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.