After what has been one of the most challenging downturns in the history of the UK oil and gas industry, we are starting to see tangible signs of recovery with new entrants investing in the North Sea; an increase in transactions; and further reductions in operating costs from $30/boe to $15/boe.
To help the industry navigate this period of uncertainty, the UK Government acknowledged the need to create a competitive, predictable and simplified fiscal regime which reduces the administrative and tax burden for the sector while encouraging continued investment.
However, following the EU Commission’s review of special procedures, Her Majesty’s Revenue and Customs’ (HMRC) announcement of the removal of End Use Relief (EUR) – customs duty relief operated by businesses in the UK oil and gas sector for nearly 20 years – is contradictory to this policy objective and inconsistent with recent moves to provide certainty to the sector.
Historically, HMRC held the position that oil and gas companies could import goods in the UK under EUR with the aim to subsequently use these goods offshore – in oil rigs and fixed platforms in the North Sea. The EUR allowed the import of goods duty free provided:
– The business held an appropriate end-use authorisation;
– The conditions outlined in the business’s authorisation were met;
– The goods were put to their prescribed end use.
Following discussion in the Special Procedures Expert Group in Brussels, the commission reviewed the guidance on end-use procedure and specified that “the assignment of goods to the prescribed end-use must take place within the customs territory of the Union because assignment outside the Union would require an export of goods”. The export (physical exit) of goods renders the end-use procedure inapplicable for companies that know in advance that the goods will be placed under prescribed end-use outside the European Union (for example, use on the UKCS).
From a business perspective, where such “assignment outside the Union” is envisioned, the goods should not be placed under the end-use procedure. Such goods may be entered into the UK under a different customs arrangement, such as customs warehouse or temporary storage for subsequent export. These alternatives entail obtaining the necessary authorisations.
To promote a “smooth transition” in the change of policy, HMRC has allowed businesses, under standard operating procedures, to discharge goods from the end-use procedure outside the customs territory of the European Union up to July 31, 2018. This is an unachievable and unrealistic timeframe for the industry to deal with the significant impact this will have on business operations not only in terms of financial burden but also in additional costs such as compliance and systems.
The proposed changes will impact the entire supply chain, and oil and gas businesses will potentially bear substantial customs duty costs on day one of the changes. Trade body Oil & Gas UK have estimated the tax burden could be in excess of £100million.
In practice, the end-use changes imply that oil and gas companies currently using EUR for goods destined for operations in the North Sea will no longer obtain an end-use authorisation from HMRC for these specific operations. Considering that companies imported products in the UK based on valid end use authorisations, it will be logistically and practically impossible to export these by July 31, 2018.
In the event companies continue to hold goods intended to be assigned to the prescribed end-use outside of the Union after July 31, HMRC’s position is these goods should be diverted to home use with full payment of customs duties and import value-added tax. The customs duties will constitute an irrevocable cost for the businesses.
Discussions with HMRC and the industry continue to get a more realistic transition date and agree a practical, workable solution.
These alternatives should be carefully analysed by the affected businesses to verify if it is feasible, from a business perspective, to implement (An export might not be possible within the given timeframe) and to identify the business implications (Apply for another customs authorisation).
The timing of these changes is unhelpful, causing uncertainty and disruption when the sector is showing signs of recovery. Oil & Gas UK and the UK Oil Industry Taxation
Committee have met HMRC. Hopefully, there will be a swift resolution and a return to the consistent approach of working towards delivering a competitive, predictable and simple fiscal regime.
Niall Blacklaw is head of energy indirect tax for EY