Memorandum by the Chamber of Shipping
(TT 05)
TONNAGE TAX
The Chamber of Shipping welcomes the opportunity
to set out its assessment of the success of the tonnage tax and
to offer some comments on how the Government should complete its
objectives, though some of these fall outside tonnage tax itself.
SUMMARY
There has been a remarkable and potentially
historic reversal of the 25-year trend of decline in the level
of ship-owning and operating activity in the UK. Not only has
the activity and value of existing shipping ventures been enhanced,
but the UK has become a more attractive place in which to base
international shipping operations and there has been significant
inward investment. The size of the fleet is now back to the levels
of the late 1980s.
However, this recovery is still very fragile
and will be derailed if the business climate for shipping in the
UK does not remain positive and flexible. In particular, the Chamber
opposes any suggestion of a mandatory requirement on tonnage tax
operators to employ British crews, even in part, on the grounds
that such a restrictive message to those companies now beginning
to expand their fleets here will drive them away and shatter the
success of the policy to date.
It is inevitable that the revival of the fleet
should precede any positive impact on training and employment
for British seafarers (particularly officers). Training has begun
to increase, but both this and jobs at sea are subject to complex
and longstanding factors that still have to be addressed by industry
and by Government.
Tonnage tax has had a significant positive influence
on the size of the UK-registered fleet by creating the right environment
for shipping operations based in Britain. The Chamber advocates
strongly the need for the UK register to continue to be a user-friendly,
efficiently-run and high-quality register in the UK, to ensure
that the UK register remains a real "register of choice"
for UK-based shipping operations.
Improvements of a practical nature are under
discussion with the Inland Revenue (on technical tax aspects)
and with the Department for Transport and the unions. The Chamber
is happy to go into greater detail on the former, but has confined
itself here mainly to highlighting the need to expand the scope
of the tonnage tax regime to include some sectors which are currently
excluded—aggregate carriers and specialist North Sea vessels—which
also happen to be key employers at the present time of British
officers and ratings.
THE EFFECTS
OF TONNAGE
TAX ON
BRITISH SHIPPING
Four years after its adoption in July 2000,
the UK tonnage tax has already had a fundamental and deep-ranging
impact on British shipping—both directly and as a result
of the confidence it has inspired in the UK as a good base for
shipping business generally. Tonnage tax has become a symbol of
new opportunities, which would not have arisen if it had not been
adopted.
Although the industry warned of the consequences
of inaction at the time, it is even clearer now that—without
the tonnage tax—there would have been a further, very substantial
reduction in the UK-based and UK-registered fleets, with no attractions
to inward investment. This UK's maritime contribution would have
become that of a third-division player, with most of our shipping
activity confined to near-sea (rather than global) trading and
any strength internationally confined to specific niche areas.
The prospect of recovery would have been lost for the foreseeable
future.
More details concerning the background to the
tonnage tax, including the relative state of the UK fleet and
British manpower, are included in Annex 1.
In the event, the tonnage tax has been a great
success. The most recent figures from the Department for Transport
indicate that 70 company groups have elected for the new regime,
representing over 277 companies and 756 ships.
As the statistics in Annex 1 show, the UK-flag
fleet has increased by 250% since January 2000 to nearly 10 million
deadweight tonnes. The UK-based fleet (ie that directly owned
in and operated from the UK and subject to the UK's tax regime)
under all flags has increased by 100% to nearly 15 million tonnes.
This has already taken both the owned and the flag fleets back
to their levels at the end of the 1980s.
In terms of numbers of ships, the owned fleet
has shown only a modest increase. The register has shown an increase
of over 50%. In reality, the increase in the number of ships has
been even greater, if changes in the national ship register are
taken into account (over the last five years the Register in Cardiff
has reviewed all the ships on the register and removed a substantial
number of ships which it found were no longer in operation).
The average age of the fleet is down over the
last five years from 15 to 10 years and falling—below the
world average (12½ years) for the first time in a long time.
An assessment of the impact on overall UK shipping
turnover and the balance of payments is not yet possible as up-to-date
figures are not available and the statistics hide other distortions.
To date, gross turnover remains at around £5 billion.
There have been considerable benefits to "corporate
UK", both for employment in enhanced shore-side establishments
of existing UK shipping companies and in the form of new offices
opened up by new companies brought into the UK. The beneficial
impact also extends to a wide range of service-providers including
the Stock Exchange, banks, insurers, public relations agencies,
lawyers, accountants, and a variety of consultants.
TONNAGE TAX
AND TRAINING
There is also good news on seafarer training.
The last four years have seen a significant increase in the number
of cadets being trained in the Merchant Navy in both the deck
and engine room departments. The figures for new officer trainees
recruited since the year 1999-2000 are shown in the following
table.
| British new officer
entrants
|
| 1999-2000 | 446 |
| 2000-01 | 481 |
| 2001-02 | 483 |
| 2002-03 | 606 |
| 2003-04 (estimate) | 627
|
| |
(Notes: This information is derived from returns to a Merchant
Navy Training Board enquiry to sponsoring companies and "group"
training organisations. These are then adjusted in the light of
Government information from the Support for Maritime Training
(SMarT) scheme. New entrants include "traditional" HND
cadets, graduate/under-graduate recruits and shore-trained engineers.
In addition, and not included here, an increasing number of trainees
have joined and now completed rating-to-officer conversion courses.)
These figures show a 40% increase since 2000. This increase
is due to two factors. The first is the increase in the size of
the British fleet. The second, and far more significant factor,
is the requirement in the tonnage tax for one new cadet to be
taken on each year for every 15 officers (of whatever nationality)
on the safe manning certificate. While the tonnage tax regime
allows for Payments In Lieu Of Training (PILOT), this happens
mainly where companies fall into default on their tonnage tax
training commitment through unexpected developments (mainly wastage,
or trainees leaving and the company having to wait for the next
college course cycle to begin). "Planned" PILOT has
to be formally approved by the Department for Transport and represents
a minute fraction—as low as 1-1½%—of the training
undertaken by or on behalf of tonnage tax companies.
Companies not in tonnage tax and who traditionally trained
have, generally speaking, continued to train for their own requirements.
THE NEW
POLICY AND
EMPLOYMENT
The impact on the employment of British seafarers was always
going to take longer to come through. This is because:
— the increase in the fleet has to come first, followed
by positive effects on training and only then on employment and
skills (there has in recent years been effectively no unemployment
of officers);
— the lead-time for the training of skilled crew
members (particularly officers) is long. It takes eight to 10
years to produce a master or chief engineer;
— there are longstanding demographic trends which
have to be reversed, before we shall see a halt in the reduction
of total officer and rating numbers year by year. It stems from
an combination of long-term low levels of officer recruitment
over the last 15 years and an ageing seafarer population (with
large numbers in their 50s); and
— much of the reason for the current reduction lies
in the 25-year period during which the fleet was shrinking. Large
numbers of British officers were compelled to find berths on foreign
ships. Their ability to make such a move, rather than be forced
to find other work as might happen in a shore-based career, has
meant that the total number of British officers has remained high
in comparison to the requirements of the UK fleet. Now, many are
reaching retirement or moving ashore. Inevitably, therefore, the
number of British seafarers will continue to decline until a new
equilibrium is found.
In addition, there are many other complex factors involved
in the issue of employment in the shipping industry. The competitive
pressures on employers of crews at sea are stronger and more immediate
than equivalent pressures in land-based industries. In shipping,
they are becoming ever keener as a result of the global nature
of the industry and the fact that quality and fully certificated
officers are freely available from countries whose basic wage
rates are considerably lower than those in the UK. This is a challenge
faced by all high-cost European countries.
These difficulties have been intensified by the fact that
the Government has not implemented or developed the central issues
relating to seafarers' employment costs which were jointly put
to it by the Chamber, NUMAST and RMT in the late 1990s (some were
discussed in "Charting a New Course").
The effects of the tonnage tax on employment are only just
starting to emerge as the first cadets taken on to meet the companies'
training requirements under the tax complete their training and
gain their watch-keeping certificates of competency.
Dangers of unemployment
There have been reports that some newly qualified cadets
are experiencing problems obtaining positions as junior officers
and of some companies not being able to offer all their cadets
posts on their ships. While some have found difficulty, there
is as yet no firm evidence that unemployment as such is a significant
issue. There has always been some "churning" at this
stage of a seafarer's career and cadets may well be finding posts
in other companies.
To gain clarity, the Chamber of Shipping and NUMAST are jointly
commissioning independent research to assess the practical position
and to look as well at the other surrounding issues which might
affect the viability of the employment of junior officers into
the near and middle future. It is hoped that the results of this
research will be available during the autumn.
In this context, it may also be helpful to note that:
— most companies that have traditionally recruited
and trained cadets to meet their own requirements continue to
do so, even though some companies in the short-sea sector lose
all cadets when they gain their first certificate as they seek
the advantages of an income-tax-free environment by going deep-sea;
— the Chamber is aware of surpluses and shortages
in a number of our member companies and, wherever possible, seeks
to put one in contact with another;
— companies who are training for the first time
because they have entered the tonnage tax regime have generally
done so with a view to offering gainful employment to suitable
cadets on the completion of their cadetship. There is a spectrum
of views as to how the cadets will be remunerated—from full
north-west European rates to so-called "international rates"
which may not be the same wage rate as a full UK officer but which,
nevertheless, offer a reasonable remuneration package for the
age and qualification of the individual; and
— employment is available in the international maritime
labour market (as opposed to the traditional national labour market)—the
question is whether individuals are willing to be employed at
international rates. Some might if they see it as a way of reaching
the more senior positions (when more seagoing options will become
available to them and/or when there will be opportunities to transfer
ashore to progress their careers within the wider maritime sector).
THREATS TO
THE SUCCESS
The danger remains that the fruits of the Government's policy
and the successful revival of the UK-based fleet have still to
be consolidated for the long term. Last year saw a number of actions
by Government—mostly unwitting—that threatened the
recovery, both in the eyes of UK owners and, especially, potentially
among other groups which have chosen to establish a shipping base
in the UK. By way of example, the proposed changes to race relations
legislation which would have affected the pay structures of international
crews on UK-flagged ships would, if proceeded with, have caused
a major exodus from the register. The threat to adjust the National
Insurance arrangements for British seafarers employed in a number
of short-sea sectors would, if implemented, have led to considerable
loss of jobs.
There is no reason that the success should not continue well
into the future—provided the Government continues to pursue
policies which bolster rather than detract from the positive environment
it has created. One example of a change in other areas which could
enhance the attractiveness of the UK register even further would
be in matrimonial law—at present, marriages on board ships
are not recognised under British law; with a buoyant desire for
marriages on board cruise ships, this puts UK-flag operators at
a competitive disadvantage and acts as a disincentive to register
ships in this country.
An employment link?
Understandably, some parties—including some seafarers'
unions—have expressed frustration with the time that improvements
are taking to come through in employment terms. Some have gone
further and called for an "employment link".
There is no clear or common definition of what such an obligation
might comprise. However the concept of requiring a fixed number
of the crew of a tonnage tax ship to be UK nationals was explicitly
rejected at the inception of tonnage tax (as was a flag link),
on the grounds that it would introduce a rigidity that would deter
companies from opting for it or from coming to the UK to do shipping
business. It would also—if the Government did not match
the best employment-cost arrangements offered by our competitors—put
UK-based operators at a severe competitive disadvantage compared
to say the Dutch or the Danes or other European regimes.
The Chamber remains strongly of this view. Nothing has changed
since that earlier common view of industry, unions and Government.
If an inflexible change of this nature were introduced, the Chamber
foresees a substantial removal of a number of companies and fleets
from the UK flag and from the UK as a base. This is a real and
very present danger, which would be sufficient to wreck the recovery.
This does not mean that nothing can be done, but it is important
for any action to be of a voluntary nature and to involve a review
of the way in which seafarer training and employment is currently
supported within the UK. The Chamber is currently in dialogue
with its social partners and with Government on how best to address
this matter.
CHANGES TO
THE TONNAGE
TAX REGIME
While the fundamentals of UK tonnage tax are right, and the
need for stability of fiscal regime is a most important aspect
of tonnage tax policy, there is of course room for further improvement.
The Inland Revenue has been conducting an ongoing review of tonnage
tax which will be drawn to a close in the autumn. In that context
the Chamber has made and is making a number of submissions, some
of which are focused specifically on detailed points of tax law.
Further information can be provided on these if required; they
include, for example, the volume of leasing linked to the regime
which is considered acceptable (the level of the "lease cap")
and rules covering the payment of dividends to UK tonnage tax
companies by foreign shipping subsidiaries.
However, there is one specific aspect that would be more
appropriate to raise within this submission—that is, the
extent of eligibility for tonnage tax. When the tonnage tax was
established in 1999-2000 two important shipping sectors were excluded:
— Offshore specialist vessels. While some
offshore vessel types (supply vessels, anchor-handling tugs and
the like) and their trades are eligible for tonnage tax others
are not, particularly when working on the UK Continental Shelf.
These include emergency response and rescue vessels, seismic survey
vessels, diving vessels and the like. At the time this was a decision
taken within the Treasury, which was trying to balance conflicting
policy objectives of supporting the shipping industry on one hand
and protecting the "rent" from North Sea oilfield development.
All these vessels offer a high level of UK employment of officers
and ratings. The case for their inclusion in tonnage tax has been
renewed and is currently under consideration within Treasury and
Inland Revenue.
— Aggregate Carriers. An important part of
the British short-sea shipping sector, aggregate carriers were
excluded initially, because the European Commission had not understood
the difference between port maintenance dredging (which would
not be eligible) and the transport of sea-dredged aggregates to
the UK and Continental markets, which happen to have loaded at
sea rather than at another port. The Commission has subsequently
been persuaded that this sector may be included and it is hoped
that this will be arranged soon.
June 2004
Annex 1
BACKGROUND TO THE TONNAGE TAX
At the low point in December 1999, the UK-owned fleet (under
all registers) had shrunk to about 20% of its size in 1980. The
size of the UK-registered fleet had shrunk even more—to
around 7%.
At that time, the UK-owned fleet stood at 7.2 million deadweight
tonnes and the registered fleet at just over 2.5 million dwt,
representing less than 1% and 1/3 % respectively of the world
fleet. The average age of the fleet was about 15 years, compared
to eight years in 1980. Shipping's contribution to the UK's balance
of payments was about half what it had been in 1980 in real terms.
The position regarding employment was more complex to assess,
because of changing statistical bases and the identification of
substantial numbers of British seafarers serving on ships outside
the UK shipping industry. Nevertheless, those numbers also showed
a heavy reduction of more than 50% (for both officers and ratings).
Moreover, their average age was older—70% were over 40 years,
compared to an average age in 1980 of about 28 years. Recruitment
was also low—about 450 new officer cadets were taken on
in 1999, compared to 1,274 in 1980.
Following its election in 1997, the new Government established
the Shipping Working Group, chaired by the Deputy Prime Minister
and involving both trade unions and the industry. In December
1998, responding to the group's report, the Government developed
a package of specific policies related to shipping, set out in
the white paper "British Shipping: Charting a New Course".
This included a range of policy actions to encourage employment,
increase maritime training, improve the UK's attractiveness to
shipping enterprises and facilitate UK ship registration. It committed
the Government to consider options for the taxation of shipping
enterprises, including the introduction of a tonnage tax system.
Following an independent report to the Chancellor by Lord Alexander
in 1999, tonnage tax was introduced as an optional fiscal regime
in the Finance Act 2000.
The design of the UK's tonnage tax regime took account of
the nature and recent history of the UK-based shipping industry
and the competitive international context in which it operated.
It was considered important that the tonnage tax option should
be attractive to a substantial part of the existing British shipping
industry as well as stimulate investment in new UK shipping ventures,
including those from abroad.
Among other things, the possibility of requiring tonnage
tax ships to fly the UK flag was considered. With the existing
internationally-trading British-owned fleet at that time operating
(for a variety of reasons) under many registers as well as under
those of the UK and the other "Red Ensign" registers,
it was considered that such a restriction could dramatically lower
the take-up of tonnage tax. In any case the attractiveness of
the UK register was very much a function of the cost and efficiency
of the Maritime & Coastguard Agency. At that time the MCA
had already embarked on a programme of reform and improvement
intended to make UK registry a more attractive choice for shipowners,
while retaining its commitment to maintaining the highest international
standards and reputation. This was recognised as a separate policy
area in "Charting a New Course".
This approach has proved to be well justified and the resulting
practical flexibility has been a significant factor underpinning
the remarkable expansion of both the owned and the registered
fleets—particularly in the minds of inward-locating companies.
Conscious decisions were also made to encompass shipping
operators in as many sectors as possible, regardless of the registry
of their fleets or the nationality of their crews; similar approaches
can be found in some other European tonnage tax regimes. However,
in recognition that a revival in British shipping activity should
specifically enhance the maritime skills base—with the more
extensive requirements of the wider maritime services industries
in the UK—the regime incorporated a "training commitment".
This provision was, and remains, unique in tonnage tax regimes
worldwide.
Annex 2
UK FLEET AND MANPOWER
Total Trading Fleet on UK Register
| End Year | Number
| 000 GT | 000 Dwt
|
| 1996 | 381 | 3,291
| 3,319 |
| 1997 | 369 | 2,822
| 2,412 |
| 1998 | 378 | 3,081
| 2,699 |
| 1999 | 379 | 3,200
| 2,740 |
| 2000 | 417 | 4,579
| 3,757 |
| 2001 | 427 | 5,035
| 4,269 |
| 2002 | 497 | 7,114
| 6,686 |
| 2003 | 587 | 9,971
| 9,830 |
| % change 1999 to 2003 | 54.9
| 211.6 | 258.8 |
| | |
|
Total UK-owned Trading Fleet
| End Year | Number
| 000 GT | 000 Dwt
|
| 1996 | 638 | 8,341
| 11,646 |
| 1997 | 612 | 7,840
| 10,579 |
| 1998 | 616 | 7,610
| 9,761 |
| 1999 | 617 | 6,530
| 7,196 |
| 2000 | 624 | 8,536
| 10,499 |
| 2001 | 594 | 9,480
| 12,013 |
| 2002 | 590 | 9,752
| 12,273 |
| 2003 | 649 | 12,654
| 14,972 |
| % change 1999 to 2003 | 5.2
| 93.8 | 108.1 |
| | |
|
Estimated Seafarer Numbers
(MCA data compiled by London Metropolitan University)
| Cert Offs
at sea
| Ratings |
| 1998 | 15,794 | 10,795
|
| 1999 | 14,466 | 11,409
|
| 2000 | 14,982 | 10,331
|
| 2001 | 13,099 | 9,707
|
| 2002 | 13,763 | 10,360
|
| 2003 | 15,585 | 10,037
|
| | |
NB: Excludes uncertificated officers
Recent CoS research indicates rating numbers have been underestimated
over time.
Volatility in officer numbers is due to changes in the STCW
requirements and in rating numbers to the voluntary nature of
the Chamber survey.
|
