EIM33062 - Seafarers' Earnings Deduction: Statement of Practice 18/1991

Statement of Practice 18/1991

The complete text of the Statement of Practice is set out below. The references in brackets reflect the changes that are necessary following the enactment of ITEPA 2003 covering the years from 2003/04 onwards.

“1. A person who is resident and ordinarily resident in the United Kingdom may be liable to United Kingdom tax on earnings for any work done abroad as well as for work done in the United Kingdom. However, Section 193 ICTA 1988 [Section 378 ITEPA 2003] provides that, where individuals [seafarers] who are resident and ordinarily resident in the United Kingdom perform the duties of their employment wholly or partly abroad, they are entitled to a 100 per cent foreign earnings deduction for tax purposes, provided they are absent from the United Kingdom for a “qualifying period” [eligible period] of at least 365 days. This relief is given by allowing a deduction equal to the individual’s earnings so that in fact, no tax is due on those earnings.

2. The term “qualifying period” [eligible period] is defined in Paragraph 3 Schedule 12 ICTA 1988 [Section 378 ITEPA 2003]. This provides that return visits to the United Kingdom may count as part of the qualifying period [eligible period] on condition that:

  • no single visit lasts for more than 62 [183] consecutive days; and
  • the total number of days spent on visits to the United Kingdom during the “qualifying period” [eligible period] do not exceed one-sixth [one-half] of the total number of days in the “qualifying period” [eligible period].

3. Inland Revenue practice has been to allow people who have previously been resident in the United Kingdom and return after an absence abroad - during which time they have been not resident for tax purposes - to count the absence abroad during which they were non-resident as part of a “qualifying period” [eligible period] for the purposes of the 100 per cent foreign earnings deduction. However, the Board of Inland Revenue are advised that for the 100 per cent foreign earnings deduction to apply, the law requires the person to have been resident and ordinarily resident in the United Kingdom throughout the “qualifying period” [eligible period].

4. The Revenue will apply this new interpretation of the law with effect from 6 April 1992. Anyone who becomes resident and ordinarily resident in the United Kingdom on or after that date will be subject to the new practice. They will not therefore be able to count a preceding period abroad, during which they were not resident, towards a “qualifying period” [eligible period] for the purposes of the 100 per cent foreign earnings deduction. The new practice will not apply to people who became resident and ordinarily resident before 6 April 1992. They will continue to be able to utilise a period of non-residence in the United Kingdom towards establishing a “qualifying period”[eligible period], until the benefit of the period of non-residence runs out.

Terminal leave pay

5. This change also affects the tax treatment of pay for a period of leave in the United Kingdom following a period of non-residence. Where pay is for a period of terminal leave during which the individual is resident and ordinarily resident in the United Kingdom, liability arises under Case I of Schedule E [Section 15 or 21 ITEPA 2003]. If this follows a period of non-residence the foreign earnings deduction cannot apply under the new practice.

6. Where however terminal leave follows a period abroad during which someone has remained resident and ordinarily resident, Paragraph 3(3) Schedule 12 ICTA 1988 [Section 379(2) ITEPA 2003] allows earnings attributable to the “qualifying period” [eligible period] to include any pay for that employment which relates to a period of leave immediately following the “qualifying period” [eligible period] in the same tax year.”