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LEGAL CASES
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Excerpts from HMRC Employment Income Manual
EIM 33111 Seafarers’ Earnings Deduction:
Offshore installations and ships:
Torr and Others v CIR (Pride of South America) Section 1001 ITA 2007
This decision was published on 14 January 2008.
Mr Torr and four other appellants worked on the Pride South America (PSA), a self propelled, dynamically positioned, semi-submersible vessel designed as a mobile offshore drilling unit (MODU). In the period concerned in the appeals the PSA had been involved only in well workover and support operations. It had not carried out any drilling operations.
Lloyd’s Register of Shipping defines a “workover” vessel as a vessel that worked over a well to install, refurbish and perform sub-sea completion work on wells but could not enter the well for extraction purposes. A “support vessel” is defined as one involved in operations other than workover, such as diving, crane operations, heavy lifts and construction.
In broad terms, the Special Commissioner found that the activities of the PSA could be described as the repair of non functioning equipment. A well had to be killed (temporarily shut down) when the PSA carried out its operations. In the years under appeal, the PSA carried out its workover and support operations at between 18 - 26 different locations in each year.
The appellants put forward two principal contentions to demonstrate that the PSA was not an offshore installation and, as it was capable of movement across water, it must therefore be a ship -
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the PSA was not involved in the exploitation of mineral resources by means of a well as it did not extract oil from below the sea bed because when it performed its operations the well had to be temporarily shut down, and
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when the PSA performed its operations it was not standing or stationed because it was not wholly static or anchored - it was held in place by dynamic positioning which allowed for some limited movement.
The Special Commissioner held on the first point that mineral resources do not cease to be exploited when a well has to be temporarily shut down for repairs. The well workover and support operations formed part of the process of exploiting mineral resources.
On the second point, the Special Commissioner held that it was “absurd” to suggest a vessel can be stationed only by anchors or hawsers, neither of which can be used in deep waters. He found that a vessel can be clearly “stationed” in deep waters if held in position by dynamic positioning, which at least has the effect of making the ship “substantially stationary”, which is sufficient to meet the statutory definition of “standing or stationed” for an offshore installation.
Consequently as the PSA was involved in exploitation of mineral resources by means of a well whilst standing or stationed in any waters, the Special Commissioner held that the PSA was an offshore installation. As it was not a ship the claims to SED failed. The decision was not appealed.
EIM33112 Seafarers’ Earnings Deduction:
Offshore installations and ships:
Spowage and Others v CIR (Prosafe vessels) Section 1001 ITA 2007
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This decision of the First-Tier Tribunal (Tax) was published on 18 June 2009.
Mr Spowage and three other appellants worked on three vessels owned by the Prosafe Group in the four years under appeal from 2001 to 2005. All three vessels had been designed in the early 1980s as semi-submersible accommodation/service vessels. All three vessels underwent significant refits in the early 2000s to enable them to perform a range of construction and maintenance duties in support of oil production platforms, as well as to continue to provide accommodation and related services for as many as 700 persons.
SED is available to a seafarer who performs duties on a “ship” but not to a seafarer who performs duties on an “offshore installation". HMRC refused the appellants’ claims to SED because the appellants were at the relevant times working on an offshore installation involved -
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either mainly in providing accommodation (one of the definitions of a “relevant use”), or
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in maintenance and repair activities which, following Torr, constitute a “relevant use” because these activities are part of the process of exploiting mineral resources by means of a well.
The Judge in the First-Tier Tribunal found that the three Prosafe vessels carried out various tasks including
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lifting plant and machinery into position on platforms
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onboard fabrication, construction and assembly work,
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workshop, sandblasting and storage facilities,
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providing a base for diving operations, as well as
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providing significant accommodation and related services.
The Tribunal Judge found that following the upgrades to the three vessels, none of the Prosafe vessels was engaged “mainly” in providing accommodation. He decided that after their upgrades the vessels were used as multi-purpose maintenance and construction support vessels and he commented that -
“The vessels were in effect, floating toolboxes”.
However, he declined to accept HMRC’s contention that, following the decision in Torr, these activities were part of the process of exploiting mineral resources by means of a well because he found that the duties performed by the Prosafe vessels were not directly related to the extraction of mineral resources from wells. Unlike the PSA in Torr, none of the duties on the Prosafe vessels were involved with well-head and/or associated subsea equipment or with well workover work.
“Generally, their work was remote from actual oil extraction and/or processing.”
Consequently the Tribunal Judge distinguished the facts in the Spowage case from those in Torr. Unlike the PSA, which carried out activities in close association with the well and/or subsea equipment that comprised the production process (e.g. working down the well, pumping liquid down the well, removal and replacement of Xmas trees and construction of manifolds), the construction and maintenance carried out by the Prosafe vessels was too remote from the production process to be regarded as performed “by means of a well”.
Therefore the duties carried out did not amount to a relevant use. As the vessels did not perform a relevant use they were not offshore installations. It follows that they should be treated as ships for the purposes of SED.
The Tribunal Judge also decided that the vessels had undertaken their duties whilst neither standing nor stationed. This decision was dependent on its own facts. As he had already decided that the vessels did not perform a relevant use, it was not relevant in determining the outcome of the appeals.
How does the decision in Spowage impact on the decision in Torr?
The decision in Torr published in January 2008 supported a broad definition of the definition of “exploiting mineral resources by means of a well”, which could arguably include all parts of the process that occur between exploration of a mineral resource until extraction of the resource is complete and/or the production process is closed down.
The decision in Spowage takes a more restricted view of the same definition. Whilst activities that involve extraction, storage and processing of the mineral resource, including in circumstances such as those carried out by the PSA in Torr, will continue to form part of the process of exploiting mineral resources by means of a well, construction and maintenance activities that are carried out remotely from the production process (e.g. away from the well head and/or associated subsea plant and equipment) will not form part of the process of exploiting mineral resources by means of a well.
Applying Torr and Spowage for 2008/09 onwards
The decisions in Torr and Spowage are complementary. It would not be equitable to apply one without taking into account the other, particularly as the later decision (Spowage) has a direct impact in some circumstances on the scope of the application of the earlier decision (Torr).
Consequently whilst HMRC has already issued guidance in February 2009 in relation to the Torr decision, and in particular how it should be applied for 2008/09 onwards, that guidance has been revised to take account of the later decision in Spowage as well. The later decision in Spowage provides further clarity in relation to the earlier decision in Torr.
As HMRC has stated already that the Torr decision will apply for claims to SED from 2008/09 onwards, the clarification in Spowage of certain aspects of the Torr decision will also apply for claims to SED for 2008/09 onwards.