There were a couple of announcements in the chancellor’s Autumn Statement that will have an almost immediate effect on the oil industry.
The first is a crackdown on “bareboat” chartering of oil rigs into the UK North Sea. This aims to raise £140million in 2014/15 and up to £525million by the end of 2019.
An oil company will often contract with a drilling service company for drilling services offshore, paying a day-rate.
Where a rig is bareboat chartered (i.e. without operating personnel) from an overseas company, HM Revenue & Customs (HMRC) accepts that the owner is not carrying on activities on the UK Continental Shelf so as to be chargeable to UK tax.
The charterer (operating company) will claim a deduction for rig rentals in computing its profits. This may lead to disputes over the UK charterer’s true level of taxable profit if the rig owner is a member of the same group of companies who is based in a low tax jurisdiction.
The new measure caps the amount that independent offshore contractors may deduct against their corporation tax liability from the leasing of oil and gas capital equipment, primarily drilling rigs, from April 2014.
HMRC’s intention to block avoidance of employment taxes and NI contributions through the use of “offshore intermediaries” is well documented.
The statement announced further moves to counter avoidance by “onshore intermediaries” used to avoid employment taxes and obligations by disguising employment as self-employment.
The details were sparse, but this underlines HMRC’s intention to collect more tax using “IR35” (as the “employment intermediary” rules have become known).
The IR35 rules are intended to collect tax from partnerships, one-man companies and “umbrella” companies that are used to break the employment relationship between the individual who does the work and the ultimate user of his or her services. Among other things, this can save significant amounts of NIC and PAYE and is common practice in the oil and gas industry.
Legislation will be also be introduced in Finance Bill 2014 to prevent a small number of high-earning non-domiciled individuals from avoiding tax by creating an artificial division of the duties of one employment between contracts in both the UK and overseas. These are known as “dual contracts”.
Callum Wilson is a tax partner at Johnston Carmichael
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