Seafarers Earnings Deduction: HMRC’s Best Kept Secret

The Seafarers Earnings Deduction (SED) as it has become known is a unique piece of tax legislation that allows seafarers to claim a 100% tax exemption on their foreign earnings. It stands as testimony to a bittersweet battle fought between HMRC and the trade unions.

It took nearly 15 years of legal wrangling before both parties finally reached a settlement. A final agreement was sought in 2012, although the unions still insist that they want to increase the scope of the exemption to include those in the armed forces.

How does the SED work?

However eighteen years on from the first ratification in the 1988 Finance Act, it still seems that few people actually use it. In this article I'll explain how the SED works, and explore why yacht crew don't use it, but should.

The historical context that saw the first incarnations of this tax exemption came into effect for several reasons. It was felt that since seafarers spend long periods of time out of the country, work in a highly competitive labour market, and play a vital role in the defence needs of the UK, they should receive a tax break. The exemption was specifically designed for financial renumeration as the pressures of globalisation and competitive jobs markets were evident.

The reason that yacht crew do not claim this exemption is in part because it is difficult to understand. In true HMRC fashion the information on the SED that they publish is almost unintelligible.

You must work on a ship

However it is still possible to gather enough information from Helpsheet 205 to confirm if you do qualify. The most straightforward aspect concerns the type of vessels which do not qualify as ships (below is a short list). The main requirement of the SED is that you must work on a ship. This amendment came into effect in 1998 due to the abuse of this exemption by non-seafarers:

• Fixed Production Platforms

• Floating Production Platforms

• Mobile Offshore Drilling Units

• Flotels

In the industry there is a certain sentiment that this exemption is just fallacy and that it doesn't really work.

There are then two distinct personality types, those that choose to do nothing at all or the more proactive crew members who opt to set up limited companies ashore or in countries that have slightly more sympathetic taxation schemes. Those who choose to do nothing at all risk becoming subject to investigation when there is no need for them not to declare.

The crews that choose to pay corporation tax fail to reap the benefits of an 18 year battle between the unions and HMRC. You cannot beat a zero tax bill no matter how little you pay!!

Days spent in the UK

The greatest reason, in my opinion, as to why individuals do not use this tax exemption is the issue of days spent in the UK. Those who have an understanding of how this works are aware that you may not spend more than 183 days per tax year in the UK. It seems that crew panic when it comes to accounting for these days and decide not to be proactive with their tax affairs as they may not have the ticket stubs.

Travel days seem to only add to the confusion, but the governing rule with these is that if you were in the country at midnight on the given day it counts as a day. We advise clients to be honest with the number of days that they have spent in the UK but always round up.

Helpsheet 205 for the SED looks in detail at qualifying periods at sea. They must include a foreign port, so you cannot embark and disembark from the UK. In addition they are judged on the number of days outside of the UK. HMRC  have created a spreadsheet to try to help calculate if the number of days you have spent out of the country is sufficient to qualify.

Understanding the rules

However this often prevents people from using it as it is very difficult to understand. In this instance it is best to simply speak to an accountant or use an app. Please see examples below:

• Seafarers Tax Calculator
• Seafareres Earnings Deductions

I believe that if HMRC were to make this tax exemption more understandable then more people would use it. Furthermore even those who do use it do not always use it correctly. We find that sometimes individuals fail to declare all of their income.

It is essential that when you complete a tax return that you declare everything that you earn or receive a return on. If you choose not to declare certain investments you run a terrible risk of them being discovered later on and receiving penalties. This facility enables you to declare all income derived from investments except rent and receive tax back; why not declare it!

Open exchange of information

The SED offers a superb alternative to the Offshore Disclosures Facility as it enables crew to declare all of their offshore income without it being subject to tax. Now more than ever it is important to be honest, especially with the Open Exchange of Information where big brother could quite possibly be watching you.

In addition, if you do not declare your income there is little you can do with it. When left in a 0% interest account you will actually be losing money as it is not rising in line with inflation. You will need to prove your earnings if you ever wish to raise a mortgage and most lenders now require an SA302 letter which is only available if you submit an annual tax return.

Contrary to the rumour mill I believe that this exemption is here to stay and after an 18 year battle I doubt that anyone will be seeking to make any changes quite yet. It might be that the Seafarers Earnings Deduction is HMRC’s best kept secret and rightly so. We might have a problem on our hands if everyone knew that they could file a return but not pay tax!

Note:Any tax advice in this publication is not intended or written by Marine Accounts to be used by a client or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing or recommending to another party matters herein.