The measure

The Government announced that it will consult with industry on legislation to be introduced which will cap the amount allowed as a deduction from profits for companies operating in the UK Continental Shelf. The stated policy objective is “to prevent companies who lease rigs and equipment to oil and gas operators from using associate companies in tax havens to minimise their UK tax bill”.

The cap is expected to apply to intra-group leasing payments for large offshore oil and gas assets that are leased under a bareboat charter arrangement. The cap will be calculated by reference to the historical capital cost of the asset which is subject to the lease, and will consist of a proxy for capital expenditure at a rate of 4 per cent per calendar year, plus an amount to represent the possible finance costs of newer assets which will be set at 5 per cent on borrowing of half the cost.

Legislation will also be introduced to provide a new form of ring fence applicable to the ‘composite activity’ which is the subject of this measure. Whilst profits within this ring fence will only be taxed at standard corporate tax rates (and not the higher rates which apply to oil producers), those profits will no longer be able to be reduced by other tax reliefs derived from activity outside the UK Continental Shelf.

Who will be affected?

Companies operating in the UK Continental Shelf who lease offshore oil and gas assets from connected party contractors.

These changes will apply equally to UK and non UK based groups operating in the UK Continental Shelf and have the effect of restricting the amount of a bareboat charter (or similar transactions) which can be deducted against income derived from the activity for which the bareboat forms a component part. Any amount above the cap can still be set against other income unrelated to the UK Continental Shelf activity.


The Government will consult with industry in the New Year, further details are expected to be published on Tuesday 10 December. The changes will have effect in respect of leasing payments made on and after 1 April 2014, and a Tax Information and Impact Note will be published alongside the draft legislation in January 2014.

Our view

The announcement represents a significant change in the way that these arrangements are currently taxed, and will come as a surprise to taxpayers who operate under them. The estimated incremental tax collected as a result of the measure is significant, at £140m in 2014/15, and £120m in 2015/16.

The proposal suggests that the Government does not consider the arms length basis to be a satisfactory measure of the value of certain leasing arrangements and appears to change the basis on which such bareboat charters are taxed.

The announcement refers to offshore contractors who “lease equipment” to oil and gas operators. However, we expect that the scope of the proposal might change during formal consultation and has the potential to capture a wider range of activities than merely leasing, eg offshore construction contracts, time charters and drilling service contracts.

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