How profits are treated from activities carried out in the UK territorial sea or designated areas and the effect of double taxation agreements.
Designated areas and territorial sea
UK residents carrying on activities in the territorial sea or designated areas are chargeable to tax under the normal rules.
Since 6 April 1973, the territorial sea has been deemed to be part of the UK for all the purposes of:
- Income Tax
- Capital Gains Tax
- Corporation Tax
UK tax jurisdiction over the continental shelf, however, is limited to profits from activities and rights connected with the exploration or exploitation of the natural resources of the seabed and subsoil of the designated areas.
Treatment of profits and employment duties
Profits from such activities and rights are treated as profits arising in the UK or gains on the disposal of assets situated in the UK. In broad terms, the legislation brings within the UK tax net profits from certain oil and gas related activities carried on offshore, and income from certain rights to natural resources situated offshore.
Profits or gains of non-residents from such activities are regarded as arising from a trade carried on through a branch or agency in the UK and this brings them within the charge to UK tax. Companies are chargeable at the main rate of Corporation Tax and not the ring fence rate. Annual Corporation Tax Returns must be filed with the HM Revenue and Customs (HMRC) Large Business Oil and Gas.
Employment duties performed in the designated areas in connection with exploration or exploitation activities are also treated as though they had been performed in the UK itself.
Double-taxation agreements - non-residents
The effect of the above provisions in the case of some non-residents is limited by double-taxation agreements as the UK domestic legislation will be overridden by a double-taxation agreement.
The definition of the ‘UK’ in the relevant treaty is therefore important. Most treaties have a definition of the UK that includes the continental shelf of the UK. Ordinarily such treaties will have a standard provision that an enterprise of the partner country is not taxable on profits in the UK unless they are made through a permanent establishment in the UK. Some of these treaties also deem an enterprise to be carrying on business through a permanent establishment in the UK if its activities are in connection with exploration or exploitation of UK Continental Shelf (UKCS) oil and gas. Therefore the non-resident who has activities on the UKCS which constitute a deemed UK permanent establishment remains liable to tax.
There are provisions to overcome the information and collection difficulties that may arise through the extension of the charge to UK tax to non-residents who may have no physical presence in the UK. HMRC will seek such information from an exploration or production licensee about transactions connected with his licence areas (for example, payments to contractors and their subcontractors) which may give rise to tax liabilities. Unpaid tax assessed on a non-resident under those provisions may be recovered from the relevant licensee.
You can find detailed guidance on the taxation of non-residents working on the UK Continental Shelf in the Oil Taxation Manual.