'Hypocrisy': Ministers under fire as CalMac uses P&O tax dodge to save £46m

It led to legal experts debating whether staff with offshore contracts have full employment rights in the UK.

State-controlled ferry operator CalMac which provides lifeline island services mainly on Scotland's west coast through a fleet of over 30 ageing vessels uses a subsidiary company based in the tax haven of Guernsey to employ its 1000 seafarers, exempting it from National Insurance contributions.

Over the last 16 years, CalMac has saved an average of £3m a year on the offshore scheme.

Caledonian MacBrayne Crewing (Guernsey) was established to cut more than £1.5m in costs. That has now risen to around £5m a year.

The transport workers union TSSA says Scots ministers should "hang their heads in shame" in allowing tax avoidance to happen.

Seven years ago in front of a University College London audience (see below) the First Minister, Nicola Sturgeon weighed into the growing political storm over legal tax avoidance, branding it "obscene", "immoral" and "despicable", and promising a "zero tolerance" approach in Scotland.   She said she could not "think of words strong enough for it".

She said the "whole political establishment" had negligently allowed tax avoidance to become routine, even though it robbed public services of essential funding.

Just last month the SNP publicly condemned Westminster's record in dealing with tax evasion saying powers to deal with it lie solely with them and that UK Tories "simply continue ignoring Scotland".

The party said Scotland loses over £3 billion a year from unpaid tax – "money that could be spent on schools, hospitals and our NHS".

"Along with UK Overseas Territories – such as the Cayman Islands – UK and its territories account for more than 36% of global tax losses.

READ MORE: Sturgeon demands zero tolerance on obscene and despicable tax avoidance

"These are astronomical sums on a global scale, and yet Westminster is failing to take real action to tackle it."

The party went on: "The UK leads the world in tax evasion and abuse – and as a result of Westminster’s failure to clamp down on it, the UK loses £38 billion a year," the party said.

Unions are pushing in the wake of the P&O debacle, for the use of offshore shipping companies to be re-examined.

Sacked P&O seafarers employed through a Jersey company may have to take legal action over their contracts on the island.

Two years ago the Tax Justice Network's ranking of corporate tax havens scored Jersey and Guernsey 98 out of a possible 100, putting them "up there with the worst".

TSSA general secretary Manuel Cortes said, “Sadly, the race to the bottom in the maritime industry is a long-standing problem. With P&O we saw the culmination of what happens when governments have allowed ferry companies to use tax dodges and other means to reduce their labour costs.

“CalMac, however, is a state-owned company and it is indefensible for CalMac to dodge taxes. £45million pounds is a huge amount of money to take from the public purse, money that could have been used for the benefit of the poorest among us.

"The Scottish government are ultimately responsible for the decisions CalMac make about their staffing and they should hang their head in shame. This is nothing more than state-sanctioned tax-avoidance!”

In 2020/21 CalMac parent company David MacBrayne Limited received £22.8m in Covid support from the Scottish Government and £1.1m of furlough funding through the taxman (HMRC). That's on top of a £153m Scottish Government subsidy it gets to maintain services to some of Scotland's remotest islands - a £9m increase on the previous year.

The practice of allowing ferry companies to avoid paying National Insurance contributions was brought in to keep them competitive in the face of foreign competition.

Many of the major ferry operators on UK, Ireland, Isle of Man use offshore schemes, including Serco NorthLink Ferries which operates services to the Northern Isles of Orkney and Shetland. Outsourcing giant Serco beat Calmac to the £450m, six-year contract to run the services in 2020.

Another union official said: "I have never thought it was ever the right thing to have seafarers brought into these offshore schemes and the Scottish Government is hypocritical if it stands against tax avoidance but appears to accept this.

"You cannot escape the accusation that it is tax avoidance and while I am all for job security for our members, what has happened at P&O has changed the way everyone is thinking about how seafaring staff are dealt with."

Nine years ago, then chief secretary to the Treasury Danny Alexander, a Liberal Democrat in the coalition government, said a tax loophole allowing firms to dodge National Insurance would be closed under a new scheme targeting offshore payroll services.

He said it would end the use of offshore payroll services in tax havens such as Jersey and Guernsey.

He said these staff could be unknowingly ineligible for certain benefits.

The establishment of Caledonian MacBrayne Crewing (Guernsey) was approved by ex-Liberal Democrat Scottish transport minister Nicol Stephen.

Seafarers union Nautilus said that there was a need for change and said it had been campaigning to promote the employment of UK-resident seafarers on routes between British ports including the North Sea offshore sector for many years.

"The actions of P&O Ferries now makes the need for minimum ‘local content’ requirements even stronger. We shall be working with the government to seek changes to manning/crewing requirements," said a spokesman.

"Under the United Nations Convention on the Law of the Sea (UNCLOS) ships are meant to have a ‘genuine link’ to the flag they fly. Which means among other things operating the business out of the jurisdiction, with offices and people based there not just a brass plate company.

"PO Ferries admitted that it has offices in Dover and Hull. It employed mostly British residents and operates in British ports. So why should it be allowed to fly flags of convenience from other jurisdictions? There needs to be stricter UK laws to enforce the ‘genuine link’ under UNCLOS.

CalMac defended the offshore practice saying: “The National Insurance Exemption for Seafarers scheme is standard industry practice in the UK. It is a scheme designed to enable UK flagged vessels to be competitive, protect UK maritime jobs and is approved by the UK and Scottish governments, as well as HMRC and the Treasury.

The SNP launched a campaign to stop tax avoidance in 2017

“CalMac applies UK employment legislation and our vessels and staff are governed by the UK Maritime and Coastguard Agency.”

The Scottish Government would not comment when asked why it had not taken action to stop the offshore tax avoidance scheme operated by the ferry operator it controls.

A Scottish Government spokesman said: “We support measures to ensure individuals and businesses pay a fair amount of tax and have called for greater tax transparency and stronger action from the UK government on avoidance and evasion.

“The Scottish Government’s capacity to tackle tax avoidance is constrained by the devolution settlement, as we have no power to legislate on reserved tax policy or in areas such as international affairs, which includes the ability to independently designate tax havens.”

New measures introduced four years ago put further onus on firms to justify why they should benefit from the low or non-existent tax rates paid on their profits in Crown Dependencies like Guernsey, Jersey and the Isle of Man which is home to nearly 80,000 companies.

In 2017, Guernsey had just under 18,000 companies, with 89% not employing staff locally. The laws were introduced after the European Union threatened the dependencies with inclusion on its 2019 tax blacklist, along with 62 other places.

With it comes the possibility of economic sanctions and major damage to the reputations of the islands' financial services sectors.

The dependencies said the law change addresses concerns - by introducing fines of up to £100,000 for so-called brass plate companies that cannot prove they have a sufficient physical presence in the islands.

Depending on the type of company, tax-resident firms will have to demonstrate they are locally managed, generate income in the islands, and that they have a physical presence in terms of staff, premises and local spending.

EU attention on the islands sharpened after the 2017 release of the Paradise Papers, where Jersey and Isle of Man were the focus of major revelations.

Nicola Sturgeon hits out at tax avoidance and evasion at First Minister's Questions in November 2017. Source: SNP

By bringing in the new laws, Britain's dependencies hoped to avoid finding themselves on the 2019 EU tax blacklist.

But there remains concerns about transparency over the companies based in Guernsey and Jersey.

In its condemnation of UK tax evasion, the SNP said last month: "The UK only has 0.86% of the world’s population – but the UK’s tax loss is equal to 14.2% of the world’s total tax loss."

"Per person, this equates to around £570 a year – a figure that hits particularly hard amid a Tory cost of living crisis, for which we all pay the price."