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Tax for offshore oil and gas workers explained

People working offshore on oil rigs or supply vessels have highly complex tax requirements. This article provides a detailed overview and provides guidance to help establish where you may owe tax

Written by Phil Needham on 4 October 2019

One of the more complex UK tax situations is reserved for British people working offshore, for example on oil rigs or supply vessels. If you consider that nation states are fundamentally based on the right to tax the people living and working within their boundaries and people working offshore are, by definition, not working within any nation state.

Today oil rings and supply vessels working in the North Sea are manned by individuals with homes in Essex and Thailand and everywhere in between. On the other hand, rigs and vessels from Vietnam to Mexico are manned by individuals with homes across the UK, from Southampton to the Scottish Glens.

Who claims the right to tax offshore oil and gas workers?

The independence movement in Africa didn’t throw out the European colonial governments only to see European workers earn 100 times their national average and fly back to Scotland each month without paying any local taxes; and the European nations that divided up the North Sea continental shelf are unlikely to want the individual to fly back to Thailand without paying local taxes.  And of course wherever you are resident that country is going to want to tax your income.

For UK income taxes it is Residence that is the paramount consideration.  Nationality hardly counts at all, and domicile (which is subtly different) only really makes any difference for the super-rich, who are not usually to be found working offshore.

Therefore, in the first instance we need to assess your liability to UK taxation is to assess whether you are resident in the UK.

Prior to the Gains-Cooper case tax residence in the UK was established by case law and revenue guidance.  Probably as a result of the case the government brought in the Statutory Residence Test, which is a complex rule-based system to determine whether anyone is a UK resident for tax purposes.    

It is worth saying that although the Statutory Residence Test can be straight forward for many people, there are some aspects where definitions have been open to challenge, in general the rules are generally pretty definitive and work well.

Later in the article, we will cover a couple of rules which can be decisive or where it may be possible to manage your affairs to reduce or eliminate liability to UK tax.

Suffice to say when we provide an introduction for a British offshore worker to a specialist UK tax expert from our network, our first job is to compile the information that allows us to establish where you fall within the rules.

The crucial questions will be in the current and previous tax years

  • Where do you have a home (or homes)?
  • Where do you work?
  • How many days were you in the UK?
  • How many days were you working – in the UK – outside of the UK?

There may be many supplementary questions, but note that at this stage we do not need to know what nationality you are, or who your employer is.   For example supplementary questions around your home may well include where your partner and or children live.

But the first thing to determine for an offshore worker is whether you are working on a fixed platform (reasonably well defined in most instances) or on a vessel moving around under its own propulsion.  The rules for seafarers are completely different, also quite complex, and covered in a later article.

Then if you are working on a fixed platform, the next thing to determine is in whose waters that platform is located.  The government have a map published on the internet that locates all the fixed platforms in the North Sea. 

When the nations bordering the North Sea divided up the continental shelf the UK quickly changed its tax laws so that working in the UK sector of the North Sea counts as working in the UK for all UK tax laws.  It also changed many tax treaties, but not all.  If the tax treaty doesn’t cover the North Sea then this will favour a foreign resident, so this is an important issue.

Tax treaties and offshore workers

The first thing to understand about tax treaties is that they take precedence over domestic law, so it impossible to overstate their importance for offshore workers.  The tax treaties are bilateral agreements, but the OECD (Organisation for Economic Co-operation and Development) has worked hard on harmonising the structure, lay out and contents of the treaties.

Understanding the language of these treaties is important, for the lay person they can be impenetrable, and subtleties are easily missed.  Here are 3 clues to how you can approach them.

  1. Firstly, they tend to use the terms “the first state”, “the other state” and “that state”.  You might wish to go through each relevant paragraph striking these phrases out and substituting say “UK” and “France” as appropriate which makes the whole thing easier to read.
  2. The word “may” as in “income from property may be taxed in the state in which the property is located” means that the state in which the property is located gets first dibs at taxing that income.  It does not prohibit the other state taxing the income as well, although you will always get relief from double taxation elsewhere in the treaty.
  3. The word “Notwithstanding” as in “Notwithstanding the preceding paragraph” means “If you meet these conditions the outcome overrides (and therefore you can ignore) the results of the previous paragraph.

The structure of the treaties is fairly consistent, and for such important legal documents they are astonishingly succinct.

Case study of an offshore worker (Jo) working on a UK oil rig

Jo works full time on rig in UK waters but flies home to Esparanto on his time off.  He spent 172 midnights in the UK last year.

Under rule 3 of the UK residence tests (working full time more than 75% of which is in the UK) he is definitely UK resident.

So then we go to the UK Esparanto double tax treaty.

Article 4.2 establishes Jo’s residence and as he has a home with a wife and kids in Esparanto and no such home in the UK (a room on an oil rig might be “accommodation” under the Statutory residence rules, but it certainly isn’t a home) he is most definitely “tax resident” in Esparanto.  Remember this takes precedence to the decision that he is tax resident in the UK under the Statutory Residence Rules.

So now we find where the tax is to be paid.  We look at Article 16 of the treaty for employees.

This tells us in paragraph 1 (in esoteric language) that a resident of Esparanto may be taxed by the UK when working in the UK.

Paragraph 2 is however critical.  This starts with “Notwithstanding the contents of paragraph 1” which tells us that it is capable of overriding paragraph 1.  And goes on to say (in my translation)

a)       If Jo spends less than 183 days in any 365 day period in the UK, and

b)      If his employer is not resident in the UK, and

c)       If his employer does not have a “Permanent Establishment” in the UK.

then he may only be taxed in Esparanto.

These are often three most crucial considerations, whilst working hours may (with a bit of negotiation) be within Jo’s control the other factors are usually not.

But Jo has been unusually careful he has chosen an employer based in Singapore, who most certainly do not own the oil rig and who do not have a “permanent establishment” in the UK.  Pay is calculated by a bureau, and payment is made out of Singapore.

As long as he keeps his UK presence below 183 days Jo does not have to pay tax in the UK and we can get PAYE repaid to him.

Getting specialist assistance with an offshore worker UK tax specialist

If you are a British citizen working offshore, whether on an oil rig or a supply vessel, we can help you by introducing you to a tax specialist who has vast experience assisting people with a wide range of complex situations.

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Hornbeam Accountants

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