Memorandum by the Inland Revenue (FUS
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 treatmenteven 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relief was withdrawn from those employed on oil/gas rigs (relief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'
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 testsregardless 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.
1 February 1999