OT42280 - Non-residents working on the UK continental shelf: computation of profits: treatment of idle time costs - multiple vessels

The operator of vessels (including rigs) will remain within the charge to UK Corporation Tax for a period during which a particular vessel is idle if, throughout the entire period, he continues to operate other vessels on the UK Continental Shelf. In such circumstances, a proportion of the idle time costs specifically relating to the idle vessel will normally be allowed based on the circumstances relating to employment of the vessel, or rig, before and after the idle period, and to consider the purposes for which the costs were incurred. What amounts to a reasonable proportion of the costs is then arrived after a full consideration of the facts of the individual case. In arriving at ‘a reasonable proportion of the idle time costs’ the following factors are taken into account:

Short gap in UK continental shelf working

If one of the vessels is idle for a short period following the completion of a contract on the UKCS, and then resumes work on another contract on the UKCS, it may be reasonable to allow a deduction for expenses specifically relating to the vessel which are incurred in the idle period.

Significant gap in UK continental shelf working

If, following the completion of a UKCS contract, one of the vessels is idle for a significant period before work is resumed on the UKCS, it is often the case that the operator has sought work on a world-wide basis in the interim period. In these circumstances, it will be necessary for the operator to establish to HMRC’s satisfaction that the idle period expenses are incurred wholly and exclusively for the purposes of the business carried on on the UKCS. A disallowance under CTA2009\S54(1) may be particularly in point where idle time period costs include payments to affiliates (for example vessel or rig rentals). This statutory provision is not affected by the Business Profits Article in a Tax Treaty because the expenses would not have been incurred for the purposes of the permanent establishment.

Movement on and off the UK continental shelf

If a vessel moves regularly from work on the UKCS to work elsewhere and then back again to the UKCS, HMRC will allow a reasonable proportion of the expenses of any idle period in computing the profits of the notional UK branch, based on the proportion of days the vessel was active on the UKCS compared to the total number of active days.

Major Refit

If one of the vessels is involved in a major refit after a long period of operations on the UKCS, it is appropriate to allow a deduction for the whole of the refit expenses against the profits of the notional UK branch if the vessel is to recommence activity on the UKCS. If, however, that major refit arose after a long period of operations outside the UKCS, or the refit is being undertaken in preparation of a new contract outside of the UKCS no deduction should be allowed for idle period expenses. The location in which the vessel was operating during the period during which the need for the refit accrued would be one of the main factors in determining the allowable expenditure. As OT42050 also indicates, it is not when or where expenditure on refitting is incurred which determines whether the costs are allowable, but the purposes for which it is incurred. These have to be the purposes of the permanent establishment.