Detailed proposals for a new UK tax on North Sea oil and gas operations have now been rejected by Oil and Gas UK, the trade association after Chancellor George Osborne first proposed the so-called ‘bareboat tax’ in his Autumn statement last year.
Oil and gas service companies often lease drilling rigs, vessels and other equipment from overseas related parties on a ‘bareboat’ basis (i.e. without operating personnel). The associated rental costs are then claimed as a deduction against the UK profits of the service company when it uses such equipment to provide services to oil and gas licence holders in the UK Continental Shelf.
At the Autumn Statement there was an announcement proposing the introduction of a cap on the deduction available to UK service companies on bareboat charters from connected companies. In addition profits are to be ring fenced from other business activities so that the taxable profit cannot be reduced by other tax losses.
HM Revenue & Customs and HM Treasury have now circulated a note which sets out the scope of the proposed measure, including a description of how the legislation will function, together with the Government’s assessment of potential impacts.
Draft legislation for inclusion in Finance Bill 2014 has still not been published.
The Treasury plan is to cap annual bareboat deductions at 6.5% of the historic asset cost (regardless of current value), and to ring-fence the profits to avoid shelter by way of group relief or from losses outside the new ring fence. The excess of the lease payments above the cap will be available to shelter non-UK Continental Shelf contracting profits.
Helicopters and other “supply vessels” are excluded from the measures. All other vessels and assets of a value above £2m are potentially included.
The Treasury document requested views by 28 February 2014 on a number of matters, including how best to legislate to prevent the measure applying unfairly to operators of assets where there is an insufficient overall economic return.
In reply, Malcolm Webb, Chief Executive, Oil and Gas UK, said: ““On first learning of this possible bareboat tax measure, we asked for it to be reconsidered.
“Following further discussion of the matter at a Fiscal Forum meeting, the Treasury then opened a full consultation with the industry on this matter. We applaud the UK Government on the extent and breadth of its consultation with the UK oil and gas industry, producers and contactors alike.
“We remain hopeful of a satisfactory outcome on this matter. Nobody should consider this matter as having yet reached its conclusion.”
Meanwhile, a briefing written by Alan McRae, head of taxation business advisory group PWC, for the International Association of Drilling Contractors (IADC) states: “Government policy promises fiscal stability and a considered process for changing tax policy. That has simply not happened.”
And McRae warned of the government’s bareboat tax plan: “Double taxation could happen as a result of the UK and the asset owner’s home country both warning to tax the profits from asset ownership.”
The article also highlights a letter from Malcolm Webb to the Treasury, in which the Oil & Gas UK Chief Executive said: “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.”
Webb said that people in the industry were still “scarred” by the Treasury’s £10bn oil and gas tax grab in the 2011 budget.
Last night SNP MSP Maureen Watt said that the Treasury’s bareboat charter taxation plan ‘flies in the face of promises made by David Cameron just last week on fiscal stability for the oil and gas industry.’
She said: “The last thing our oil sector needs is yet another ill-thought out tax bombshell – it’s no wonder industry leaders are up in arms.
“These industry concerns come less than a week after the UK Cabinet flew into Aberdeen to promise fiscal stability for Scotland’s North Sea industry. It is notable that the Prime Minister didn’t mention this during his visit – even though he must have been aware of industry views.
“In just 10 years there have been 16 substantive changes to the fiscal regime in the North Sea – no industry can possibly operate at its best when faced with such challenges.
“These warnings come as we learn that the value of Norway’s oil fund has soared past the £500bn mark – serving as a stark reminder of how successive Westminster governments have squandered Scotland’s fantastic natural resources.
“In contrast to the approach taken by Westminster, the Scottish Government is clear on the need for closer co-ordination and co-operation between the industry and relevant bodies.”
“With independence, Scotland would have the fiscal powers to support the industry – ensuring it is no longer subject to sudden and unexpected tax hikes by the UK Government”.