Brexit and tax relief on fishing vessels

One of the apparent justifications for the five and a half year transition period for an increase in UK fishing rights in the Brexit agreement is the need to expand the UK fishing fleet. This is because the existing UK fishing fleet is too small to be able to take advantage of the additional fishing rights that will become available to the UK. Hence the announcement of a £100 million fund to help rebuild the UK fishing industry.

So, if the government’s aim is to incentivise the expansion of the UK fishing fleet and ideally also generate work for UK shipyards, it is worth considering the tax treatment of fishing vessel expenditure.

The starting point is that fishing vessels are plant and machinery and so qualify for capital allowances on capital expenditure. If a new fishing vessel is constructed now with an expected useful economic life of more than 25 years, then it is a long-life asset and so writing down allowances are given at 6% on a reducing balance basis. This rate is much lower than the commercial rate of depreciation and so increases the tax burden on fishing businesses trying to expand. This is surprising and is probably an unintentional policy.

The long-life tax treatment of fishing vessels was announced in the November 1996 Budget by Ken Clarke. The Budget day press release stated that “the tax treatment of long-life assets is to be brought more closely into line with normal accountancy treatment”. The legislation was included in Finance Act 1997 which was one of the last acts of John Major’s government and consideration of the Finance Bill was truncated because of the forthcoming election. This legislation was a culmination of several changes throughout the 1990s targeting capital allowances on structures and property assets. The principal target was the newly privatised utilities who were fuelling a capital expenditure boom and were considered to be unduly benefiting from tax relief on capital expenditure.

As far as existing fishing vessels are concerned, HMRC’s view is that steel hulled vessels had a useful economic life expectancy of more than 25 years when first built and so long-life treatment applies to those vessels as well. However, the legislation did include transitional rules to grandfather the more favourable 18% reducing balance rate of tax relief to older fishing vessels in certain circumstances.

These grandfathering rules are not well appreciated because for ships, tramways and railways there was a further delay in implementation of the long-life rules within the 1997 legislation until 1 January 2011. An implementation delay of over 14 years from the date of an announcement is both highly unusual and hard to understand. It means that the measure was enacted when John Major was Prime Minister but did not take effect until David Cameron was in office – entirely bypassing the Labour governments in-between.

The grandfathering rules are complex but broadly should permit a fishing vessel that has always been operated by a UK owner, and entered service prior to 2011, to continue to qualify for the 18% rate. The position is more complex where a fishing vessel has been owned by a foreign owner, such as a Dutch or French fleet. In that scenario it may well be that the 6% rate applies.

So, we have the perverse situation that there is a tax incentive to buy an older fishing vessel from an existing UK operator rather than investing in a new more efficient and better vessel or to purchase an existing vessel from abroad. It is hard to see how this tax policy is consistent with a desire to expand the UK fishing fleet and it is to be hoped that Rishi Sunak looks to improve this tax relief position in his forthcoming Budget on 3 March.