Appendix
Introduction
This paper sets out the Government's response to
the Transport Committee's report on Tonnage Tax (HC 299 published
on 10 February 2005). The Government welcomes the interest that
the Committee has shown in this regime.
The Government's responses to the individual conclusions
and recommendations of the Committee are set out below.
Response to recommendations
1. It would be possible to bring the tonnage tax
regime into compliance with the new state aid guidelines by making
only minimal changes, which would benefit the Exchequer. It would
be wrong to do so. We support the Government's approach, which
will allow a wider range of vessels to qualify for the regime,
and look forward to the inclusion of these changes in the next
Finance Bill.
The Government welcomes the Committee's support for
its decision to take the opportunity to widen the range of vessels
qualifying for the regime. The Finance Act 2005 contains provisions
that will permit the activities of North Sea multi function vessels
and emergency response and rescue vessels to come within tonnage
tax.
2. We welcome the Government's decision to ensure
that the penalty for early exits from tonnage tax does not apply
to tug operators who no longer qualify for inclusion in the tax.
The Government is pleased that the Committee supports
the Government's decision to provide assistance to companies required
to leave the regime. The Finance Act 2005 contains the necessary
provisions to allow companies to elect out of tonnage tax without
receiving a penalty from the normal capital allowance exit provisions
of the regime.
3. We were surprised that the Inland Revenue had
not investigated how other Member States interpreted the state
aid guidelines to provide support to their shipping industries
(Para 28) and that it had not carried out such an investigation
during the course of the review. We recommend it does so now.
Since they gave evidence to the Committee, Her Majesty's
Customs and Revenue (formerly the Inland Revenue) has engaged
in regular communication with other Member States regarding their
interpretation of the state aid guidelines, and how changes required
by the revisions to the guidelines will be implemented. Officials
have attended two meetings in The Hague to discuss the guidelines
with other Member States. No significant differences of interpretation
of the guidelines have been discovered.
4. Our predecessor Committee recommended in 1999
that the Government should consider as a matter of urgency "how
to end the anomaly concerning the non-application of Foreign Earnings
Deduction to British seafarers engaged in the short-sea and coastal
trades". It is vital that the UK maximises its support for
the shipping industry within EU rules (Para 29).
Foreign Earnings Deduction (now known as Seafarers'
Earnings Deduction) is an exception in UK's tax system. It effectively
exempts 100% earnings from tax if the seafarer accumulates sufficient
days outside the UK and works at least partly outside the UK.
This special treatment is justifiable on grounds of meeting a
defence objective. The recommendation to extend the relief is
made to address an apparent difficulty in retaining trained crew
on short-sea and coastal shipping.
Any extension to this relief has to be balanced against
the need to achieve fair and equal treatment of the UK taxpayer
population as a whole. This system is based on the premise that
everyone in the same circumstances will pay the same amount of
tax. No other UK residents employed in the UK receive a comparable
100% deduction. Extending FED to those based in the UK would distort
this system and it is not clear how such a distortion could be
justified.
5. The draft clauses for the Finance Bill give
the Treasury the power to make regulations prescribing periods
within which companies may make an election to tonnage tax. We
support this. The tonnage tax has been successful so far; there
may well be scope for allowing further elections at some point
after 2006. (Para 35).
From its introduction in 2000, the tonnage tax legislation
has permitted the Treasury to make regulations to provide for
further periods during which tonnage tax elections may be made.
The Government is grateful for the Committee's support on this
matter. A further opportunity to elect into tonnage tax has been
made for the period 1 July 2005 to 31 December 2006 by Treasury
Order 2005 No. 1449.
6. Couples now have more freedom to marry where
they wish. It seems illogical to exclude ship board weddings from
the general relaxation of the law relating to places of marriage
and we recommend that such weddings should be legally recognised
The Government would support in principle a proposal
to bring in legislation to allow weddings on board UK registered
ships. Officials are already exploring the possible options and
implications for bringing this forward in the light of other legislative
changes affecting marriage and civil partnership.
7. The Committee considers that the shore-based
maritime sector should do much more to support training for its
future manpower requirements. (Paragraph 41).
The Government agrees that this is an area that should
be explored in more depth and has announced that improving maritime
employment will be a key priority for its presidency of the EU.
David Jamieson, the then shipping Minister, hosted an industry-wide
seminar in London on 10 March 2005, specifically to consult the
maritime community on how to improve employment prospects and
secure future supply of maritime expertise. In taking this work
forward, the Government will be working with other EU states to
consider how maritime service industries can be more closely involved
in sector-wide actions on recruitment and training and how "Maritime
clusters" should be encouraged as a way to formalise cooperation
between different branches of the maritime community.
8. We are extremely concerned that the level of
unplanned payments in lieu of training suggests a high drop out
rate among cadets. DfT must establish some hard facts about the
training carried out by tonnage tax companies. We need to know:(Paragraph
49)
- The effect of tonnage tax on
the number of trainees on UK registered vessels;
- What proportion of tonnage tax funded cadets
really do fail to complete their training;
- The reasons why cadets fail to complete training;
- How the MTT fund can be used most effectively.
The Government shares the Committee's concerns about
the level of unplanned payments in lieu of training. It is widely
recognised that wastage rates among cadets are high. However,
there are other causes of unplanned payments in lieu of training,
amongst which the main one is temporary additions to the fleet
which temporarily increase a company's training commitment for
a limited period. The Department for Transport analyses the causes
of non planned payments in lieu of training when End of Period
Adjustment reports are submitted and reports to the Shipping Task
Force. The Government agrees that the additional information highlighted
by the Committee would be very helpful in identifying reasons
behind wastage rates. The best way of obtaining this information
is currently under consideration by the Department. One possible
option is to include additional sections to the End of Period
Adjustment reports.
The Government also believes that it is important
to evaluate the effect of tonnage tax on the number of trainees
on all vessels registered under the tonnage tax regime, not just
those in registered in the UK (there is no requirement for ships
in tonnage tax to be registered in the UK).
When the tonnage tax scheme was introduced, it was
agreed that the Maritime Training Trust, which was established
to provide a single vehicle for the receipt and administration
of the wider industry's financial contributions to the cost of
seafarer training, would receive and distribute the monies received
from Payments in Lieu of Training. Members include representatives
from RMT, the Chamber of Shipping and NUMAST. The Maritime Educational
Foundation (MEF), set up by the Maritime Training Trust, is registered
with the Charity Commission and was granted charitable status
on 17 October 2003.
The Maritime Educational Foundation Objectives, amended
by special resolution on 18 September 2003, are as follows: -
I. The advancement of education and training
in maritime skills for the benefit of the general public;
II. The promotion of the mercantile marine for
the benefit of the public, in particular by the education and
training of seafarers and persons seeking to become seafarers
in maritime skills;
III. The relief of unemployment for the benefit
of the public in particular by the provision of training and education
to unemployed seafarers.
These were registered by the Charity Commission on
17 October 2003.
The Maritime Educational Foundation allocates the
monies received to promote UK seafarer training for both cadets
and ratings. DfT officials attend the meetings of both the Maritime
Training Trust and the Maritime Educational Foundation, but, as
agreed when the scheme was devised, the distribution of the funds
is carried out independently from the Department.
9. The Government was responsible for introducing
the tonnage tax scheme and including a commitment to training.
It must now monitor the effectiveness of this link in ensuring
that the UK has the skills it needs. It cannot delegate responsibility
for commissioning such research to others. The first tonnage tax
cadets are just completing their training. The DfT must, as a
matter of urgency, put in place mechanisms to find out how they
are employed once trained. (Paragraph 55).
The Government agrees with the Committee that it
is important to establish how cadets are employed, once they have
achieved their First Certificate of Competency. DfT are considering
how best to access this information, possibly by adding an additional
section to the End of Period Adjustment reports.
10. The Committee agrees that the Government should
not unilaterally alter the terms of the tonnage tax, which is
a ten year contract. Nonetheless, it should be possible to make
changes as new companies come into the regime.
The Government will bear in mind the Committee's
views on the arrangements for applying changes to the tonnage
tax regime, should any future changes be under consideration.
11. The Committee believes that it should not
be beyond the industry and Government to devise an employment
link which is acceptable to both sides. If it becomes apparent
that tonnage tax companies are not offering positions as junior
officers to their cadets we recommend that the Government consider
refining the scheme so that participation in the tonnage tax regime
is linked to providing employment and training to higher level
certificate. The surplus in the training funds suggest that this
could be done in a way which imposes no extra costs to the shipping
industry, but we should not forget that tonnage tax offers real
financial advantage to shipping companies. (Paragraph 62).
The Government agrees that the junior officer phase
is important to long term maritime careers both at sea and on-shore.
The work currently being undertaken by the Shipping Task Force
includes consideration of proposals to support the employment
of cadets as junior officers once they have achieved their first
certificate of competency.
12. We welcome the decision by the DfT to publish
a comprehensive annual list of the number of active seafarers.
(Paragraph 67).
The Government welcomes the Committee's support for
its decision to publish an annual list of the number of active
seafarers. The 'United Kingdom Seafarers Analysis 2004' was published
on the 19 May 2005. Considerable effort has gone into improving
the quality of data which is included. The report estimates the
number of UK seafarers working regularly at sea by department
(deck and engine, technical officers, ratings, trainees etc) in
2004, and gives recent trends in employment. The report, which
also makes projections of the number of UK deck and engine officers
to 2020, will be updated annually.
13. We welcome the Government's decision to include
the consideration of proposals for a training commitment for ratings
in the expanded Terms of Reference of the Shipping Task Force.
The Committee considers that there is a pressing need to information
on what companies in the tonnage tax regime are doing to honour
their commitment to rating. Without this it is difficult to disagree
with the RMT conclusion that "the vague commitments to review
the number of ratings employed and employ more highly trained
ratings in technical posts has unfortunately amounted to virtually
nothing in terms of industry commitment." (Paragraph 68)
The Government is pleased that the Committee supports
the decision to include consideration of proposals for ratings
in the work of the Shipping Task Force.
As part of the existing process to apply to DfT for
approval of a training commitment, there is a requirement for
companies in tonnage tax to review the recommendations of the
Ratings Task Force (a body established in 1998 to consider training
and employment opportunities for ratings) annually at board level
and to submit a return to DfT stating which of the recommendations
they plan to implement and how. These are
- To employ more British/EEA
ratings
- To employ more highly -trained British/EEA ratings
in some technical posts
- To recruit British/EEA ratings in a planned stream
towards officer qualifications
- To assist existing British/EEA ratings to advance
towards officer qualifications and posts
DfT officials do not accept or approve training commitments
unless this form is submitted and at least one of the recommendations
is being given active consideration.
These arrangements were put in place because the
Chamber of Shipping and the maritime trades unions were unable
to reach agreement on a formal training commitment for ratings
in line with the 1:15 ratio for officer cadets when tonnage tax
was first developed.
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