Szymusik
| Jurisdiction | UK Non-devolved |
| Judgment Date | 30 March 2020 |
| Neutral Citation | [2020] UKFTT 154 (TC) |
| Date | 30 March 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 154 (TC)
Judge Charles Hellier
The appellant appeared in person
Max Simpson appeared for the respondents
Income tax – Was a discovery assessment properly made – Yes – Seafarers Earnings Deduction – Whether applicable to occupation as a diver in UK waters treated as a trade – No – Was each vessel on which he worked a ship – In 3 out of 5 cases – Yes – Was work as a diver on a ship – Yes – Was credit available for tax which should have been deducted under PAYE – No.
The First-tier Tribunal (FTT) partially allowed the taxpayers appeal against a closure notice and discovery assessments issued by HMRC denying a Seafarers Earnings Deduction in respect of work performed as a diver both off, and on the UK continental shelf which had been treated as a trade. In addition, the FTT denied credit for tax which the taxpayer's employer may have been liable to deduct, but which had not actually done so.
The question as to whether a discovery assessment was properly made was rejected because (through his original advisers) Mr Szymusik had entered into a failed tax avoidance scheme which was subsequently disclosed by the taxpayer's new adviser. At that point it became clear to HMRC that there was an insufficiency in the tax assessment and that it had been brought about carelessly or deliberately by a person acting on the taxpayer's behalf, thus a discovery had been legitimately made. The main thrust of the case dealt with issues surrounding the Seafarer's Earnings Deduction.
A Seafarer's Earnings Deduction may provide relief from income tax, under s. 378Income Tax (Income and Pensions) Act 2003 (ITEPA), in respect of work performed outside of the UK as a “seafarer”, subject to certain conditions. To qualify, the taxpayer must be in employment (as opposed to self-employment), on a ship, outside the UK and for an eligible period.
There was no dispute between the parties as to the existence of an eligible period, but Mr Szymusik worked as a diver in areas both on and off the UK continental shelf. Under s. 15Income Tax (Trading and Other Income) Act 2005 (ITTOIA), work as a diver in UK waters (including the UK continental shelf ) is treated as a trade for the purposes of income tax, even where the work is performed under a contract of employment. The issues at stake were therefore:
- Does the operation of s. 15 ITTOIA have the effect of treating the taxpayer as self-employed thus preventing a Seafarer's Earnings Deduction?
- Could the taxpayer's work as a diver be considered as work on a ship?
- If the taxpayer's employer should have deducted PAYE, could the taxpayer have credit for the tax which ought to have been so deducted?
There was no doubt that the taxpayer was engaged under a contract of employment throughout the period. Also, clearly that part of Mr Szymusik's work which was performed out of UK waters and off the UK continental shelf was outside the scope of this question. However, s. 15 ITTOIA treats any income from employment in UK waters or on the UK continental shelf which is “otherwise chargeable to tax under Pt. 2 of ITEPA”, as if it were a trade. Since the qualifying conditions for a Seafarer's Earnings Deduction (SED) require the taxpayer to have income from employment, the question arises, which applies first? If the SED is applied first, then there is no income “otherwise chargeable …” and so s. 15 ITTOIA cannot apply. On the other hand, HMRC contended that s. 15 should apply first, to deem the earnings as not being from an employment in the first place and consequently that the SED could not apply.
The FTT found that because the definition of “chargeable” in ITEPA (s. 9 and 11) refers to the net amount after any SED, it must be the case that ITEPA (and therefore the SED) operates first, before s. 15 ITTOIA. Consequently Mr Szymusik's argument prevailed.
Not surprisingly, HMRC contended that Mr Szymusik worked “from” a ship and “on” the seabed, rather than on a ship.
However, in the particular circumstances of this case, the FTT found that Mr Szymusik's work as a diver could be considered to be “on” a ship. In this context, it was held that the word “on” could be given sufficient breadth of meaning and the FTT cited various situations in which a person who was “in” (such as a submariner in a submarine) or even outside but connected to a vessel (such as a painter in a cradle suspended outside a ship) would in common parlance still be described as being “on” the vessel.
In addition, Mr Szymusik made the point that his work could be distinguished from that of a scuba diver (a diver with an air tank on his back acting independently from the ship), because he was attached at all times through an umbilical cord to a diving bell which supplied him with air and communications, and which in turn was permanently attached to the diving support vessel which supplied air, power, light and communications to the bell. Mr Szymusik argued that this chain of permanent connection meant that he was tied to the vessel, could not exist without it, was dependent upon it and therefore should be considered as part of it.
A subsidiary question then arose as to whether the vessel in question was a “ship”. Over the period, Mr Szymusik had been on five different vessels. Section 385 ITEPA defines a ship for the purpose of the SED and specifically excludes an offshore installation, which is in turn defined in the Income Tax Act 2007 (ITA), s. 1001. This definition includes a structure which is substantially standing or stationed in water and is or has been used for the purpose of exploiting mineral resources by means of a well, or exploring with a view to such purpose.
The FTT followed the precedent in Gouldson v R & C Commrs [2011] BTC 1,788 that the purpose of the legislation was to deny relief for those working on essentially fixed installations used directly or indirectly for mineral exploitation. Whilst three of the vessels could be shown, or be presumed, to have moved frequently and could not be said to have been standing or stationed to any significant degree, the evidence was scant in respect of two of the vessels and Mr Szymusik was unable to convince the FTT that those vessels had not either been put to a relevant use in the past or might be so again and therefore they fell to be treated as offshore installations. The remaining 3 vessels were accepted as being ships.
Regulation 185 of the Income Tax (PAYE) Regulations 2003 provides that the tax due from a taxpayer under a self assessment return is reduced by any tax which the taxpayer's employer was liable to deduct but failed to do so. This requirement only applies to employment income and therefore any income falling to be treated as trading income (rather than employment income) under s. 15 ITTOIA cannot benefit from this treatment.
Further, any credit due would be given as part of the calculation under s. 59B of the Taxes Management Act 1970 (TMA), but the FTT found that section applies only to tax under a self assessment return. The FTT's view was that reg. 185 does not have a wider effect and therefore cannot be used to reduce an assessment made by HMRC under the discovery provisions, since this is not a self assessment.
The casual observer may find it interesting that work as a diver could be considered to be “on” a ship, but nevertheless the FTT reached that conclusion in the particular circumstances of this taxpayer. It does not necessarily follow that all diving work would qualify – the taxpayer himself drew a distinction between his own work as a diver who was permanently attached to the ship and dependant at all times upon it, and scuba divers working independently.
[1] Mr Szymusik appeals against a closure notice in relation to 2009/10 and “discovery assessments” made under section 29 Taxes Management Act 1970 (“TMA”) in relation to 2010/11, 2011/12 and 2012/13. I shall call the closure notice and the assessments together “the Assessments”.
[2] In each of these tax years Mr Szymusik participated, on the advice of his then accountants, DATs, in a tax avoidance scheme which he was told reduced the taxable income from his occupation as a diver to nil. But, after HMRC opened enquiries and an investigation into his tax affairs, Mr Szymusik appointed a new agent, Mr Leslie, who advised him that the scheme did not work. Mr Leslie sent a report to HMRC in which he described the scheme as “the worst tax scheme in recent knowledge” and set out the amount of Mr Szymusik's earnings in each of the relevant years. HMRC then used these figures to close their 2009/10 enquiry and make the assessments under appeal.
[3] Mr Szymusik does not assert in this appeal that the tax scheme worked. He says instead that he was entitled to Seafarers Earnings Deductions (“SED”) under section 378 ITEPA 2003 in computing his taxable income and this is not reflected in the Assessments.
[4] HMRC assert that no such deductions are available. They say that in relation to his earnings working as a diver in the UK or on the UK Continental shelf (together the “UKCS”) section 15 ITTOIA requires his occupation to be treated as a trade and that, as a result, those earnings are not eligible for SED; and in relation to his work as a diver outside the UKCS, that he did not qualify as an “seafarer” for the purposes of that deduction. As a result they say that the full amount of his earnings is taxable in the amounts assessed.
[5] The appeal against the section 29 discovery assessments requires me to consider whether they were properly made.
[6] Finally if Mr Szymusik's income was at relevant times taxable, an issue arises as to whether any deduction from the tax payable in...
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