If you are a UK tax resident employed as a seafarer then Her Majesty’s Revenue & Customs (HMRC) may allow you to claim back 100% of UK income tax paid in relation to your employment on a ship as a Seafarer, provided certain qualifying criteria are met.
This tax rule is known as Seafarers Earnings Deduction (SED).
Vast numbers of people working at sea, presume they do not owe tax or need not declare their income as they do not reside in a particular country.
Whilst there may be no tax to be paid with regard to your income from employment at sea, more often than not HMRC will still expect to receive a declaration of this income.
As many UK seafarers are out of the country for significant amounts of time, they can be eligible for certain tax concessions, as set out by HMRC.
If Seafarers are away from UK shores for a significant portion of the year, then they should be able to benefit from UK tax exemptions.
Land based income will remain taxable, regardless of the SED, but the current personal tax allowance of £12,500 (2019/2020), can still be taken into account for this.
The Seafarers Earnings Deduction (SED) is a less commonly known yet distinct piece of UK tax legislation that grants seafarers the right to claim a 100% tax exemption on their sea-based earnings, as long as they qualify.
For crew who are employed by overseas companies, this means the ability to declare your income to HMRC without owing income tax.
Meanwhile, crew employed by UK companies that are paying tax via PAYE can reclaim this income tax.
This law came fully into effect in 2012 after a long battle between the trade unions and HMRC, spanning almost 15 years in the courts until both parties reached an agreement.
At the time of writing, the SED sadly doesn’t apply to the Armed Forces (other than the Royal Fleet Auxiliary) 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.
The reason that this tax exemption came into effect was with consideration for the fact that seafarers and yacht crew spend long periods of time at sea, in a highly competitive market, with potential to play a huge role in the defence needs of UK waters.
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.
Consultations, with yacht crew, commercial seafarers and many others, have made it alarmingly apparent that a large proportion of eligible seafarers are not making use of this fantastic opportunity to claim exemption from taxation.
It appears that in most cases this is either because they weren’t aware of the legislation, they believed they did not qualify for the deduction, or that they are unsure how to claim it because the rules and regulations surrounding it were so obfuscated.
In order to achieve a qualification for the Seafarers Earnings Deduction, you must satisfy the following criteria:
For more detail about each of the qualifying criteria, read on.
Once you have established a qualifying period, you are able to declare your income under the SED.
The simplest way of achieving this is by spending 183 days outside of the UK in the 365-day period following your departure, and by being outside of the UK at midnight on day 365.
You are considered to be absent from the UK on a particular day if you are outside the UK at midnight at the end of that day.
Non-work days spent outside the UK may be counted as days of absence.
During your qualifying period you are of course permitted return visits to the UK but must meet the following guidelines:
The word 'ship' is not defined in tax law, but it is safe to assume that in order to qualify for the SED you must be employed onboard a vessel that can navigate and maneuverer under its own power.
Offshore installations used in the oil and gas industry are specifically identified and are not regarded as 'ships' for the purposes of the Seafarer's Earnings Deduction.
The following list of 'offshore installations' do not qualify for the SED, and is given as a guide only:
If you work on an offshore installation anywhere in the world, you are not regarded as a 'seafarer' for the purposes of Seafarer's Earnings Deduction and so cannot claim the deduction.
The employment duties of a seafarer are regarded as being performed outside the UK if they are carried out on a vessel that is engaged on a voyage or part voyage which begins or ends outside the UK.
For this purpose, the UK sector of the North Sea is treated as part of the UK.
You can claim Seafarers Earnings Deduction for the whole of the income from an employment in an eligible period provided that at least one trip either begins or ends in a valid foreign port.
In order to be considered as working wholly or partly out of the UK it is generally held that during every tax year you must either:
A qualifying day is one in which you are absent from the UK at midnight.
Under normal circumstances HMRC regard being outside the twelve-mile limit as outside the UK.
However, by concession they are prepared to accept that where a vessel leaves its UK berth before midnight and goes to a foreign port, then that is a day out.
But if a vessel sails from a UK port to another UK port then it is only when the vessel is outside the twelve-mile limit at midnight, that it is regarded as outside the UK.
Although UK tax residents claim the Seafarers Earnings Deduction (SED) by filing a tax return, the process differs slightly if you are a resident elsewhere.
Many non-resident crew find themselves employed by UK companies which deduct income tax.
If you are from the European Economic Area (EEA), you may be entitled to a refund of your income tax by claiming the SED.
You can apply for this refund by completing the R43M(SED) form either online, or by posting it to HMRC.
Legislation introduced in 2017 named the Automatic Exchange of Information (AEOI) has changed the way that financial organisations communicate with tax authorities.
Whilst you may believe that your offshore holdings are hidden from prying eyes, this is seldom the case.
It is also a common misconception amongst crew that because UK seafarers are not required to pay tax on their earnings, this means that they are not obliged to file tax returns.
This is untrue and although you may not owe income tax, HMRC still expect to be informed of your worldwide income.
For more detailed information on the Automatic Exchange of Information, read our article.
You can claim the SED by filing a UK tax return, an area that we specialise in.
If you’ve never filed a UK tax return before, the first step is to obtain a unique taxpayer reference (UTR) number which registers you for self-assessment in the UK.
We handle the application process for you to ensure that the paperwork is completed correctly.
After you have sent us the relevant information regarding your income for the tax year, we will go away and prepare your tax return ready for your approval.
If you are not a UK resident but you qualify for the SED and are looking to reclaim income tax, there is a different route to follow.
Completing the R43M(SED) form either online or posting this to HMRC will get the process started.
In order to process your claim, HMRC will require evidence of your time outside of the UK, so ensure that you have your ships logs or flight stubs ready before you start the process.
Although we do not require copies of the following documents in order to complete your tax return and claim the Seafarers Earnings Deduction, it is beneficial for you to keep them in case of the unlikely event that HMRC ask to see evidence of your circumstances to substantiate your SED claim.
Forms of evidence that you can keep for yourself include:
The deadline for filing your UK tax return is the 31st January following the end of the tax year in question.
For example, the 2020/21 tax year runs from 6th April 2020 to 5th April 2021, meaning the filing deadline for 2020/21 tax returns is 31st January 2022.
When preparing your tax return, you can choose between having your tax refund sent to you by cheque, transferred to a nominee’s bank account, or transferred directly to your bank account.
We recommend opting to have your refund transferred directly to your bank account as this is by far the fastest option.
Choosing this method should mean you receive your refund within 4-8 weeks from the date of submission.
Most commonly queries are the Channel Islands, the Isle of Man and the Republic of Ireland which we're happy to confirm do all count as outside the UK.
Do bear in mind that the onus is on you to demonstrate that you were outside the UK, meaning that a short walk over the Irish border just before midnight really isn't going to be viable.
As recently as May 2020, the Supreme Court has ruled that as UK waters, this area is not considered to be outside the UK for the purpose of counting you days.
Whilst proving you were outside the UK at exactly Midnight in any given date does come with its obvious challenges, it's important to keep as much documentary evidence as possible. Good examples which are used commonly follow:
Whilst the above are the most common, any document which assists in confirming your whereabouts on a given day should be added to your records.
A qualifying day is one in which you are absent from the UK at midnight.
Normally this will mean a position outside the UK 12nm limit is required.
However, having identified issues in recording and evidencing this, HMRC have allowed that a vessel which leaves it's UK berth before midnight and heads directly to a foreign port can be considered to be outside the UK for that day.
There is no limit as to the number of holiday days you can include in your count if days outside the UK.
As long as you are outside the UK at midnight then there's no reason this can't be included.
This is not a problem at all.
As you will know you are entitled to spend just a little less than half your time in the UK and there's nothing to stop you working here or elsewhere, when you don't have employment in a vessel.
Whilst this income won't qualify to be declared under the deduction, you're still entitled to claim your tax-free personal allowance meaning an element of this will also be declared with no tax to be paid.
No, any fixed installation like FPSOs, FSUs or flotels do not count as vessels for the purposes of claiming SED.
Current guidelines state that in order to qualify, an individual must be engaged on a "self-propelled vessel", meaning that those working on barges, wind turbines and the like will also not qualify.
Having discussed this point with HMRC, the key point identified is that in order to sustain an eligible claim period the vessel must be capable of navigation at the specific date in question.
It therefore follows that a vessel may qualify for a claim during periods of dry docking, dependent upon whether ongoing work renders the vessel incapable of navigation for a period.
This is a question posed regularly and in most cases, has a simple answer.
In order for an eligible claim to be made, the vessel must be "capable of and used for navigation".
The earliest point at which this can be the case will usually be the first sea trial.
The results of this trial will also be crucial in terms of the work to be carried out after this date.
If the works required following the sea trial are cosmetic only, then the vessel is capable of navigation from then onwards.
If the works required are fundamental to the safety and operation of the vessel, it could be said that the vessel is not yet capable of navigation.
There is nothing to stop you studying alongside your employment and continuing to claim the SED.
It is important however to understand that if you are being paid to study, this income will not qualify to be declared under the deduction.
The UK tax year runs from 6th April to 5th April each year.
With the introduction of the Automatic Exchange of Information (AEoI), allowing tax authorities to request details of your income from your bank, it is important that all income between these two dates each year be included in your return.
Each year HMRC allow a window between the 6th April and 31st January each year for filing of the previous year's return.
If you miss your opportunity to file and file after the following 31st January, HMRC will begin to impose fines which will increase the longer you wait to bring your affairs up to date.
The fact is that once you have established a qualifying period which extends beyond a 365-Day period, your "anniversary date" is no longer relevant as the half day rule (see above) comes in to effect.
However, having noticed conflicting information supplied by accountants online, we have confirmed with HMRC that in order to establish your initial 365 day qualifying period, you MUST be outside the UK at midnight in day 365.
Example: If you begin working on a yacht on 1st January, in order to establish a valid claim period you must be outside the UK at Midnight on the following 31st December.
Student loan repayments, whether they be Plan 1 or Plan 2, are calculated based upon your taxable income.
As income declared under the SED is not taxable, a liability for Student loan repayment will not arrive with regard to this employment income.
When your tax return is filed, confirmation that you have a student loan should be included and HMRC will contact the SLC to confirm the amount which you have received in taxable income.
Find out if you're eligible to claim under the Seafarer Earnings Deduction by using our free online test. Just hit the button below to get started!
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