Maladroit new tax on oil and gas industry creates new threat to North Sea competitivess

In bis Autumn statement in early December, the Chancellor, George Osborne, announced the government’s intention to levy national insurance contributions on workers employed through offshore intermediaries in the UK oil and gas industry – as of April 2014.

This showed he has not learned lessons from the serious mistake he made early in his post, in suddenly tinkering with the tax regime for the oil and gas industry.

Back in March 2011, the Chancellor announced a ‘windfall tax’ on gas companies as a way of recovering revenues lost in lowering duty on petrol and diesel.

Gas companies then warned the Treasury that they would have to raise their prices and limit investment in Britain in order to absorb the impact of the introduction of this tax.

As the Government’s strategy started to backfire, Treasury officials confirmed that they were considering handing out hundreds of millions of pounds in tax breaks to compensate energy companies whose profits would be hit by the new tax.

Centrica, which operates British Gas, told ministers then that plans for further investment in the Morecambe Bay gasfield could be shelved as a result, making Britain – already a net importer, more reliant on imports from the Middle East and Russia.

Osborne then reined back on his plans, apparently having come to understand the very real problems that sudden changes to tax regimes bring to financing the oil and gas industry.

This industry, by its nature, operates on long lag times – between commitment to investment and the coming onstream of new infrastructure to earn the profits to pay for itself.

Strong and accurate financial planning underpins the way this industry works, with an absolute need to know the specifics of the tax regime that will apply.

Sudden changes in taxation alter at once the costs-to-profits ratio on which such planning is balanced; and threats to that ratio – with margins in North Sea production already very low in relation to the necessary investment tend to cause stalls.

Possible changes in taxation, without much notice or time to gear up to absorb their impact, spook the industry, leading to production shut downs and reluctance to invest.

With the Chancellor seeming to have grasped this, the measures proposed in his 2013 Autumn statement came as a shock to the financial sector and to the industry.

The proposal is to introduce NIC at 13.8% on the UK contractors supplying rigs, FPSOs and other equipment to oil and gas operators,

Martin Findlay, tax partner at KPMG in Aberdeen, said that the UK government’s intention to limit tax relief on payments made to overseas affiliates which charter rigs and other equipment to oil and gas operators  would come as a surprise to many in the sector.

In a published analysis for KPMG, he said: ‘Pledging continued investment in and support of the North Sea oil & gas sector with one hand while announcing this unexpected new measure, which will affect drilling companies, will raise significant uncertainty throughout the industry.

‘Drilling companies face the prospect of significantly larger tax bills, which will have to be passed through the supply chain to producers and energy providers. It is bound to negatively affect the competitiveness of the UK as opposed to other oil and gas jurisdictions.

‘The industry will welcome the fact that there will be a consultation process on the new legislation, but given the UK government has said it will raise £140m in the first year, there may be fears the outcome will be a foregone conclusion.  The proposed start date for the new regime of April 1st, 2014 is very close and will have a negative effect on existing contracts.’

There would seem also to be unhelpful uncertainty as to the amount of the tax take to come.

HMRC estimates put the potential cost to the North Sea oil and gas industry at £90m.

However, the UK government announcement gave the intention as being to raise £520m with the measures.’

It is fair to say that the industry in angry and unsettled by this sudden move.

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11 Responses to Maladroit new tax on oil and gas industry creates new threat to North Sea competitivess

    • “I have always wondered if the crews get the state pension and UK health services post retirement?”
      The very short answer is “yes”. By registering in the Isle of Man or channel Islands for example companies are trying to avoid employers contributions. Further complication ensue – Seafarers’ Earnings Deduction (SED) apply when working on a ship – Oil rigs and other offshore installations aren’t ships for the purposes SED – but cargo vessels, tankers, cruise liners and passenger vessels are. Work all or part of the time outside the UK – this means that for each employment you must carry out duties on at least one voyage per year that begins or ends at a foreign port and be resident in the UK or resident for tax purposes. MN Officers have the benefit of the Merchant Navy Officers Pension Scheme – a portable contributory scheme – once supported across the whole industry. Plus any normal State benefits on retirement + dedicated treatment for MN active and retired seafarers at Guy’s Hospital.

      Like or Dislike: Thumb up 4 Thumb down 1

      • I wish we all did have access to the MNOPS but most companies have opted out so it’s dying from having few/no new entrants. My company is belatedly starting a contributory scheme after the deadline set by the MLC but it’s no defined salary scheme. Better than nowt though.

        Like or Dislike: Thumb up 1 Thumb down 0

        • MNOPS has now bee transferred out to a new management company, which has re-insured the debt.It was way ahead of it’s time, but as you say, there ain’t enough of us left to support it.

          Like or Dislike: Thumb up 0 Thumb down 0

      • And it looks as if the UK Government has classified FPSOs as ‘not ships’ since they’re included in the NIC payables.
        This must be a marginal classification, if an arguable one since they spend most of their time in fixed positions.

        Like or Dislike: Thumb up 0 Thumb down 0

        • ‘Offshore Installations’ used in the offshore oil and gas industry are not classed as ships under SED rules. Here are some examples of offshore installations.
          • Fixed production platforms.
          • Floating production platforms.
          • Floating storage units.
          • Floating production storage and offloading vessels (FPSO).
          • Mobile offshore drilling units (drill ships, semi-submersibles
          and jack ups).
          • Flotels.
          • Vessels engaged in the exploitation of mineral resources
          using a well, while standing or stationed in any waters.
          The more complex the tax rules the more reasons for taking registered companies offshore. Most UK kids now don’t know that over 90% of what they use and eat comes in a shipping container. These containers are more likely to be owned, managed and shipped by by foreign companies and carried in ships manned by foreign crews from a multitude of countries. If FA did a survey of ships in Argyll waters few would be British registered or manned. Next time you’re on a Calmac ship just check the age profile of the guys on deck – few if any will be aged under 25. A succession of Governments have taxed the industry to the extent that (I kid you not!) Calmac is truly now Scotland’s premier and one of Britain’s last major Shipping Companies – with an aging yet diminishing pool of local expertise to call on. Another British industry with a home grown manning crisis of our own making – yet paradoxically British marine expertise from aging professionals are in constant demand worldwide.
          Consider this The UK has given tax breaks to build super sized aircraft carriers, destroyers and submarines, with a remit of defending British shipping interest, yet, successive governments have taxed that very British mercantile fleet out of existence – as a nation we need to get the fundamentals right.

          Like or Dislike: Thumb up 1 Thumb down 0

    • Calmac but not Argyll Ferries crews are administered from Guensey and the company does not pay Employers NI Contributions as far as I know.

      I always thought a government owned company actively avoiding a legitimate tax was below the belt.

      Like or Dislike: Thumb up 2 Thumb down 0

  1. Osbourne … the man Times has branded ‘Briton of the year 2013′ … yet again fires torpedoes at economy for his own amusement

    Like or Dislike: Thumb up 3 Thumb down 0

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