The government should encourage investment in the UK fishing fleet

The WFPO and other POs, fishing businesses and boat-builders have written a letter to the Treasury requesting a positive investment environment for building new, safer, more environmentally friendly fishing vessels.

Dear Rt Hon Mr Sunak

I am writing to you from the fishing and boat building industries, specifically these businesses: C Toms and Son, Hooktone Group Interfish Ltd, Parkol Marine Engineering, Scottish Whitefish Producers Association, South West Fish Producers’ Organisation, Waterdance Ltd and Western Fish Producers’ Organisation. There is a desperate need to invest in new fishing vessels and there are companies that are very keen to make this investment, but currently the tax classification of new vessels is perversely incentivising buying old vessels over new.

Building for the future

The Brexit agreement of December 24th secured an increase in a number of key commercial species. In recent statements and in a financial commitment to the seafood sector it is clear the UK government are committed to future investment in line with these new opportunities. Prime Minister Boris Johnson has already stated ‘Fifteen percent of the EU’s historic catch from our waters will be returned to this country next year alone. To prepare our fishing communities for that moment, we will invest £100 million in a programme to modernise their fleets and the fish processing industry. We will be restoring a great British industry to the eminence that it deserves, levelling up communities across the UK.’ A publicly stated aim of this government is to promote investment, to level up the country and encourage development of coastal areas.

European countries have generally invested more in their fishing industries in the past than we have here in the UK; their second-hand vessels traditionally end up in the UK for sale. The UK government has now pledged £132 million to aid investment in the seafood sector although we have yet to understand whether investment in new builds will qualify. In the absence of new build support it is very likely that our fishermen will continue to source less efficient second-hand vessels although fishermen would look more favourably upon investing in new builds if there was a tax regime in place that made such an investment more attractive with regards to the tax regime and capital allowances.

Different tax treatment of new-build fishing vessels than old vessels

Capital or ‘writing down’ allowances is when a business can deduct a percentage of the value of an item bought for the business, from their profits each year before corporation tax is applied, thus reducing the taxation charge. This prescribed rate of depreciation for tax purposes replaces the depreciation charged in the accounts. Fishing vessels are treated as plant and machinery for tax purposes.

There is one rate for plant and machinery, which can have 18% of the value written off against tax each year on a reducing balance basis until 100% has been written off. There is another rate for long-life plant and machinery assets such as buildings and structures, which can have 6% of the value written off against tax each year.  The latter gives you smaller tax savings each year but gives you these over a longer time period. This longer timeline reflects the assumed lifetime of the asset and the assumed commercial rate of depreciation of the value of the asset.

Due to a change in January 2011, HMRC now classifies fishing boats as being long-life assets with a low rate of tax relief that takes a long time to be returned. Fishing companies now face a significantly higher initial tax burden with every investment that they make in a new vessel. The new classification of vessels came into force in 2011 but, due to grandfathering rules, vessels which came into service before 2011 will still be allowed the higher rate of tax relief.

The tax legislation defines a long-life asset as “plant or machinery which if new, can reasonably be expected to have a useful economic life of at least 25 years”. HMRC consider that fishing vessels may have a useful working life of up to 30-40 years.

In practice there are very distinct categories of fishing vessels which are specific to their respective sector or operation and fishing licence type. Some classes of vessels operate for a very small proportion of the year and consequently accrue only a limited number of days at sea in operation – the value of these assets are more suited to “long life asset” classification due to the low operating hours of the vessels.

In contrast, other fishing vessels, which make up the vast majority of the overall UK fleet, fish year-round supplying fresh fish to fish markets withing coastal communities. These types of commercial fishing vessels have a much quicker rate of depreciation associated directly with the exposure to more regular working conditions and time spent at sea.

It is understood the timing of classification change in 2011 was directly related to a rebuilding programme of commercial fishing vessels classified as “Pelagic Trawlers” within the Scottish fleet. These vessels (typically 60metres +) operate for short periods of time and retain values consistent with long life assets.

A good indicator for a separate classification rate of depreciation could be number of days spent at sea, with a full-time fishing vessel spending on average 175+ days at sea per year - a measure easily evidenced from licenced fishing activity associated with a registered UK fishing vessel.

For full-time fishing vessels, whilst the hull of the vessel may last over 25 years, in that time, the internal structures and various machinery will undergo extensive refits, repairs, and replacements, as fishing at sea is an extremely harsh environment for machinery. Repairs are 100% tax deductible which gives further tax savings to older vessels in the early years of ownership due to the increased repairs required compared with higher capital depreciation costs for new vessels. The hull is around one third of the cost of the new-build vessel, and the machinery and internal fittings are around two thirds of the cost. Banks loan money for new fishing vessels of this size over a term of up to 15 years as they consider this the useful economic life of the vessel.

This lower level of writing down allowance treats fishing vessels akin to buildings or structures and increases the initial cost of investment due to the longer post-tax payback period. This is acting as a disincentive to investing in new-build vessels, which are safer, more comfortable for crew, efficient and more environmentally friendly and is perversely encouraging fishing businesses to instead purchase and maintain older, less efficient, and less environmentally friendly vessels.

The issue is a cashflow issue rather than in the total amount of tax paid over the lifespan of the asset, as this evens out in the end. A new vessel costing £2million, would incur £154,000 more tax in years 1 to 9 than buying an old vessel of the same value. It would take 37 years for 90% of the vessel’s value to be written down under the long-life asset treatment compared to 12 years if treated as normal plant and machinery.  In short there is a higher level of taxation in the short term on a fishing company if it buys a new vessel than if it buys an old vessel. A new fishing vessel is akin to a new business, investing in a good vessel at the start, will improve the economics of the business upstream and downstream, meaning the HMG Treasure and the business will both gain. A new fishing vessel is akin to a new business, investing in a good vessel at the start, will improve the economics of the business upstream and downstream, meaning the HMG Treasury and the business will both gain in the long-term.

Benefits of new build vessels

The benefits of modernising the fishing fleet and incentivising new build vessels over repairing old vessels are numerous.

Newer vessels are more energy efficient and have reduced noxious gas emissions. Comparing state of the art of marine diesel engines with those installed 20 years ago (the average life of a good and well-maintained engine) many improvements have been achieved to reduce fuel consumption, GHG and nitrous oxide (NOx) emissions, mainly due to the introduction of turbocharging with intercooler engines and electronic management of fuel ignition into cylinders. The estimated reduction in specific fuel consumption is about 10% (CNR-ISMAR, 2012). Hull design can also bring about energy efficiencies. An example is a new vessel built in 2020, is using 800 litres less fuel per day than her equivalent vessel built 30 years ago. This amounts to roughly 233,600 litres of fuel saved on a build vessel each year (based on fishing 80% of the year). New vessels also must comply with new environmental regulations, such as the new regulation to have ad-blue in all new vessel engines from 1st Jan 2021, which neutralises emissions of NOx.

New vessels are more comfortable for the crew, allowing the UK to reach required criteria on crew living standards. The UK ratified ILO C188 in 2019, which has specific stipulations for the living standards of new vessels built since the convention was signed, older vessels may not comply with these specifications.

Commercial fishing continues to be one of the most hazardous occupations. Modern vessels are more suited to reducing exposure to occupational hazards. It is evident that new-build vessels will also have more modern machinery, which is safer for the crew to operate, and the standard of design and build will often be higher with greater vessel stability reserve for safe working, reducing the risk of accidents within this sector.

The commercial benefits of a policy review are not just for the fishing industry. There are numerous other industries and supply chains upon which the commercial fishing industry rely. The UK has a number of highly skilled shipyards, which will all need materials and parts supplied if a new vessel is ordered and maintained through its useful lifespan. To build one new medium-sized vessel employs 14.5 FTEs for a year. The government’s levelling up agenda means bringing the right jobs to the right areas and indeed the government is currently considering re-introducing the Home Shipbuilding Credit Guarantee Scheme to stimulate building ships in the UK. The UK has many highly skilled shipyards that must be provided with ongoing work, such as Parkol Marine Engineering Ltd in Whitby where one of WFPOs’ member companies - Waterdance Ltd is currently building a vessel. 

Summary

For a worked example of the difference in tax payments between new and old vessels please see annex 1.

Despite the fact that a fishing vessel is to a fishing company what an aircraft is to an airline, HMRC classifies planes far more favourably in terms of tax relief. In HMRC’s view, planes and fishing vessels both have a similar length lifetime for around 30 - 40 years. Should the government be giving favourable tax status to a high carbon producing industry over lower-carbon food production?

If the government wants to support scaling up and modernising the fishing industry and encouraging work for UK shipyards and jobs in coastal areas, they should reconsider the tax treatment of fishing vessels, based on the number of days they spend at sea per year. They should not class full-time fishing vessels as long-life assets similar to buildings, but instead should be eligible for capital allowances at the 18% plant and machinery rate. The impact of the long-life asset status is that fishing businesses in the UK are being perversely incentivised to buy and maintain older vessels instead of investing in new, more energy-efficient vessels. This is surprising and is probably an unintentional policy and one that we hope is reconsidered in the forthcoming budget on March 3rd.

A 25-year-old law is negatively impacting investment, but the government can do something about it. Fix the classification and give the fishing industry the fiscal stimulus and the boost that it needs.

We are requesting that this matter be considered urgently for the forthcoming government budget.

Kind regards,

C Toms and Son Ltd - Boatyard, Cornwall

Hooktone Group – Fishing Company

Interfish Ltd – Fishing company and fish processor, Plymouth

Parkol Marine Engineering – Boatyard, Whitby

Scottish Whitefish Producers Association – Association of fishing organisations, Scotland

South West Fish Producers’ Organisation – Fish Producers’ Organisation, SW England.

Waterdance Ltd – Fishing company, Devon

Western Fish Producers Organisation – Fish Producers’ Organisation, SW England

Annex 1. Worked example of the tax paid each year for old vessels vs new vessels

The below example demonstrates the difference in cashflow between treatment of a £2million vessel as plant and machinery at 18% writing down allowances and under the long-life asset (LLS) treatment at 6% writing down allowances.

There is a £154k negative cashflow impact on a £2million vessel in years 1 to 9 of ownership as a result of the reduction in the rate of allowance to 6% per year.  It should be noted that this is a cashflow issue rather than a tax deduction issue as there will come a point in future where the allowances claimed at 6% would exceed those claimed at 18% if the fleet remains unchanged, in this example it occurs from year 10. Despite this, this additional tax cost of £154k has to be financed. It represents nearly 8% of the capital cost of the fishing vessel. Further, it would not arise if an older fishing vessel was purchased and refitted.

Decision Making

With an increased payback period the difference that this may have over vessel selection when making decisions to purchase an old vessel versus a new build is crucial.  Over the first 5 years this is c£150k of cash.  The explanation for this is twofold:

1.      New build vessels are much more expensive than older second-hand vessels, but profitability wise may not have the capability to earn significantly greater profits.

2.      The tax deductions available on repairs and maintenance as a direct cost against revenue will be suppressed in the earlier years versus a second-hand vessel as they will not require the extensive repairs that an older vessel may attract.  This further pushes up taxable profits in the early years, but without the benefit of higher writing down allowances – indeed the writing allowances will be lower. 

The drive to innovate and produce improved boat structures which offer enhanced crew welfare, safety as well as potentially having improved environmental footprints may be seen as a less welcome option once the tax position has been taken into account.  Not only does this impact our business but also the potential demand on the fishing boat building industry.

Note: The example given does not take account of the Annual Investment Allowance for same-year tax relief which has been extended at the £1 million level until 31 December 2021, as the utilisation of this allowance will depend upon the individual tax circumstances of the company/individual.  Due to the build time for fishing vessels, and investment being incurred after this date with no certainty over the level at which this relief will be set having been due to have reduced to £200,000 as of 1 January 2021.