In order to take advantage of seafarer tax exemptions on earnings while working at sea, UK nationals must first take a statutory residence test to determine UK residency status.
The new Statutory Residence Test
Earlier this year, HM Revenue and Customs (HMRC) introduced a new Statutory Residence Test, which has been designed to provide greater certainty as to whether or not individuals are UK resident for tax purposes.
It is a welcome development as many clients have faced years of uncertainty over their residence status, however as with many such initiatives, the rules are unfortunately complex and it may be necessary to obtain professional advice before your residence status can be determined conclusively.
Although the test does not have retrospective effect, it could be the case that someone who has previously been considered to be non-UK resident becomes UK resident with effect from 6 April 2013. There are a number of stages to the test and a variety of rules to apply in order to determine status, of these, the ‘automatic overseas test’ is the first port of call since if you ‘pass’ this test, you can conclusively be considered to be non-UK resident and you need proceed no further.
The basic rules are:
1. You are non-UK resident for a tax year if you meet any of the automatic overseas tests.
2. You are UK resident for a tax year if:
A. You do not meet any of the automatic overseas tests; and
B. You meet:
i. one of the automatic UK tests; or
ii. the sufficient ties test
There are three different components of the residence test: The Automatic Overseas Tests, The Automatic Residence Tests and The Sufficient Ties Test.
The Automatic Overseas Tests
If you meet any one of the following points, you are considered to be a non-UK resident:
1. You were resident in the UK for one or more of the previous three tax years and you spend fewer than 16 days in the UK in the tax year.
2. You were not resident in the UK for any of the three preceding tax years and you spend fewer than 46 days in the UK in the tax year.
3. You work full time overseas throughout the tax year without any significant breaks (there is a complex calculation to define both ‘full time’ and ‘significant breaks’ and it is advisable to take advice if you fall within this test), and:
A. You spend fewer than 91 days in the UK in the tax year.
B. The number of days in the tax year on which you work for more than three hours in the UK is less than 31.
If, having taken this test, you are not conclusively non-resident, then you must move on to the next level, which is the ‘Automatic Residence Test’.
The Automatic Residence Tests
If you meet any one of the following points, you will be automatically consider a UK resident:
1. You spend 183 days or more in the UK in the tax year.
2. You have a home in the UK during all or part of the tax year - You will meet this test if there is at least one period of 91 consecutive days, at least 30 of which fall in the tax year, when you have a home in the UK in which you spend a sufficient amount of time - and, either you:
A. Have no overseas home; or
B. Have an overseas home or homes in each of which you spend no more than a permitted amount of time.
This test is subject to detailed calculations; therefore, if you think you fall within this test, you should take advice to confirm the position.
3. You work full time in the UK for any period of 365 days, with no significant break from UK work, and:
A. All or part of the 365-day period falls within the tax year
B. More than 75% of the of the total number of days in the 365-day period when you do more than three hours of work are days when you do more than three hours of work in the UK
C. At least one day in the tax year is a day on which you do more than three hours of work in the UK.
This is a complex test, and if you think you may fall within it, you should seek advice.
The Sufficient Ties Test
If, on the basis of the first two tests, you are not conclusively resident or non-resident, the ‘Sufficient Ties Test' will be applied to determine your residence status for a tax year. This sets out a further five ties to the UK, which must be considered, together with the number of days spent in the UK, in order to determine your residence.
There are five elements to the connecting ties test. If you were non-UK resident for any of the preceding three tax years you will need to consider the first four ties, and if you were resident in the UK for one or more of the three preceding tax years you will also need to consider the fifth tie.
The five connecting ties are:
1. Family – spouse, civil and common law partner, or minor children in the UK.
2. Accommodation – having accommodation in the UK which is available for a continuous period of at least 91 days (ignoring breaks of less than 61 days) and you spend at least one night there.
3. Substantive work in the UK – 40 working days or more (a working day is defined as more than 3 hours of work).
4. UK presence in the previous two tax years – more than 90 days in either of the previous two tax years.
5. More days spent in the UK in a tax year than in any other single country. This applies to leavers only and is designed to catch leavers who do not take up residence in any other country following a period of UK residence.
The number of days you spend in the UK in a tax year will dictate the number of UK ties that are needed for you to be UK resident.
Table: Ties required to verify residence or non-residence status
The table below sets out how many ties need to be present for you to be resident or non-resident in the UK, this depends on the number of days spent in the UK and also whether you are an ‘arriver’ or a ‘leaver’.
Further conditions for ‘split’ tax years
The Statutory Residence Test is designed to determine residence status for the whole tax year, however, if part way through a tax year you leave the UK to live or work abroad, or come from abroad to live and work in the UK, and certain conditions are met, the tax year will be “split” into two parts.
In one part of the tax year you will be treated as UK resident and in the other part you will be treated as non-UK resident. Again, if this scenario might apply to your own circumstances, it is important to seek advice from a tax specialist.
Seafarers Earnings Deduction
If you’re an employee and work at sea, you may be able to reduce your tax bill by getting ‘Seafarers’ Earnings Deduction’.
How Seafarers Earnings Deduction works
In order to enjoy Seafarers Tax exemption, individuals must:
• Work on a ship - oil rigs and other offshore installations aren’t ships for the purposes of Seafarers’ Earnings Deduction – but cargo vessels, tankers, cruise liners and passenger vessels are.
• Work all or part of the time outside the UK - this means that for each employment you must carry out duties on at least one voyage per year that begins or ends at a foreign port.
• Be resident in the UK or resident for tax purposes in an European Economic Area (EEA) State, other than the UK.
Individuals may enjoy the deduction from their earnings as a seafarer if they have an ‘eligible period’ of at least 365 days that consists mainly of days when they are absent from the UK. There are special rules for working this out and so it is recommened to contact a tax professional for further advice.
Who can get the deduction?
Anyone who is employed on a ship can get the deduction, while self-employed persons who ‘work’ on ships are not entitled to SED. While you can enjoy SED if you are employed as a marine entertainer, cook, travel courier or musician, you will be unable to if you are a Crown employee, such as a Royal Navy sailor, or you are not UK resident nor a resident of an EEA State other then the UK. If this is the case, there may be other tax reliefs that you can claim, however.
As a seafarer, it is worth considering that:
• Seafarers often have relatively high net income, but often have a shorter career earnings period than other occupations. It is therefore important that any excess income is carefully invested for the future.
• UK resident Seafarers can benefit from up to £3,600 gross pension contributions per year and receive tax relief of 20%, even if your Income Tax liability is nil.
• UK tax allowances, e.g. ISA savings are available to UK resident Seafarers.
• UK resident Seafarers can benefit from Offshore Investment Bond rules, which can defer an Income Tax liability to a period when the individual’s tax rate applied may be lower than currently.
• Property investment in the UK or overseas, can affect your residency status and create additional tax liabilities.
It is imperative that Seafarers seek on-going professional advice regarding their residency, tax status and investment decisions. It is a complex area of financial management with rules constantly updating.
For more information, visit Reedman Wealth Management.