drilling rigs, Santa Fe Magellan and Santa Fe Monarch. The rigs both had a floating hull with no rudder or motive power, and was moved either by tugs or by being transported on a cargo vessel. The rigs' legs were retracted during towing, but stood on the sea bed during drilling when the hulls were jacked up above the water. Each rig had a satellite navigation system, compass and depth sounder.

The taxpayers claimed the 100 per cent foreign earnings deduction under section 193(1), Taxes Act 1988 on the basis that the qualifying period in paragraph 3(2) of Schedule 12 to the Taxes Act 1988 should be determined according to the special requirements applicable to emoluments 'from employment as a seafarer', as defined in paragraph 3(2A) as 'employment consisting of the performance of duties on a ship'.

The Revenue rejected the claim, saying that jack-up rigs were not ships as they were incapable of moving independently, and that any movement was incidental to their main purpose, i.e., oil exploration.

The General Commissioners said that the rigs were used in navigation and therefore fell within the definition of ship in section 313(1), Merchant Shipping Act 1995. The Revenue appealed.

In the High Court, Mr Justice Ferris said that the meaning of ship was a matter of law on which he was entitled to give effect to his own view. He decided that the jack-up rigs did not have the features of a ship, and allowed the appeal. The taxpayers appealed.

(Michael Davey for the taxpayers; Timothy Brennan QC for the Revenue.)

The Court of Appeal judgment

Mr Justice Carnwath gave the first judgment. He said that the word 'ship' was as 'ordinary an English word as one could imagine'. He agreed with Michael Davey that the High Court judge's approach with regard to the meaning of ship was wrong. Once the meaning of ship had been established, it was a question of fact as to whether or not the particular case came within that meaning, it was not a question of law. Thus the High Court judge's decision could not be upheld on the basis that he reached it.

However, the Revenue argued that the General Commissioners had erred in law in two respects. Firstly, it was wrong for the Commissioners to base their conclusions on cases relating to merchant shipping law, as this was not embraced in the Taxes Acts. Secondly, the correct test to be used was the 'real work' test, and this was not used by the Commissioners.

Mr Justice Carnwath said that the first contention 'came as something of a surprise' as it had been generally accepted that the Merchant Shipping Act definition was relevant, and indeed the Revenue's internal guidance specifically adopted that definition. He said that the Commissioners were never asked to reach a conclusion disregarding the Merchant Shipping Act cases, so it was not right for the Court of Appeal to do so now. Furthermore, the Revenue had not produced any material which would have led the Commissioners to reach a different decision. There was virtually no guidance as to the meaning of ship in the Taxes Act 1988, and the definition in the Oxford English Dictionary was comparable with that in the Merchant Shipping Act.

With regard to the 'real work' test, the Revenue said that the proper approach was to consider what was the real purpose and use of the structure taken by itself. In this instance, the real work of the jack-up rig was its stationary drilling function, and any movement was incidental to that. Mr Justice Carnwath considered the various definitions of ship arising from previous cases. He said that in each of the instances mentioned, the real work of the various structures was something other than navigation, and mobility was incidental to that work. These structures were deemed to be ships, however, where navigation formed a significant part of the function.

In the present cases, it was clear that the rigs were capable of, and used for, navigation. The General Commissioners had not erred in law in their findings.

Overall, Mr Justice Carnwath concluded that the General Commissioners had reached a conclusion that was open to them, and that the High Court judge was wrong to treat the issue as one of law, whereby he could substitute his views for those of the Commissioners.

Lord Justice Longmore agreed, as did Lord Justice Robert Walker.

The taxpayers' appeal was allowed.

Decision for the taxpayers

(Reported at [2001] STC 1254.)

Commentary by T M Thomas FCA and A R Jordan

So, finally the Appeal Court judges have unanimously ruled that the General Commissioners for Norwich and Great Yarmouth were correct in their decision that the jack-up rigs 'Santa Fe Monarch' and 'Santa Fe Magellan' were also ships for the same purpose.

It is particularly noteworthy that, in the appeal, the Revenue attempted, in the words of Mr Justice Carnwath, to 'move the goalposts'. Michael Davey, for the appellants, argued that on the basis of the facts before them, the General Commissioners were entitled to arrive at their decision and that their decision fell within the limits of reasonableness, as defined in Edwards v Bairstow 36 TC 207. The Appeal Court judges agreed with him.

In our article in Taxation, 29 March 2001 entitled 'I See No Ships', we concluded that 'for the Revenue to triumph, it is only necessary for good men to do nothing!'. The fighting fund succeeded, the appeal was heard and the Revenue soundly rebuffed. Furthermore, there has been no indication from the Revenue that it intends to seek leave for an appeal to the House of Lords, and the appellants have been awarded costs, for both the High Court and Appeal Court hearings.

The most disturbing aspect of the case, however, is the Revenue's attitude towards costs. In the High Court hearing, the Revenue's skeleton argument claimed that the matter was of considerable importance, involving a substantial number of taxpayers, with £100 million in income tax at stake. In accordance with usual practice in such instances, the Revenue said that it would not pursue our clients for costs if the Revenue were successful. However, when the question of costs arose in the Court of Appeal, the Revenue was adamant that not only would it expect costs from our clients if the appeal did not proceed but, if the Revenue were successful again, it would expect costs. Its reasoning was that the case was not one of great importance, it did not involve many taxpayers and no great amount of income tax was involved. Surely this is a text book example of a contradiction in terms!

Not without problems

For the taxpayer there are many problems. Those who have open appeals from 1991-92 onwards are the lucky ones, as their appeals will now be settled by agreement. However, three other classes of taxpayer may have problems.

Firstly, there are those who are subject to section 9A, Taxes Management Act 1970 enquiries into their self-assessment tax returns. These enquiries were launched on the basis that the claim for 100 per cent foreign earnings deduction was incorrect, citing the then established Revenue opinion that jack-up rigs were not ships. Will these enquiries now be concluded with the minimum of delay?

Secondly, there are those unfortunate taxpayers who lodged in-time claims for 100 per cent foreign earnings deduction, but were effectively rebuffed by the Revenue, again citing the Revenue's opinion that jack-up rigs were not ships and reluctantly agreed at that time not to claim. If the taxpayers concerned have retained correspondence, would anyone care to speculate on the Revenue's attitude to late appeals? We would argue that late appeals should be accepted, on the basis that the Revenue's decision was incorrect, as confirmed by the Court of Appeal.

Thirdly, for those who did not lodge a claim at all, the possibility of lodging a successful claim is going to be difficult.

Acknowledgements

This success could not have been achieved without the sterling work done by Silas Taylor, senior partner at Andrew M Jackson, solicitors of Hull, his assistant Jennifer Reeves, and the skilled advocacy of Michael Davey.

T M Thomas and A R Jordan, M Hoose & Coy, Chartered Accountants, 18/19 South Quay, Great Yarmouth, Norfolk, NR30 2RG, tel: 01493 842637; e-mail: m.hoose.coy@dial.pipex.com.

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