The UK oil and gas market continues to be stagnant and UK companies are increasingly looking overseas for work opportunities and tendering for potentially lucrative contracts.
Successfully winning overseas contracts undoubtedly generates higher revenues for UK companies, however in our experience, inaccurate contract language, which doesn’t describe the actual supply being undertaken by the company, can be costly in the event of a challenge, from an overseas tax authority, that the company is liable to Corporation Tax (CT) there.
To explain, contracts typically, but not always, fall into two distinct categories, being “Hire of Labour” or “Provision of Services”. The distinction between the two is critical when analysing the company’s CT position:
– Under “Hire of Labour” contracts, companies are engaged to provide specialist personnel, who work directly for, and report to, their customer.
– Under “Provision of Services” contracts, companies are engaged to perform services, assigning their own personnel to deliver those services, under the company’s direct control and supervision.
The overseas tax consequences, both for the company and the personnel, are potentially very different under each type of contract:
– “Hire of Labour” contracts should not create an overseas CT liability, so the company should not incur any CT or compliance costs.
– “Provision of Services” contracts can create CT exposures, the risk of which must be considered on an individual contract basis, with incremental tax and compliance costs being built into the tender price as appropriate.
Clear, unambiguous contract language is therefore necessary to be able to distinguish between contract types. When reviewing draft contracts, companies should study the wording carefully, ensuring the contract accurately describes what is being supplied.
The contract is the company’s first line of defence in the event of a challenge by the overseas tax authorities. However, increasingly we observe contract language describing a “Provision of Services” when, in fact, our client is simply providing personnel to their customer under a “Hire of Labour” arrangement. The contract cannot, therefore, be submitted as evidence to the overseas tax authority in defence of a CT challenge. In absence of other evidence, the company is exposed to overseas CT liabilities, when none should be due.
Defending such a position becomes difficult, time consuming and expensive, with no guarantee of success. Often, overseas tax authorities issue estimated CT assessments (including interest and penalties), demanding full payment before allowing any defensive appeal, and further eroding profits. Had the contract been drafted properly, simply submitting it to the tax authorities should have been sufficient to end their challenge.
Diligent contract reviews are obviously important, but critically so in overseas situations. Our International Tax team is highly experienced in reviewing draft overseas contracts, ensuring they are robust enough to withstand any challenges from overseas tax authorities.
Kevin Mann, International Tax Partner at Anderson Anderson & Brown LLP, Chartered Accountants
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