Anger is growing within the UK offshore industry including among vessel owners and drilling contractors over the Treasury’s (HMT) bareboat charter taxation plan which, by its own admission will load additional costs on to the North Sea.
Energy has received copies of material attributable to both Oil & Gas UK and the International Association of Drilling Contractors pressing for the proposed tax to be dropped.
We have also received a copy of a note from Treasury to the IADC claiming that the planned tax is fair.
In a guidance note for IADC members penned last month by business advisory major PWC, head of taxation in Aberdeen, Alan McCrae says: “Government policy promises fiscal stability and a considered process for changing tax policy.
“That has simply not happened. As a result, this is being rushed through with indecent haste without regard to the consequences which could be very serious for government, industry, taxpayer and jobs.
“It goes against the spirit of Wood which urges fiscal stability and a collaborative approach.
“If industry were given time to work with government in a constructive manner then solutions to make the UK a centre of excellence might be possible, creating a win-win rather than lose-lose (situation).”
McCrae says he understands HMT’s concern that a lengthy consultation could create uncertainty, but that this could be addressed by giving “grandfathering” relief for contracts entered into in good faith in the meantime (perhaps limited to two years relief) thus allowing the best of both worlds of a fully considered and open-minded consultation but allowing investment to proceed until the changes are agreed.
He goes on to say that the lack of process goes particularly against the government’s open for business agenda and the assurances given thereby.
McCrae refers to a note from Laura Kidd of HMT to Taf Powell at the IADC where she says: “We don’t think current arrangements are giving a fair return for the taxpayer. While we haven’t specifically identified what we consider a fair return, we have set out a proposal that we think achieves it.”
He suggests a counter to Kidd’s note: “You might want to highlight that its very difficult to have a discussion about a fair outcome when the Government is not even prepared to articulate what is fair and why the measures only apply to oil and gas and not other industries.”
He points out that the government is not willing to subject itself to the same rules and standard of fairness for assets owned in the UK and used elsewhere as it wants to apply here where the assets as owned elsewhere and used in the UK.
And he warns: “Double taxation could happen as a result of the UK and the asset owner’s home country both wanting to tax the profits from asset ownership.”
It is pointed out that the one size fits all approach ignores commercial reality and as a result is a blunt instrument that causes the tax system to distort competition, for example:
– Rigs owned for a long time will be taxed more heavily under the proposed formula than rigs that are new or are newly acquired as second hand
– Companies that have income outside the ring fence to negate the impact of these measures are at a competitive advantage to those with none
– New players with smaller portfolios and higher financing costs will not have their higher costs taken into account, thus putting more established players at a considerable advantage
“No credible justification has been articulated for the ring fence and its unfairness for those companies that have been lured to the UK under the open for business agenda is a national embarrassment,” says McCrae.
However, he does add that engagement with HMT and HMRC is now under way and that ministers “are properly informed of the true picture so that ministers can take decisions with the full facts and understanding of the consequences”.
Turning to Oil & Gas UK’s letter of February 17 from chief executive Malcolm Webb to chancellor George Osborne, Webb writes: “We strongly urge this proposed measure, announced in the recent autumn Statement, be withdrawn due to the serious adverse impact it will have on investor confidence, UKCS exploration and the cost base of our sector.”
Webb warns that exploration drilling in the UK has plummeted of late and that this is in part due to a lack of available rigs and inability of companies to secure the money needed for exploration.
“This measure threatens to worsen the situation on both counts,” warns Webb.
He warns too that the average unit cost of production is now at an all-time high and set to rise further, despite efforts by the industry to contain costs.
And he points out: “The proposed measure will, by HMT’s own admission, increase day rates for rigs and other equipment caught by this measure by up to 14%.
“It is also being accepted by Treasury that the full impact of this will not be contained within the contractor community but will flow through to investors.”
Webb concludes his letter by calling for a “more appropriate, simpler and predictable” fiscal regime for the UKCS.
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