TTM11220 - Offshore Activities: Offshore profits

Examples

The following examples illustrate the effect of the provisions on ‘offshore activities’:

Example 1

A diving support vessel works half of the year on offshore activities relating to the UK sector, and the other half on Dutch sector activities. The company reports annual turnover as £1,250,000 less expenditure of £800,000 giving an operating profit of £450,000 (before capital allowances).

The use of a time apportionment formula to arrive at the special CT profits may overstate/understate the actual position because the day rate for each contract may be different - there could even be a loss on one of the contracts.

The company upon request is able to separate out the results of the company as shown in the table below:

If this summary is accurate the special CT profits chargeable under the normal rules would be £350,000 (before capital allowances), instead of £225,000 under a time apportionment basis.

Example 2

A company with one diving support vessel, working half of the year on offshore activities in the UK Sector of the North Sea, files accounts showing annual turnover of £1,000,000 less expenditure of £800,000 giving an operating profit of £200,000 (before capital allowances).

The conditions of paragraph 106 (see TTM11150) are not satisfied, and so the idle period is not taken to be a period when the ship was engaged in offshore activities.

As with Example 1, the use of a time apportionment formula to arrive at the special CT profits may overstate/understate the actual position because the day rate for each contract may be different.

The company, upon request, is able to separate out the results of the company as shown in the table below. This reveals that the vessel had a three month idle period between two assignments. The first 3 months was spent on Dutch sector activities, then 3-months idle period, with the final 6 months working in the UK sector.

In this example the special CT profits (before capital allowances) would be £350,000 instead of £100,000 under a time apportionment basis (i.e. greater than the overall profit of the company) and the company would be subject to Tonnage Tax for 6 months as well.

Example 3

A heavy lift vessel works half of the year on offshore activities in the North sea and the other half on Norwegian activities. It files accounts showing annual turnover of £46m less expenditure of £40m giving an operating profit of £6m (before capital allowances).

As with Example 1 the use of a time apportionment formula to arrive at the special CT profits may overstate/understate the actual position because the day rate for each contract may be different.

There is also the question of 'service' profits.

The company upon request is able to separate out the results of the company as shown in the table below:

The first step would be to calculate the North Sea profits, which would be chargeable under the normal rules. If this summary is accurate the special CT profits would be £4m instead of £3m under a time apportionment basis.

Once this is determined it is necessary to split the profit from the Norwegian contract between the transport and service elements.

The profit from the service element will fall outside the ring fence (since it is not a shipping profit) and be chargeable to CT in the normal way. The profit from the transport element will form part of the company’s “relevant shipping profits” which will be replaced in the tax computations by a profit calculated by reference to the tonnage of the vessels it operates.

The split could be made by measuring the transport element (by reference to a time charter of a similar vessel) with the balance relating to the service element. But this can be difficult when highly specialised vessels are involved.

Another approach could be to measure the 'service' element by reference to the contract for the construction work, crew lists etc., so that any remaining profit would be the 'transport' element.

In this type of activity the service element will often be the lion share of the profit as the construction activity is the prime activity. This should be borne in mind when considering whether any particular method of making the split is appropriate.

See TTM06600 for more details of the transport/services split.

References