Select Committee on Environment, Transport and Regional Affairs Appendices to the Minutes of Evidence

Memorandum by the Inland Revenue (FUS 36)


  The UK tax system provides generous relief for seafarers by means of the Foreign Earnings Deduction (FED). In very broad terms, this means that the income of anyone employed on a ship is free of UK income tax, provided they spend at least half the days of a qualifying period of at least 365 days outside the UK and not more than 183 consecutive days in the UK during the qualifying period. Location (inside or outside the UK) is measured at midnight for each day. A day counts as spent outside the UK if it forms part of a voyage to or from a foreign port. So relief is available to seafarers engaged in both short sea and deep sea shipping.

  The main purpose of the seafarers' FED has been to provide support for the use of UK crew on UK-owned deep-sea vessels which might be of strategic value in time of war. This strategic defence need is currently far from pressing and others who might be considered of at least equal strategic value receive no similar tax relief. However, the Government considers it prudent, for the time being, to maintain this support.

  Other taxpayers do complain about the generous treatment for seafarers. It is seen as unfair that a group of UK residents, whose homes and families are here and who spend a large part of their time in the UK should pay no tax on their earnings. Employees in other industry sectors have not been offered this special treatment—even when those sectors have been facing decline or stiff international competition.

  The general Foreign Earnings' Deduction (which was provided on terms significantly less generous than the seafarers' relief) was abolished last year (Finance Act 1998) on grounds of fairness and to counter abuse. At the same time, the seafarers relief was withdrawn from those employed on oil/gas rigs (relief for whom had previously accounted for 2/3 of the cost of the seafarers' relief).

  Comparisons of the seafarers' FED with reliefs provided by other countries need to be treated cautiously. Some countries have special rules for seafarers (though it is not always clear how these operate in practice), others do not. However, differences in local income tax, social security contributions and benefits make meaningful comparisons very difficult if not impossible. A seafarer may well be better off resident in a country with relatively low rates of tax and no special relief than in a country offering a special relief but which has higher general levels of taxation.

  The seafarers' FED has no effect on decisions to flag out. The relief is available to all UK resident seafarers passing the qualifying tests—regardless of the ownership of the vessel on which they are employed.

  The seafarers' FED benefits about 15,000 individuals and costs the Exchequer about £40 million a year.


  UK Shipping companies, like all other UK companies, pay corporation tax on their income and capital gains after deduction of certain allowances and reliefs. Relief for capital expenditure on machinery and plant, on industrial and agricultural buildings, and on scientific research is provided by capital allowances which are deducted from profits.

  The main rate of corporation tax for the year to 31 March 1999 is 31 per cent, with a reduced rate of 21 per cent for small companies (those with profits below £300,000 in a year). Relief is allowed for a company with profits between £300,000 and £1.5 million, so that the company's overall rate increases steadily from the small companies' rate to the main rate as profits rise to £1.5 million. These rates apply equally to all companies, including those in the shipping sector.

  There are special rules for ships included in the system of capital allowances. Normally if an item of machinery or plant has an expected useful economic life of more than 25 years, the rate of allowance available is 6 per cent of cost per year on the reducing balance basis. However ships are excluded from this rule and the normal rate of allowance of 25 per cent a year (again on the reducing balance basis) is available in respect of investment in shipping, however long the expected useful economic life of the vessel in question. There is also a special "rollover relief" available for shipowners when a ship is disposed of. Normally the Inland Revenue would make a balancing charge to recover any capital allowances given over and above the actual depreciation suffered by the shipowner over his period of ownership. The "rollover relief" provisions allow a claim to be made so that, subject to certain conditions, the balancing charge is not made, but an equivalent amount will be deducted from the amount of expenditure qualifying for capital allowances on a new vessel, provided this is bought within six years.

  There is no precedent in the UK context for a tonnage-based system of taxation for shipping companies. Such regimes exist in Greece, The Netherlands, Germany and Norway. It is difficult to extrapolate the possible outcomes of the introduction of such a scheme in the UK as there are significant differences in the economies and fiscal systems of those countries as compared with the UK.

Mark Nellthorp

1 February 1999

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