The Seafarer’s Earnings Deduction…could you be eligible?
The recent First Tier Tribunal (“FTT”) case of Szymusik v HMRC  raised some interesting questions about the eligibility criteria for claiming Seafarers’ Earnings Deduction (“SED”) – But what is SED? And who can claim it? This article will answer these questions, whilst also discussing what we can learn from Szymusik’s case.
What is Seafarer’s Earnings Deduction?
The SED is an amount which employed seafarers can deduct from their employment earnings when calculating their UK tax liability – it is not available to seafarers who are self-employed.
Who can claim it?
In relation to the SED, a seafarer is someone whose employment consists of the performance of duties on a ship, including tasks which are incidental to the performance of these duties (excluding Crown employment, i.e. public in nature, payable out of the public revenue of the UK or Northern Ireland).
Along with having worked on a ship, the following conditions must also be met in order for a seafarer to claim SED (ITEPA 2003, s.378):
- The earnings are ‘relevant general earnings’ (taxable earnings from employment received by UK resident individuals/taxable earnings in respect of duties performed in the UK by non-UK residents who are taxable in another EEA state/taxable earnings from employment remitted by non-UK domiciled individuals);
- The duties of the employment must be performed wholly or partly outside the UK;
- Some or all of the duties must be performed in the course of an ‘eligible period’ (broadly speaking a period consisting of at least 365 days outside the UK, of which no more than 183 consecutive days are spent in the UK).
What can we learn from the case of Szymusik v HMRC ?
Mr Szymusik had claimed SED in relation to his work as a diver both off and on the UK continental shelf in his 2009/10, 2010/11, 2011/12 and 2012/13 tax returns. HMRC made a closure notice and discovery assessments in relation to these tax years, against which Mr Szymusik appealed in the FTT – he did so because the assessments did not include SED.
The issues raised in the case are as follows:
1) HMRC contended that Mr Syzmusik’s earnings related to the diving work carried out on the UK continental shelf should be treated as UK trading income (under ITTOIA section 15).
Three conditions must be met for this to apply. The FTT found that two of these conditions were clearly immediately met: Mr Szymusik was an employee performing duties as a diver and diving supervisor on the UK continental shelf and his duties consisted wholly or mainly of seabed diving activities. However, there was some deliberation as to whether any employment income from this employment would otherwise be chargeable to tax employment income (under Part 2 of ITEPA) and if not, section 15 would not be applicable. The FTT considered the timing of whether the SED or section 15 applied first, as if the SED applied first then there would be no employment income and therefore section 15 would not be applicable.
Eventually, the FTT decided in favour of HMRC on the basis that employment income is a gross sum before deductions. Consequently, the income in relation to this employment should be taxable as UK trading income and SED is not available.
2) HMRC argued that Mr Szymusik’s work off the UK continental shelf did not meet the definition of a ‘seafarer’ – HMRC argued that Mr Szymusik’s duties were actually performed ‘from’ the ship and ‘on’ the seabed, rather than ‘on’ a ship, with all other duties being incidental. They also argued that the vessels from which he worked were offshore installations and not ‘ships’.
However, Mr Szymusic pointed out that the vessels were ships that are specially designed to allow the divers to perform their activities and the divers were constantly connected to the ship through an umbilical cord in order for them to carry out their duties – the divers were dependent on the ship at all times and therefore their duties were performed ‘on’ it. This could be contrasted with a scuba diver as they carry out their duties with an air tank on their backs acting independently from the vessal.
The FTT reviewed evidence from Mr Szymusik’s activity logs from his voyages. The FTT ruled that where offshore installations (structures or ships) were put to relevant use (i.e. relevant diving activities took place) while stationary during the voyages, SED was available.
The notable points to take away from this are:
- When diving duties are being undertaken on the UK continental shelf it is important to carefully consider whether any employment income should be treated as UK trading income as this would affect the availability of SED.
- It is crucial to keep a detailed activity log of voyages and the meaning of ‘on’ a ship can extend to being dependent on it to perform the relevant activities. It also shows that the definition of a ‘ship’ can extend to stationary offshore installations.
- Whether an individual is deemed to be working on a ship is a question of fact and each case will need to be looked at on its own merits.