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Seafarers Earnings Deduction and reducing tax if you work on a ship

If you are a UK or EEA resident and frequently work on ships that start or leave UK ports, understanding the Seafarers Earning Deduction could significantly reduce your tax bill

Written by Phil Needham on 16 November 2019

The Seafarers Earning Deduction is a UK tax treatment that is important for anybody who is classed as a UK tax resident and works on a ship at sea. Unfortunately, while the Seafarers Earning deduction might appear to be a simple and generous tax relief, it can also be extremely complex.

In a nutshell, the Seafarers Earnings deduction can be a complete tax exemption of 100% of the amount earned:

  • Working on a ship
  • On a vessel that is engaged in a voyage that begins or ends outside of the UK.

However, there are some significant hurdles to overcome to be able to take advantage of the tax relief.

Hurdle 1: Determining the “eligible period”

The first and biggest hurdle is that you have to have worked outside of the UK for 365 days before you can claim the benefit.  This is the “eligible period”.  You work this out by keeping a running total of three figures

  • Days spent out of the UK
  • Days spent in the UK
  • Total days in period.

Strictly you have to start with a period outside of the UK, and at no point may you have more than 183 consecutive days in the UK.  If you do, you do not have an eligible period and have to start again.

If at any point of return to the UK the days in the UK exceed 50% of the total days then you do not have an eligible period and have to start again.

Finally, the days in the UK only count to the eligible period if they are sandwiched between two periods working on a ship.

The only good thing to say about calculating the eligible period is that if you are outside UK territorial waters on midnight of a day you have an eligible day.  This is a very different rule to the one that applies to the voyages.  Also don’t forget that if you are on holiday in another country you are also outside of UK.

Hurdle number 2: What is classed as a ship?

It may seem obvious, but there have been a lot of cases go to court about this, so clearly the answer is not always that obvious.

Generally, the following are not classed as ships: fixed platforms, floating storage units, FPSO’s, flotels, and mobile offshore drilling units. Whether or not people who flit between offshore wind turbines would be classed as working on a ship rather than fixed platforms has yet to be clarified as most cases relate to the oil industry.

Hurdle number 3 – Who is eligible to apply

You cannot apply if you are a crown employee (i.e. employed by the government) and you can only apply if you are either a UK or EEA resident.

Hurdle number 4 – What trips can you claim for?

As yet there have been no court cases covering this and the legislation states that you can claim Seafarers Earnings Deduction for duties performed wholly or partly outside the United Kingdom.

This means that for the purpose of assessing whether a trip is performed wholly or partly outside of the UK the question asked is: does the journey either start or end outside of the UK?

Examples of journeys that do not meet this requirement include a fishing trip that starts and ends at a UK port, an oil field supply trip to or from a platform in UK sector of the North Sea, or a trip between platforms (The UK sector of the north sea is classed as being part of the UK for these purposes, but not for the “eligible period” calculation above).

The surprising thing is that HMRC seem to accept that you can claim Seafarers Earnings Deduction for the whole of the income from an employment in an eligible period provided that a least one of the trips begins or ends in a foreign port.  Their guidance per the HS205 help sheet states ( “Enter in box 11 the total amounts received in the year that were from an employment where you worked wholly or partly overseas”.

The key here is that the words used are “employment” and not “trip”, or “voyage”, and “partly”.

As the website states

“There is no minimum limit prescribed. Therefore, 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:

  • Complete a voyage or part voyage that begins or ends outside of the UK. In simple terms complete a voyage to or from a foreign port. 
  • Complete a voyage or part voyage to a rig while it is drilling outside of the UK territorial limits and outside a designated area. This is regarded as ending outside the United Kingdom and the return voyage will be one that begins outside the United Kingdom.
  • Complete a replenishment at sea operation outside of the UK territorial limits and outside a designated area.”

Hurdle number 5: Providing the names of the ships have you worked on

The HS205 help sheet requires that you enter in the additional information box of the tax return the names of the ships on which you carried out your Eligible duties during the tax year, and finally

Hurdle number 6: Provision of evidence

The HS205 help sheet points out that you should retain documentary evidence, although it does not say for how long.  In general HMRC have 12 months from the deadline for submitting a tax return (or when it was submitted if later) to start an enquiry, but they can then open earlier periods if they find anything wrong, going back 4 years in any case, 6 years if negligence is the issue and 20 years if fraud is suspected.

It is therefore essential that you keep your Seafarer’s discharge book first and foremost, the ships log if you can get it, a completed work sheet HS205, and it may also help to keep air tickets and other travel records such as hotel bills, passports and visa records.

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