23rd Dec 2019
Seafarer Earnings Deduction FAQs
With the help of our UK tax partners, SK Tax, we have provided answers to questions we are most regularly asked about the Seafarers Earning Deduction (SED). If you are a UK taxpayer, a UK national or work onboard a British flagged yacht, read on to learn more about how you can potentially reduce your tax bill.
What is the sed?
The Seafarer Earnings Deduction, commonly referred to as the SED, is an allowance that helps UK taxpayers working in the Superyacht industry significantly reduce their tax bill. It allows seafarers to claim up to 100% tax exemption on their earnings.
Who can apply for the sed?
Anyone who should be paying taxes to the HMRC can apply for the SED. We know that is a lot of acronyms but it is worth fully understanding SED and seeking advice about it because of the impact it can have on your yearly tax contributions. You need to be working on a qualifying vessel or Superyacht to be eligible for the deduction. The clue is in the name: the deduction is designed for those working at sea.
British Superyacht crew are liable for tax on earnings and you should declare your income to HMRC. However, as long as you meet the SED criteria you will clear your liability for tax. If you are receiving untaxed income, in the first instance, this needs declaring to the tax office.
When are you no longer eligible for the sed?
You will no longer be able to claim the Seafarers Earnings Deduction if you:
- are not employed on a yacht
- have not been away from the UK for long enough
- break the “half-day” rule or spend more than 183 days in the UK.
There are other criteria that apply but they are more complicated. For example, you may not qualify if you are employed but your yacht is under refit for a long duration, meaning your days at sea are reduced. If the yacht hull is breached, then this stops the seafaring allowance; just being in dry dock will not impact your SED allowance.
How much impact could the sed have on your uk tax bill?
It could reduce your UK tax bill to zero!
It doesn’t get much better than that. Also, because 100% of your income is declared, you can breathe easy in the future when others get caught with undeclared assets and investments. Common Reporting Standards have really changed the transparency around investments and it is essential that crew declare all worldwide earnings to protect themselves.
How does the “days at sea” rule apply?
The claim period must span a complete calendar year. It starts with a leaving date, ends with an arrival date and in between must be 365 days. These days out can also be made up with leave periods abroad. Once you have completed your first year of work, you can apply for the SED.
There is a free “days at sea” calculator offered by the Seafarer Earnings Deduction website which you can use here. They have created a digital version of the HMRC Form HS205. We would still recommend getting this calculation checked but it is a great way to check your initial eligibility for the SED.
How can I calculate my seafarer earnings deduction?
We recommend working with a tax specialist who can check that your circumstances are valid for a SED claim. There are a number of factors at play and crew often miscalculate the number of days at sea and can forget to declare 100% of their income.
What are common SED mistakes?
When calculating their days outside of the UK, many Superyacht crew forget to include their holidays. As long as your holiday was outside of the UK you can include it as part of your days of absence.
You should have at least a 12-month employment contract. But, if you don’t have this you can provide a contract which shows continual employment for the last 6 months onboard.
What is the “half-day” rule?
The “half-day” rule is a fundamental component in calculating your eligibility for the SED.
HMRC says it is:
“The total number of days you’ve spent in the UK isn’t more than one-half of the total number of days from your first day abroad to the last day of the period you spent abroad after that return visit.”
The half-day rule is calculated from your last trip to the UK. You take the first date you were abroad to the last date you were abroad. This period should be longer than half the time you spent in the UK on your last visit.
Can all superyacht crew apply for the sed?
No. This tax allowance is only for eligible UK taxpayers who work at sea. Each country has its own tax allowances and it is, therefore, important to understand which country you are a tax resident for.
You will be a tax resident in at least one country, so please ensure you know which one and that you declare all your income each year! Note that some yacht crew, such as American or U.S. connected crew, may be required to pay tax in two countries.
How do you know if you are a uk tax resident?
“You’re automatically resident if either:
- You spent 183 or more days in the UK in the tax year.
- Your only home was in the UK – you must have owned, rented or lived in it for at least 91 days in total – and you spent at least 30 days there in the tax year.”
What records should you keep?
There are a number of records you should keep to prove the amount of time spent outside the UK, including:
- plane tickets
- receipts for travel (not cash receipts, as anyone can pick these up)
- bank statements or credit card statements showing financial transactions abroad
- passports and visas (the tax office will need to see the original passport which the seafarer will be constantly using).
To show your employment onboard, keep copies of the following:
- discharge book
- Certificate of Discharge if you don’t have a Discharge Book or a letter from the Captain confirming your dates and ports of joining and leaving the vessel
- yacht log of your duties
- copy of your employment contract.
As best practice, you should also archive your old HS205.
How can crew claim SED?
You must be registered for Self-Assessment to be able to claim the Seafarer Earnings Deduction. You can then use the HS205 sheet (available here) to check your days. As we mentioned, you need to have worked for at least 365 days before making your first claim.
It is important to note that you don’t need to work for 365 consecutive days. You can do one three-month trip for example, and make the rest of the time up with holidays! The tax office states that you need at least one voyage in each tax year to claim the seafaring allowance.
Should you require any further assistance on your SED claim we recommend getting in touch.