Finance (No.2) Bill

Written evidence submitted by RMT (FB12)

Submiss ion to Finance Bill (No.2) Committee (Commons)

Clause 25 - Tonnage Tax amendments

The Chancellor announced planned reforms to the Tonnage Tax in the Spending Review statement on 27 October 2021. These are contained in Clause 25 of the Finance Bill (No.2) 2021-22 which amend Schedule 22 in the Finance Act 2000. Tonnage Tax reform is also part of the wider reform of the UK Ship Register in response to recent years of decline.

Neither the Chancellor’s CSR statement nor Treasury Ministers’ contributions to the Second Reading debate of the Finance Bill mentioned seafarer training but the Treasury Red Book section on the Tonnage tax reforms announced on 27 October indicated that the Government will

"…explore how best to make use of existing powers regarding the training commitment."   [1]

Influential lobby group MaritimeUK has also indicated that it is in talks with the Government about the use of the existing powers to train UK seafarers on Tonnage tax ships.

At present, there are no provisions in Clause 25 of the Bill that amend the use of existing powers to train seafarers through the Tonnage Tax. The Government has stated that it would like to see the reforms to Tonnage Tax on the statute book by April 2022.

During the Second Reading debate on 16 November, neither the Financial Secretary nor the Exchequer Secretary made reference to the Government’s plans for reform of the seafarer training commitment in the Tonnage Tax.

The Tonnage Tax scheme

The current Tonnage Tax scheme is largely the same as the one introduced by the Labour Government in the Finance Act 2000 (Schedule 22). This requires shipowners to pay Corporation Tax on the tonnage carried, rather than on their profits in return for training British Officer Cadets through a mandatory link. The mandatory obligation on employers is to train one UK officer cadet for every fifteen officer posts in the Tonnage Tax qualifying fleet.

The decline in ships registered on the Red Ensign and the decline in UK seafarers were the main reasons for the then Labour Government’s creating the Tonnage Tax. Whilst the scheme has increased the supply of trained Officers, a miniscule number of Ratings trained.

Officer Cadet training is also publicly funded through the Support for Maritime Training (SMarT) scheme. By 2015-16, the combination of the mandatory link in the Tonnage Tax and the SMarT scheme had contributed to training 24,430 UK-domiciled Officer Cadets since 2000-01. [2] In 2000, the officer cadet intake was 480, according to the Officers Union, Nautilus International. [3]

By contrast, only 68 UK domiciled Ratings were trained through the SMarT scheme between 2011-12 and 2015-16 [4] , with only a voluntary link to train Ratings in the Tonnage tax, which was not taken up by employers. In the early 1980s there were 30,000 [5] UK Ratings at work. This figure had fallen to around 10,000 fifteen years later [6] and currently stands at 9,080. [7]

At the same time, qualifying companies, regardless of register, have enjoyed total tax relief from their merchant fleet of over £2.165 bn (to 2019-20) [see Table 1]. This includes company groups that register their fleets under Flags of Convenience such as Panama, Liberia, the Marshall Islands, Malta and Cyprus. Many of these jurisdictions are synonymous with tax avoidance which is why international shipowners are attracted to them.

Following a joint proposal from unions and employers, the coalition Government introduced the Tonnage Tax (Training Requirement) (Amendment) Regulations 2015. [8] This gave qualifying company groups the option to train three Able Seafarer ratings each year in place of one officer trainee, in order to meet the scheme’s mandatory training commitment.

Unfortunately, these voluntary measures have not delivered the supply of new Ratings to the industry which is required to avoid the continued and dangerous loss of UK maritime jobs and skills. For example, since 2015, Tonnage Tax companies have only trained 75 UK Ratings and, therefore, UK Ratings are ageing, with 70% and 64% of deck and engine ratings, respectively, aged over forty years.

Furthermore, UK domiciled seafarers currently hold only 13% of Ratings jobs on ships owned by members of the UK Chamber of Shipping. [9] The majority of Ratings jobs held by seafarers in the UK shipping industry are recruited overseas. Non-UK nationals are recruited so that they can be paid less (invariably below the National Minimum Wage) than their UK colleagues. Nationality-based pay discrimination is rightly outlawed but not if it is committed against seafarers.

The current iniquitous settlement for Ratings in the Tonnage Tax and in employment is denying employment and skills to UK seafarers, particularly in deprived coastal communities. It also undermines the strategic economic and security interests of an advanced island economy.

Mandatory requirement to train UK Ratings

In our view, the Finance Bill No.2 should be amended to strengthen the existing powers to train UK seafarers by making Ratings training a mandatory feature of the scheme. This could be done through amendment of the Tonnage Tax (Training Requirement) Regulations 2000 created by the Finance Act 2000, specifically Part IV of Schedule 22, Paragraph 24 (The Minimum Training Obligation). [10]

Some consequential amendments would also be required but we believe that this reform would be in line with the Government’s aims as stated in the Red Book around the existing powers in the Tonnage Tax to train seafarers and would be a significant start in reversing the decline in UK seafarer Ratings and regaining strategic control of seafarer employment as we enter a period of profound reforms in the shipping industry.

This reform could also be achieved through amendment to the 2015 Regulations mentioned previously and RMT would be very happy to provide further evidence on the need for this reform, during passage of the Finance Bill (No.2) through parliament.

Extending Tonnage Tax to offshore energy and other merchant vessels

At Subsection 6, the Bill seeks to amend the Tonnage Tax to include "towage, salvage or other marine assistance’" vessels and those involved in "transport in connection with other services of a kind necessarily provided at sea." Yet, Paragraph 20 of Schedule 22 in the Finance Act 2000 seems to be untouched by the Government’s amendments. Paragraph 20 lists the vessels currently excluded from Tonnage tax. These include fishing vessels, pleasure craft, harbour or river ferries and dredgers but also vessels servicing offshore installations on the UK Continental Shelf.

It is important for the Government to provide clarification that all types of merchant ships engaged by the offshore energy supply chain (oil and gas and renewables) are now eligible for Tonnage Tax, including seafarer training obligations. This should also include vessels engaged in the transport of excess carbon emissions for storage in subsea infrastructure and the associated operation and maintenance of these offshore sites.

Tax avoidance

Subsection 5 introduces a requirement around proof that companies have not been engaging in tax avoidance but only for the purposes of a ‘bridging election’ into the scheme. Given that a large number of international shipping registers are also tax havens, further detail is needed here on how HMRC intend to carry out this check and to list which tax avoidance practices are prohibited.

Employment, safety and environmental standards

Clause 25, Subsection 8 of the Finance Bill (No.2) amends Paragraph 43A(1)(a) of Schedule 22 of the Finance Act 2000. The explanatory memorandum states that this:

"…deals with the requirement on the part of companies or groups within the tonnage tax regime to prove compliance with safety, environmental and working conditions on qualifying ships. The Secretary of State of the Department for Transport is empowered to make regulations for that purpose, and the amendment will provide that they may be made in relation to any ships not registered in the UK." (Pg 178-9)

RMT support amendment of the Bill to specifically require the Secretary of State to consult with maritime trade unions when making these regulations.

Qualifying secondary income

The Red Book refers to a 5% rise in the permitted limit for qualifying secondary income from 10% to 15% [11] which may be linked to the planned increase in the rate of Corporation Tax from 2023-24. This means that qualifying companies can earn more from passenger and ancillary services before such earnings count against Tonnage Tax liabilities. This reform is the result of a "review by HMRC aimed at smoothing administration" but does not yet appear in the Finance Bill.

Again, no reference was made to this specific Tonnage Tax reform at Second Reading and there are no Government amendments, to date. But it seems very likely that amendments to Paragraphs 45-49 of Part VI of Schedule 22 of the Finance Act 2000 will be needed to implement such a change. The Bill Committee could seek advice on an amendment in the Bill to Paragraphs 45-49 which could establish a link to Ratings training or employment in exchange for the rise in the permitted limit for qualifying secondary income.

Table 1: Tonnage Tax & UK Ratings 2000-2021

Financial year	Reduction in tax liabilities (£m)	Number of Ratings trained  [1][1]	Number of UK Ratings employed on qualifying vessels [4]
2000-01	60	No figures	No figures
2001-02	65	No figures	No figures
2002-03	70	No figures	No figures
2003-04	80	No figures	1,590
2004-05	90	No figures	1,604
2005-06	90	No figures	1,356
2006-07	100	No figures	1,803
2007-08	170	No figures	2,009
2008-09	225	No figures	1,955
2009-10	95	No figures	1,854
2010-11	100	No figures	1,886
2011-12	115	No figures	1,646
2012-13	100	No figures	1,663
2013-14	100	No figures	1,548
2014-15	95	No figures	1,576
2015-16	100	6	1,586
2016-17	115	13	1,538
2017-18	135	31	1,132
2018-19	125	25 [2][2]	1,304
2019-20 [3][3]	135	No figures	1,062
2020-21	No figures	No figures	1,025
Total	£2.165 billion	75 Ratings trained	N/A

 

 

[1]  Written Answer to PQ247013, 5 th  May 2019.

[2]  Written Answer to PQ1659, 17 th  October 2019.

[3]  Forecast HM Treasury  Estimated Cost of Non-Structural Tax Reliefs  (Corporation Tax) Oct 2020.

[4] Written Answer to PQ65406, 2 nd November 2021.

20th December 2021