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HMRC internal manual

Tonnage Tax Manual

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HM Revenue & Customs
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Background Material: Seafarers' participation in UK approved pension schemes

GeneralThe extent to which companies can participate in UK approved pension schemes depends on whether or not they are UK tax resident and, if not, on whether or not they have a UK trading presence. The following paragraphs explain how that is determined, and cover the implications for their employees.

UK tax resident companiesIf the company is UK tax resident, it can establish, or participate in, an approved scheme in respect of all its employees (whether they are employed in the UK or overseas). It cannot make contributions to an approved scheme in respect of employees of other companies, such as ‘seafarers’ employed by offshore manning companies.

Should the company’s tax residence status change the rules of the pension scheme must be amended to provide for employee membership to be restricted on the appropriate basis, as explained below. Employees who are no longer eligible for membership must cease being active members of the scheme. They can stay in the scheme, but benefits cannot be provided under the scheme in respect of their subsequent service with the company.

Overseas tax resident companies with a UK trading presenceIf the company is tax-resident overseas but has a UK trading presence, it can establish, or participate in, an approved scheme in respect of those of its employees who are chargeable to UK tax under Case I or II of Schedule E, or who are entitled to the ‘Foreign Earnings Deduction’.

The rules of the pension scheme must provide for restricted membership on that basis. If the company ceases to have a UK trading presence the rules of the scheme must be amended to provide for further restriction, as outlined in the following paragraph. Employees who are no longer eligible for membership must cease being active members of the scheme. They can stay in the scheme, but benefits cannot be provided under the scheme in respect of their subsequent service with the company.

Overseas tax resident companies without a UK trading presence If the company is tax-resident overseas, without a UK trading presence, it can establish, or participate in, an approved scheme in respect of those of its employees who are ‘seafarers’ if they are either chargeable to UK tax under Case I or II of Schedule E, or are entitled to the ‘Foreign Earnings Deduction’. The rules of the pension scheme must provide for restricted membership on that basis.

Interpretation of guidance on scheme participationPlease note the following points:

  • Most UK approved schemes have been approved in their entirety. However, a pension scheme can be granted ‘split approval’ under section 611(3) of the Income and Corporation Taxes Act 1988 if certain conditions are met. This means that one part of the scheme is approved but the other part is not. Companies can participate in the approved part of a split approved scheme on the same basis as is set out above for an approved scheme. Employees who are not eligible for membership of an approved scheme can be members of the unapproved part of a split approved scheme.
  • ‘Seafarers’ has the meaning given in section 192A(2) ICTA 1988.
  • ‘Foreign Earnings Deduction’ is defined in section 192A ICTA 1988.
  • For pension scheme purposes an overseas tax resident company is regarded as having a UK trading presence if it has a branch or agency in the UK, any trading profits from which are liable to UK tax. If it has a representative office only in the UK it is not regarded as having a UK trading presence.