VAT in Oil & Gas Is Changing: What HMRC GfC18 Means for Your Business

The complex place of supply rules for services is an area that repeatedly creates issues in the Energy sector.

• Complex supply chains
• Offshore operations
• Multiple customer establishments

Each of which can frequently lead to VAT being applied incorrectly.

To try and bring some clarity, HMRC has published new guidance (GfC18), which is specifically aimed at assisting businesses determine the correct place of supply for services for VAT purposes in the oil and gas sector.

Why HMRC GfC18 Matters

Nothing in this guidance is particularly new; however, its value lies in:

• Consolidating existing rules
• Bringing together HMRC interpretations
• Providing a single, accessible guidance note

This should prove beneficial to taxpayers operating in this highly complex sector.

The General Rule for B2B Services

For services provided to business customers, the general rule states: the place of supply is determined by where the customer belongs. However, suppliers often rely solely on this rule.

In the energy sector, this can lead to VAT being incorrectly charged on supplies between two UK businesses. HMRC is increasingly challenging VAT recovery on incorrectly charged VAT. Meaning applying VAT “just in case” is no longer a low-risk approach.

4 steps to determine the place of supply FOR VAT

HMRC recommends that businesses take a structured step-by-step approach.

In the first instance, it is essential to identify precisely what is being supplied before applying the following 4-step framework:

Step 1 – Check if any special rules apply

There are a number of exceptions to the general rule which apply for certain services.  These may override the general place of supply rules to indicate a different place of supply and VAT treatment.

GfC18 does not go into detail on every exception to the general rule, reserving focus instead to those most relevant to the oil and gas sector:

• Land Related services

Where services have a sufficiently direct connection to land, the place of supply of those services will be where the land is located.

In the energy sector, this is particularly relevant to services performed in relation to offshore installations, which may be outside the scope of UK VAT if they are located outside the UK’s territorial waters. For VAT, UK territory includes up to the 12 nautical mile limit.

The EU’s Explanatory Notes on the “VAT place of supply rules on services connected with immovable property” are helpful in establishing if a service is sufficiently connected with land.  This rule is particularly relevant to the energy sector as it covers services such as seismic surveys construction, decommissioning, maintenance and repair of fixed production platforms.

• Use and Enjoyment

For certain types of services, the place of supply depends on where the service is actually used and enjoyed.  Services covered include hire of equipment, broadcasting and telecommunication services.

Although the contract may be between two UK businesses, these services may actually be used at an offshore platform, shifting the place of supply from the UK to offshore.

We recommend that the location (e.g. platform or field name) where the services are to be used and enjoyed should be shown on the Purchaser Order raised with the supplier.

Step 2 – Apply the General Rule

Where a supply of services is not covered by any of the exceptions, the general place of supply rule applies.  For Business-to-Business (B2B) supplies of services, the general rule is that the place of supply of those services is where the customer belongs.

Consequently, we need to understand where the customer “belongs”.  A business ‘belongs’ where it has its business establishment, or some other fixed establishment.  Unless it produces an irrational result (e.g. double taxation), the supply should be treated as being made to the business establishment.

However, if the customer has establishments in multiple jurisdictions, it is necessary to consider Step 3.

Step 3 – Understand which establishment is most closely connected with the supply

Check if there is a fixed establishment that is more closely linked to the supply. Whilst the term ‘fixed establishment’ is not defined in law, the main point to consider is whether the establishment has the permanent presence of both the human and technical resources required to make or receive supplies from that location in its own right.  In the oil and gas sector, this could include fixed platforms or FPSOs.

Once all relevant fixed establishments are identified, it is then necessary to determine which one is most closely related to the supply in question.

To evidence that the supply is made to a fixed establishment outside of the UK, and therefore outside the scope of UK VAT, HMRC considers it good practice to obtain confirmation from the customer that the offshore installation constitutes a fixed establishment and that the supply is made to, and received by, that fixed establishment. Reliance on the customer’s non‑UK address alone is not sufficient for this purpose.

Step 4 – Consider other factors

HMRC has advised that, once the correct place of supply has been established, it is necessary to consider if there are any other factors that may affect the VAT treatment.  Rather than as a final step, we would recommend that these factors are considered first, as they will help in the identification of the supply.  The factors highlighted by HMRC include:

• Services or personnel

In the oil and gas sector, businesses commonly supply or receive personnel to carry out work on, or in support of, offshore production activities. Contracts of employment and practical working arrangements will help determine the nature of these supplies. Where the direction of the personnel remains with the supplier, this is likely to be a supply of services, and it is necessary to consider steps 1 to 3 above. However, where the supplier provides personnel to be deployed at the customer’s discretion, this is a supply of staff which falls under the general B2B place of supply rule.

• Single or multiple supplies

When deciding the correct VAT treatment of services, including the place of supply, it is important to consider whether the supply is a single composite supply or a multiple supply made up of distinct elements, each potentially with a different place of supply. The rules around single vs multiple supply can be complex; and these should be considered on a case-by-case basis. In the energy sector, there can often be a framework contract with individual services being called off.  Alternatively, there may be a single contract providing for milestone payments.  Suppliers should review each contract to establish if there is a single or multiple supply. For a single supply, the place of supply rules should be based upon the principal component of the supply; whereas for multiple supplies, the appropriate place of supply rules should be applied to each element of the contract.

• Work on goods

In the oil and gas sector, it is common to supply or receive services relating to the repair, maintenance, valuation or processing of moveable goods. There are no special place of supply rules covering work on goods supplied B2B, and where the work is physically undertaken does not affect the place of supply. Accordingly, work on goods follows the general rule and the place of supply is where the customer belongs.

How can AAB Help

With extensive experience advising clients within the oil and gas sector, AAB is well placed to provide further clarity on the above guidance. We understand where the rules commonly create uncertainty and where HMRC is increasingly focusing its attention. As VAT advisors, we are here to help you navigate the complexities of this specialist area to ensure the correct treatment is applied and reduce the risk of errors and penalties.

At AAB, our VAT experts have years of experience helping businesses manage the complex VAT landscape and can support businesses in navigating legislative developments and changes in HMRC policy, translating technical guidance into practical, workable solutions. If you have any questions, please don’t hesitate to get in touch with Alistair Duncan, or your usual AAB contact.