Legislative changes effective April this year will result in significant cost increases for many oil and gas sector employers.
At a time when the skills shortage in the sector has led to unprecedented levels of pay, this additional cost will put further pressure on UK Continental Shelf operators.
Offshore Employment Intermediaries (OEI) are very common in the oil and gas sector and through legitimate corporate restructuring they enable a wide range of shipping and oilfield service companies to manage employment costs and remain competitive in a global market.
Early last year, HMRC embarked on a consultation process with industry, advisors and representative bodies aimed at curbing the use of OEI.
This process has led to proposals which are due to be debated in Parliament this month and enacted in time for the start of the new tax year. Some of the key features of the changes are discussed here.
Certification scheme
Where an OEI has a UK associate, branch or agency (UK associate) the legal obligation to withhold PAYE and pay employer NIC will rest with the UK associate.
Although not covered by the proposed legislation, HMRC has confirmed that where the OEI is currently withholding PAYE on a voluntary basis then it can continue to do so, thus alleviating the UK associate from an additional admin burden, although not from the legal responsibility.
Where the OEI does not have a UK associate the legal obligation to withhold PAYE and pay employer NIC will rest with the oilfield licensees.
This means that the licensees must determine all the OEIs in their respective supply chains and establish whether or not they have a UK associate.
Potentially, this is a massive due diligence exercise so, following discussions with industry and advisors, HMRC has relented and agreed that where the OEI does not have a UK associate but it does withhold PAYE and will pay employer NIC, it will issue certificates to the OEI and the licensee.
The purpose of the certificate is to transfer the legal obligation to the OEI, protecting the licensees from any liabilities in the event of a default by the OEI, but only until such time as the certificate is revoked.
Licensees should still establish whether or not they have any subcontractors with an OEI that do not have a UK associate and will not apply for a certificate as this will be their area of exposure.
As the oil and gas sector is likely to be self-policing in this regard, OEIs with no UK associate and no certificate are at significant risk of losing business as licensees seek to eliminate their exposure.
A penalty regime for non-compliance will exist, but HMRC has confirmed a “soft landing” approach in the first year. Generally, this means that if you at least try to get it right you are likely to avoid penalties.
Continental Shelf workers and mariners
HMRC’s initial stance was that oil and gas workers could not be mariners (for NIC purposes), despite the large number of ships and vessels operating in the UKCS.
However, after consulting industry, advisors and representative bodies, HMRC relented somewhat and agreed that “recognised mariners” and their employers should not be affected by these proposals.
Their aim is to align the definition of a mariner for NIC purposes with the definition of a seafarer for income tax purposes.
It was anticipated that offshore platforms, FPSOs, drilling rigs, storage and accommodation units, etc, would be categorised as offshore installations for NIC purposes, as they are for seafarers’ earnings deduction.
What was not expected was the extremely wide range of offshore structures, ships or vessels that may come within the definition of an offshore installation, particularly as many of these will be crewed by genuine mariners.
Despite HMRC’s stated intention of ensuring that recognised mariners would not be affected by the OEI proposals, the only exclusions specifically mentioned in the legislation are supply vessels and safety vessels.
This means that any of the following – anchor handling vessels, construction and maintenance vessels, diving support vessels, heavy lifting vessels, pipe laying vessels, barges, platform support vessels, seismic survey vessels and well service vessels (not an exhaustive list) – could, in theory, be categorised as an offshore installation.
However, it is not necessarily all bad news as two conditions must be satisfied for a structure (including a ship or vessel) to be classed as an offshore installation – it must be put to a relevant use while standing or stationed in any waters.
Generally speaking, relevant use means for the purpose of exploiting mineral resources or for the purpose of exploration with a view to exploiting mineral resources.
If a structure does not satisfy both of these tests it is not an offshore installation, it is a ship or vessel and the crew are mariners not oil and gas workers.
Unless HMRC reconsider the means of defining a mariner for NIC purposes, as far as the UKCS is concerned, there will continue to be many situations where it will be necessary to analyse each work programme to determine if the conditions of relevant use and standing or stationed are satisfied.
This is not an ideal scenario because of the potential alternating NIC treatment of the same workers on the same vessel from trip to trip dependent on what the vessel is doing. Hardly a step towards simpler taxation.
In conclusion, while some aspects of the legislation have been made more practical there are certainly others where much more monitoring is required. In all likelihood employment costs of the sector as a whole will rise as a consequence of these changes.
Allan Duncan is an executive director in the EY Human Capital Tax Team
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