Tax issues for offshore maritime companies operating in the North Sea

There are a number of difficult tax areas for offshore maritime companies operating in the North Sea, and companies that support them. Some complex areas are discussed below:
 UK Research & Development (R&D) tax credits
This is a very generous tax relief, and can be of relevance even for companies that are loss making.
This should be of particular interest for companies supporting the offshore maritime sector. It is not only for companies that are inventing something brand new, and can be claimed by those that are improving existing products or internal processes. Any company involved in technological or scientific problem solving is likely to be eligible. This can include seismic research, software developers, production, engineering, construction or demolition companies. Many companies in the offshore maritime sectors could therefore qualify. Examples of successful claims include the design of gas terminal infrastructure, the development of oil spill recovery systems, and software for self-driving boats.  
Scottish income tax
The Scottish Parliament is able to set a Scottish rate of income tax to be paid by Scottish resident tax payers on certain types of income. For 2017/18, broadly the threshold for paying the 40p income tax rate was different to the rest of the UK. For 2018/19, the Scottish Parliament has introduced two new income tax brackets, whilst increasing some of the other rates. The thresholds continue to be different.
A Scottish resident is an individual who is UK resident and has their sole or main residence in Scotland or, if no main residence can be identified, has spent more days in Scotland compared to elsewhere in the UK in the tax year. An individual’s main residence is the place of residence which they have the greatest degree of connection, for example the family home, where the majority of their possessions are kept, where they are registered with a dentist and doctor, etc.
This gives rise to a number of difficulties for workers on an oil rig in Scottish waters whose residence status could depend on a word count and therefore change from year to year. The income tax position of Scottish residents is likely to become even more complex.
Tonnage tax rules for the offshore maritime sector
The UK tonnage tax rules for the sector are complex. A vessel may be within tonnage tax wherever it operates, wholly excluded, or excluded whilst operating in the North Sea. Where an offshore vessel is in tonnage tax, profits must be allocated between land based activities (non-tonnage tax) and services provided at sea (in tonnage tax).

VAT changes can result in potential significant VAT savings for holding companies in the offshore maritime sector. HMRC have been challenging VAT recovery made by holding companies, on the basis that they were not carrying out ’an economic activity’. However, HMRC has now changed its policy for holding companies providing genuine services to its subsidiaries. Corporate groups should be reviewing their arrangements and how they treat such VAT.   

For further information, please contact Sue Bill, Business Tax Partner.

This article was originally published in the Offshore Journal.

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