What is the difference in VAT rates between onshore and offshore oil and gas companies?

There often arises some confusion about the production of oil and gas in the UK, and whether, as a supplier, you should be invoicing your customers with rates which are inclusive or exclusive of VAT. As goods created and supplied from all UK-based companies must account for VAT when supplying to other British companies, British oil and gas companies are no exception when it comes to VAT and tax rates. If oil and gas are produced and supplied on UK territory, by companies who are based in the United Kingdom, then standard VAT rates apply and suppliers must invoice accordingly. This applies to all oil and gas suppliers who use onshore methods to obtain their raw materials within the United Kingdom.

However, the difficulty can sometimes arise in determining whether or not your gas and/or oil is classified as being onshore or offshore. This is particularly difficult for companies based in the United Kingdom but who use offshore rigs and platforms to drill for gas and oil. Is the place of supply for these offshore rigs inside or outside of the United Kingdom?

The answer is actually much simpler than it might first appear. If the oil rig or platform can be considered to be ‘permanent’, i.e. it is fixed to the seabed using stilts or flow lines rather than just temporary anchors, this counts as being a fixed establishment within the United Kingdom. This would be treated the same as onshore oil and gas supply and would be subject to the standard rate of VAT. The only exception to this being for oil rigs and platforms located outside of the 12-mile national boundary along the British coastline.

In order to be considered as offshore oil or gas production, the rig must fulfil one of the two following conditions.

Either:

The rig or platform used to obtain the oil or gas must be located outside of the 12-mile boundary of the UK coastline,

Or,

The rig or platform must not be connected to the seabed with any degree of permanence. Floating oil rigs which are anchored into place and not permanently connected via flow lines would come into this category.

If either of these two conditions applies, the oil and gas supplied will be considered as having been produced offshore and will not be subject to VAT. This is the key difference between sales of onshore and offshore oil and gas.

If you are confident that your oil and gas production comes into the offshore category, then you will not need to add VAT to your invoices. For crude oil sales, these would be outside the scope of UK VAT. However, for gas sales please make sure that you clearly state on the invoice that the customer must reverse the VAT charges when it comes to filing their accounts. This is merely an accounting formality for the customer you are supplying, but it is an important one. The customer will not have to physically pay the VAT, but when it comes to filing their accounts for the quarter, they must list the VAT they would have paid if the oil and gas was supplied in the UK in both the taxes that they are due to pay this quarter and the taxes they are due to reclaim.

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