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HMRC internal manual

Employment Income Manual

Seafarers’ Earnings Deduction: dual or multi-use vessels

Section 1001 (3) ITA 2007

For the purposes of a claim to Seafarers’ Earnings Deduction (SED), a seafarer must perform duties of an employment on a ship. The definition of a ship excludes an offshore installation.

An offshore installation is defined primarily in respect of the relevant use that the structure performs (EIM33103), although it must also perform the relevant use whilst “standing or stationed” in any waters (see EIM33108).

Single use vessels

In Perks v Clark and Others (74TC187), Carnwath, J. decided that the classification of a vessel as a ship or not, should be based on the original design of the vessel and not its use at any time:

“… the categorisation of a structure, as a ship or not, should be governed by its design and capability, rather than its actual use at any time…”.

Where a vessel is designed to operate for one purpose it should be straightforward to determine whether it should be classed as an offshore installation or as a ship.

Once a structure is classed as an offshore installation, it remains an offshore installation unless it ceases permanently to be put to that use (EIM33103).

Dual or multi-use vessels

However, it is common for vessels to be designed to perform two or more types of duties. Where one of those activities relates to a relevant use (EIM33103) which would classify the vessel as an offshore installation and another to an activity which is not a relevant use, which would not classify the vessel an offshore installation, and the two uses are of similar importance, Carnwath’s comments do not help to determine the status of the vessel.

In these circumstances it is reasonable to consider the different types of use of the vessel during the period concerned. If there is a principal use and the other use(s) is/ are less significant, it is reasonable to determine the classification of the vessel according to the principal use.

If it is impossible on initial examination to distinguish in importance between two or more uses, you should seek details of the nature of the operations performed by the vessel in the tax year and adopt a fair and reasonable approach to determine how to classify the vessel.

Change of use

On first principles, the purpose for which a vessel is intended to be used determines its classification as an offshore installation or a ship - see the comments above of Carnwath, J. in Clark v Perks. But a permanent change in use may change the classification of a vessel (EIM33103).

Strictly if a vessel is designed to perform a relevant use, but it is put to use subsequently for a purpose which is not a relevant use, the vessel remains an offshore installation unless the original design use has ceased permanently to be possible for this vessel (e.g. the vessel is no longer capable of performing activities for the purpose for which it was designed as a result of a refurbishment or substantial refit). This point was considered in CIR v Langley (see EIM33110).

This may seem unreasonable where the vessel has not been used at all for its original design purpose, or this has not been its principal use, during a tax year. In these circumstances you should apply a fair and reasonable approach to determine the status of the vessel depending on the facts of each case. If its sole (or principal) use during a tax year was not a relevant use, it is reasonable to classify the vessel according to its use in the year and not according to its original design specification.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)