Seafarer's Earnings Deduction (SED)

What is the Seafarers Earnings Deduction?

Seafarers Earnings Deduction (SED) is a less commonly known yet distinct piece of UK tax legislation that grants seafarers the right to claim 100% tax exemption on foreign earnings, as long as they qualify.

This law came fully into effect in 2012 after a long battle between the trade unions and the HMRC, spanning almost 15 years in the courts until both parties reached an agreement. At the time of writing, SED sadly doesn’t apply to the Armed Forces deployed overseas although the unions have always wanted this exemption included in the bill.

Even after the first ratification of the Bill eighteen years on from the 1988 Finance Act, many seafarers still fail to use the exemption however, they really should. The whole reason this tax exemption came into effect is because seafarers and yacht crew spend long periods of time at sea, in a highly competitive market, playing a huge role in the defence needs of the UK and therefore, should receive a tax break from the HMRC. Due to the pressures of globalisation and increasing competitiveness within the employment sector, it was seen as only fair to give offshore workers suitable financial compensation through reduced tax liabilities.

However like many seaborne workers, a large majority failed to claim this exemption, because the rules and regulations surrounding it were so obfuscated.

How do you qualify?

The information surrounding this rule has been published by HMRC however, it is very confusing which is one of the main reasons yacht crew do not claim it. However once you understand the basic rules that qualify you for this exemption, things become much clearer.

Essentially, there are three steps to defining if you have a valid claim. As this law applies to the UK only, you must firstly be an individual who is not tax resident outside of the UK and work onboard a vessel outside of UK waters and make any claim on your Self-Assessment Tax return.

To check if you might qualify, take our quick and easy online test. Hit the button below to get started:

The three key qualifying steps are:

1) 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 you:

  • spend 183 or more continuous days in the UK, or
  • break 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.

2) Valid foreign port for each employment each tax year

Each employment in each tax year 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.

3) Employment must be aboard a ship

A seafarer is someone that works on a ship. There is no precise definition of a ship in tax law, but “offshore installations” are specifically not regarded as ships.

HMRC’s Help Sheet 205 goes into greater detail about qualifying for the exemption, most notably the type of vessel you have worked on. Due to a great deal of abuse of the exemption by non-seafarers however, an amendment came into effect in 1998, which meant that the following vessels do not qualify for SED exemption:

  • Fixed Production Platforms
  • Floating Production Platforms
  • Mobile Offshore Drilling Units
  • Flotels

Why you should act!

Typically, there are two distinct different types of seafarer when it comes to this legislation. There are those that simply do nothing at all or there are the go-getters who choose to incorporate a limited company, either within the UK or in a country where local taxation on seaborne workers is less draconian.

Oddly enough however, it is those who fail to act who are more at risk from a tax investigation even though their income is most likely tax exempt! And those that set up a corporation are simply foregoing the benefits of an 18 year old tax law that will grant them a zero rated tax benefit. Either way, choosing not to use this exemption is a poor financial decision.

So if you are currently employed aboard a superyacht, cruise ship or sea vessel, speak to us today about the Seafarers Earnings Deduction and how you may qualify for 100% tax relief.

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