How to Stay Safe from HMRC
5 November 13 | By: Jas Jhooty
In our third article on residency issues we focus on the rules that allow employees who work primarily at sea to not pay tax on their earnings as long as they meet certain conditions.
Employees who are classified as being UK resident under the new Statutory Residence Test rules are taxable on their general earnings under UK tax law. However there is an exception to this rule called the Seafarer’s Earnings Deduction (SED) applicable only to seafarers who satisfy certain conditions. The SED was legislated for to enable UK mariners to be competitively remunerated in the global market economy.
What is a seafarer?
The legislation defines a seafarer as a person who either: -
Crown employees (e.g. members of the armed forces etc.) are not allowed to claim the SED.
What is the definition of a ship?
Unfortunately there is no statutory definition of what is a ship, only a definition of what is not a ship. These are offshore installations used in the oil and gas industry. Examples of what is not a ship for the purposes of the SED include: –
If the employee works on an offshore installation anywhere in the world, they are not regarded as a ‘seafarer’ for the purposes of the SED and so cannot claim the deduction.
A valid foreign port for each employment in each tax year
Each employment in each tax year where a claim to SED is made must include at least one voyage or part voyage that begins or ends at a foreign port. A voyage or part voyage that begins or ends at an oil or gas installation (including a rig in drilling mode) located outside the UK and outside the designated areas of the UK continental shelf can be regarded as beginning or ending at a foreign port for this purpose.
This condition prevents seafarer’s who only travel around the British Isles from claiming the SED. E.g. a seafarer who only worked on the Belfast to Liverpool ferry would not be eligible to claim SED.
What is a valid claim period?
This will be a period of at least 365 days beginning and ending with a period outside the UK. A period outside the UK can be a period of employment, a period of unemployment or a holiday abroad. Once a 365-day period has been attained it is carried on until there is a failure. A failure occurs if at any time during the claim period the employee:
a) Spends 183 or more continuous days in the UK or
b) Breaks the half-day rule.
The half-day rule is applied at each return to the UK. All days since the start of the claim are added and divided by 2 (A). Then all days spent in the UK since the start of the claim are added (B). The two figures are compared and where B exceeds A there will be a failure in the claim period. The claim period ends on the previous return date. A new claim period must then commence from the earliest possible date of leaving the UK.
Fortunately HMRC provide a useful helpsheet HS205 to keep track of valid claim periods.
Proper record keeping is essential for any employees who intend to claim SED. Records that need to be kept include the following documents: -
How emTax can help
Our consultants are experts in all areas of employment tax legislation. If you want any further advice on this or any other employment tax matter, please do not hesitate to contact us.