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HMRC internal manual

Employment Income Manual

Seafarers’ Earnings Deduction: offshore installations and ships: Spowage and Others v CIR (Prosafe vessels)

Section 1001 ITA 2007

Two Special Commissioners’ decisions published in late 2007 and early 2008 and a decision of the First-Tier Tribunal (Tax) published in June 2009 provide useful guidance relating to the meaning of ‘offshore installation’ in the context of Seafarers’ Earnings Deduction (SED). See EIM33110 for details concerning the case of CIR v Langley and EIM33111 for details relating to the case of Torr and Others v CIR.

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Spowage and Others v CIR (TC00110)

This decision of the First-Tier Tribunal (Tax) was published on 18 June 2009.

Mr Spowage and 3 other appellants worked on 3 vessels owned by the Prosafe Group in the 4 years under appeal from 2001 to 2005. All 3 vessels had been designed in the early 1980s as semi-submersible accommodation/service vessels. All 3 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:

  • either mainly in providing accommodation (one of the definitions of a ‘relevant use’, or
  • 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 3 Prosafe vessels carried out various tasks including:

  • lifting plant and machinery into position on platforms
  • onboard fabrication, construction and assembly work
  • workshop, sandblasting and storage facilities
  • providing a base for diving operations
  • providing significant accommodation and related services

The Tribunal Judge found that following the upgrades to the 3 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 Christmas 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 (see EIM33105 and EIM33106).

Applying Spowage for tax years 2008 to 2009 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 (EIM33104 to EIM33109) in February 2009 in relation to the Torr decision, and in particular how it should be applied for tax years 2008 to 2009 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 tax years 2008 to 2009 onwards, the clarification in Spowage of certain aspects of the Torr decision will also apply for claims to SED for tax years 2008 to 2009 onwards (see EIM33105 and EIM33106).