US tax return preparation for expats: North Sea offshore

For a US citizen living near Aberdeen, days worked on an installation fixed to the UK continental shelf are generally treated as days in a foreign country for the foreign earned income exclusion, and the UK taxes the same days as UK duties. The harder questions are which US relief to use and what a US payroll missed.

That is why US tax return preparation for expats in the offshore energy sector is rarely a standard exercise. Senior drilling, subsea and operations managers sit at the intersection of two sets of deeming rules: a UK rule that pulls the continental shelf into the UK tax net, and a US definition of “foreign country” that reaches the seabed but not the open sea. At Jungle Tax we prepare the US and UK returns for these clients from one reconciled record of days, pay and tax, because the two computations only agree when they are built together. This guide sets out how each country counts the same offshore day, and how earlier years are put right where they were filed incorrectly or not at all.

How does the UK tax earnings from the continental shelf?

The UK approaches offshore work in two layers, and it is worth keeping them apart.

Territorial waters: simply part of the UK

For income tax purposes the United Kingdom includes its territorial sea, which extends 12 nautical miles from the shore. HMRC’s Employment Income Manual confirms that earnings for work performed within that limit are earnings for work performed in the UK, with no special rule required. See EIM67105.

Designated areas: section 41 ITEPA 2003

Most North Sea installations sit well beyond 12 miles. Here the charge depends on section 41 of ITEPA 2003, the UK employment income statute. General earnings from duties performed in a designated area, in connection with exploration or exploitation activities, are treated as earnings from duties performed in the United Kingdom. Designated areas are those designated by Order in Council under the Continental Shelf Act 1964 and correspond broadly to the UK sector of the continental shelf. HMRC summarises the rule in EIM40208.

Two consequences follow for a senior American employee:

• The earnings are UK-duty earnings whatever your residence status. A UK resident is taxed on them in any event. A non-resident who flies in for rotations is taxed on them because the duties are treated as performed in the UK.
• The deeming is narrow. HMRC’s own wording is that section 41 applies for the employment income charge only. It converts offshore duties into UK duties for the purpose of taxing earnings. It is not a general statement that an installation 120 miles offshore is “the UK” for every other tax purpose.

Does the US/UK treaty change the answer?

Not in the individual’s favour. The US/UK income tax convention contains a specific article on offshore exploration and exploitation activities, under which employment exercised offshore in connection with those activities may be taxed in the country whose shelf it is, subject to a short de minimis period that HMRC’s guidance describes as confined to exploration work. A senior manager on a producing asset should assume UK taxing rights from the first day. For a US citizen the treaty’s saving clause in any case preserves the US right to tax, so the relief comes from the exclusion or the credit on the US return rather than from an exemption.

The seafarers’ earnings deduction is not the answer

General UK guides for offshore workers often mention the seafarers’ earnings deduction. It is aimed at employment on ships, and offshore installations are excluded from the meaning of a ship for that purpose. A manager whose post of duty is an installation should not expect it. Roles performed on vessels operating alongside installations need separate analysis.

Are you UK resident on a rotational pattern?

Residence is decided by the statutory residence test, applied to each UK tax year (6 April to 5 April). HMRC’s guidance note RDR3 sets out the tests in full. For an American manager who has relocated to the north-east of Scotland with a home there, residence is usually straightforward:

• 183 days. If you are in the UK for 183 days or more in the tax year, you are resident and no other test matters.
• The home test. A home in the UK in which you spend sufficient time, without an equivalent overseas home, makes you resident automatically.
• Full-time work in the UK. Working full-time in the UK over a 365-day period, with more than 75% of the days on which you work more than three hours being UK workdays, is a further automatic test.
• Sufficient ties. Failing the automatic tests, residence turns on UK days combined with ties. A leaver resident in any of the previous three years needs at least four ties at 16 to 45 days, three at 46 to 90, two at 91 to 120 and one above 120. An arriver needs all four ties at 46 to 90 days, three at 91 to 120 and two above 120.

Do offshore days count as UK days?

This is where the narrowness of section 41 matters. Days in UK territorial waters are days in the UK. A day spent in a designated area beyond the 12-mile limit is deemed to involve UK duties for the earnings charge, but that deeming is not expressed to extend to the residence day count. The position for your own pattern should be analysed rather than assumed, particularly if you are trying to establish non-residence. For the reader this guide is written for, with a home, a family and onshore days in Scotland, the point is usually academic: the home test or the ties test produces UK residence regardless.

It matters far more to the manager who lives in the United States and flies in. That individual may well be non-UK resident, yet remains fully taxable in the UK on the offshore earnings because of section 41.

Scottish rates for those living in Scotland

If you are UK resident and your sole or main place of residence is in Scotland, you are a Scottish taxpayer for the whole tax year. Scottish rates and bands then apply to your employment income wherever the duties are performed, including offshore. For 2026/27 the structure runs from a 19% starter rate through 20%, 21%, 42% and 45% to a 48% top rate, with the personal allowance withdrawn between £100,000 and £125,140. Savings interest and dividends stay on UK-wide rates. We cover the mechanics, and their effect on Form 1116, in our guide to Scottish rates and the foreign tax credit.

Does an installation count as a foreign country on the US return?

The foreign earned income exclusion, claimed on Form 2555, requires a tax home in a foreign country and either bona fide residence or physical presence in a foreign country. Everything therefore turns on what a foreign country is.

The definition in Treas. Reg. 1.911-2(h)

The regulation defines a foreign country as any territory under the sovereignty of a government other than that of the United States. It then extends the term to three things: the territorial waters of the foreign country, determined in accordance with US law; the air space over the foreign country; and the seabed and subsoil of those submarine areas adjacent to its territorial waters over which the foreign country has exclusive rights, under international law, to explore and exploit natural resources.

That third limb is the continental shelf. A drilling or production installation fixed to the seabed of the UK sector, engaged in exactly the exploration and exploitation that the definition contemplates, is generally regarded as within a foreign country for section 911. A separate regulation under section 638 points the same way for sourcing, treating a US citizen engineer working on a platform affixed to a foreign continental shelf as employed in that country where it exercises taxing jurisdiction, which the UK plainly does through section 41.

What Publication 54 adds, and where care is needed

IRS Publication 54 states the definition more briefly and adds that a foreign country does not include international waters and the airspace above them. The IRS also states that time spent on or over international waters does not count as time in a foreign country.

The two statements are reconciled by looking at where you actually are. The regulation reaches the seabed and subsoil, not the water column above it. In practice:

• Fixed installations attached to the UK shelf are the clear case and are generally counted as foreign days.
• Vessel-based roles beyond the 12-mile limit, where the individual lives and works on a ship rather than a structure attached to the seabed, are less certain. The facts, and the nature of the unit, should be documented before the days are relied on.
• Helicopter transfers are rarely a problem. Under the regulation, travel over areas not within any foreign country for less than 24 hours does not break foreign presence.

Can you meet the physical presence test across rotations?

The physical presence test requires 330 full days in a foreign country, or countries, during any period of 12 consecutive months. A full day is 24 consecutive hours from midnight to midnight. The days need not be consecutive, and the 12-month period can be chosen to suit you.

For an Aberdeen-based manager, a rotation does not threaten the count in the way many assume. Onshore field breaks in Scotland are foreign days. Offshore days on a fixed installation are generally foreign days. The count is eroded by something else entirely: time in the United States. Head office visits, training in Houston, home leave and client meetings each cost the days spent there plus, usually, the partial days of arrival and departure. With only 35 days of tolerance in a 365-day period, two long trips can end the claim for an entire window.

Three further points are frequently overlooked:

• The tax home test comes first. The Form 2555 instructions use the example of an offshore worker on a 28-on, 28-off pattern who returns to a family residence in the United States between hitches. That person has a US abode, no foreign tax home, and no exclusion, however many days were spent abroad.
• US workdays are US-source. Pay attributable to days worked in the United States is not foreign earned income and cannot be excluded. It is also taxed by the UK if you are UK resident, which calls for treaty-based relief rather than the exclusion.
• Bona fide residence may be the stronger test. A manager settled in Scotland for a full US tax year or more will often qualify as a bona fide resident, which is far less sensitive to US travel.

Exclusion or foreign tax credit: which should a senior earner use?

Qualifying for the exclusion does not mean it should be claimed. For 2025 the maximum exclusion is $130,000, rising to $132,900 for 2026. A senior package, with bonus, offshore uplift and equity, is normally a multiple of that. The excess remains taxable, and it is taxed at the rates that would have applied had nothing been excluded.

Question	UK treatment (HMRC)	US treatment (IRS)
Territorial waters, within 12 nautical miles	Part of the UK for income tax	Territorial waters of a foreign country: foreign days
Fixed installation on the UK shelf beyond 12 miles	Duties treated as UK duties under section 41 ITEPA 2003	Seabed and subsoil within Treas. Reg. 1.911-2(h): generally foreign days
Vessel in open sea beyond 12 miles	Depends on the activity and the unit; separate rules for ships	International waters are not a foreign country; analyse on the facts
Basis of charge	Residence, plus UK-duty earnings for non-residents	Citizenship, on worldwide income
Tax year	6 April to 5 April	1 January to 31 December
Top rate on earnings	48% Scottish top rate, plus National Insurance	37% federal
Relief for the other country’s tax	Limited; the UK has primary taxing rights over UK-duty earnings	Form 2555 exclusion or Form 1116 credit
Unused relief	Not carried forward	Excess credit carried back one year and forward ten

Because Scottish higher, advanced and top rates exceed US federal rates on the same earnings, the foreign tax credit will usually eliminate US tax on the salary in full and leave a surplus of general-category credit to carry back one year and forward ten. That surplus has real value in a later year of lower foreign tax, such as a reassignment to a low-tax jurisdiction. The exclusion generates no such asset, and you cannot credit foreign tax attributable to excluded income.

There is also a procedural trap. An exclusion election, once made, continues until revoked, and a taxpayer who revokes it must obtain IRS approval to elect again within five years. Moving from one method to the other is therefore a decision to model across several years, not a preference to change on each return.

What gets missed when a US payroll runs the contract?

Many senior Americans arrive in Aberdeen on a US employment contract, paid in dollars through a US payroll, with a US preparer who has handled their returns for years. The pattern of errors is consistent.

• No UK tax operated at source. Federal income tax is withheld; UK PAYE is not. UK legislation contains specific provisions that place PAYE responsibility on others in the contractual chain where an overseas employer does not operate it, but the individual remains exposed where nothing was deducted and no Self Assessment return was filed.
• US tax paid on income the UK taxes first. With no UK tax yet paid, the US return shows no credit. When the UK liability is eventually settled, the credit belongs to an earlier US year, and the mismatch has to be unwound through amended returns.
• An exclusion claimed without the analysis. Form 2555 is completed on the basis of “working abroad”, with no record of US days, no consideration of the tax home test, and no day log distinguishing installation, vessel and onshore time.
• Social security in the wrong country. The US/UK social security agreement generally keeps a temporarily seconded employee in the home system, evidenced by a certificate of coverage. Without one, UK National Insurance may be due alongside US contributions.
• State withholding that never stopped. A payroll address in a US state can keep state tax running long after residence there has ended.
• Equity awards sourced incorrectly. Restricted stock units that vest in the UK are apportioned over the grant-to-vest period by workdays, in both countries, and rarely by the same fraction unless someone reconciles them.
• Account reporting. A UK salary account breaches the $10,000 aggregate FBAR threshold almost immediately. Form 8938 follows at higher thresholds. Our FBAR penalty calculator illustrates the exposure.

How are missed or incorrect years corrected?

The US side

Where returns or FBARs were not filed and the failure was non-wilful, the IRS Streamlined Foreign Offshore Procedures remain the orderly route: the most recent three years of returns, six years of FBARs and a signed non-wilfulness certification. The taxpayer must meet a non-residency test, broadly 330 full days outside the United States in at least one of the three years with no US abode, and no miscellaneous offshore penalty is charged. A manager who kept a US home throughout may instead fall within the domestic procedures, which carry a 5% penalty on the relevant assets. Our IRS streamlined filing team scopes eligibility before anything is submitted.

Where returns were filed but the relief was wrong, the remedy is an amended return. A refund claim that depends on foreign tax credits has a ten-year window from the due date of the return for the year concerned, rather than the usual three. That is long enough to recover most cases in which UK tax was paid late and never credited. A late exclusion election is possible only within defined limits, which is another reason to favour the credit in reconstruction work.

The UK side

A Self Assessment return can normally be amended within 12 months of the filing deadline, and overpayment relief is available for four years from the end of the tax year. Where UK tax on offshore earnings was never paid, a voluntary disclosure is the correct route, and an unprompted disclosure attracts materially better penalty treatment than one made after HMRC opens an enquiry. HMRC’s assessment windows run from four years to six for careless behaviour and to twenty for deliberate behaviour. Our UK tax return team prepares the UK filings in step with the US ones, so that every pound of UK tax settled is matched to the US year in which it is creditable.

The sequence we follow

• Rebuild a day-by-day calendar for each year: onshore UK, fixed installation, vessel, United States, third countries.
• Determine UK residence and Scottish taxpayer status for each UK tax year.
• Compute the UK liability first, including any disclosure, so the creditable tax is known.
• Test the exclusion and the credit side by side for each US year, then fix the method across the whole period.
• Source equity and bonus income consistently in both countries.
• Reconcile the account list to FBAR and Form 8938.
• File through the appropriate procedure, with the narrative and certification supported by the calendar.

Records a senior offshore manager should keep

The evidence that decides these cases is mundane and perishable. Retain rotation schedules and personnel-on-board records, helicopter manifests, passport stamps and airline itineraries for every US trip, the assignment letter, payslips from every payroll, any certificate of coverage, the P60 or equivalent, the UK tax calculation, and equity grant and vesting statements. Keep them for at least ten years, to match the foreign tax credit refund window rather than the shorter UK retention period.

Speak to a cross-border team that prepares both returns

Jungle Tax is a specialist firm of US and UK tax accountants. We prepare both returns for senior Americans in the energy sector, and we regularise earlier years where a US payroll, a missing UK return or an unexamined exclusion claim has left the two records out of step. If you work on the UK continental shelf and are not certain that your offshore days, your Scottish tax and your US relief have been treated consistently, contact our cross-border team for a confidential consultation. We will review the position, quantify what is recoverable and what needs correcting, and set out a clear route before anything is filed.