Oil and gas contractors who have been affected negatively by falling oil prices and chose to return to employment can soften the financial impact by closing down their limited company using a Member’s Voluntary Liquidation (MVL).
This is according to Mervyn Stanley of CameronCarnegie, a retained consultant of Contractor MVLs that specialises in helping contractors to tax efficiently release cash from their limited company when taking a break or retiring from contracting.
“There is an increasing number of oil and gas contractors who are losing their contracts as a result of the low oil prices that have prompted cost-cutting measures by clients,” highlights Stanley.
“An MVL of a solvent limited company enables contractors to close their company and extract any remaining cash using entrepreneur’s relief (ER) that taxes at 10% rather than at their marginal rate. This can provide a welcome financial cushion for contractors whose income drops as a result of leaving contracting.”
Oil and gas and energy contractors face unique tax challenges
Before selling-up and becoming a consultant to other contractor service providers, Stanley formerly ran an Aberdeen-based contractor accountancy firm, so has long experience of the unique features and ups and downs of the oil and gas sector.
“In the North East of Scotland, around 95% of all contractors work in the energy and oil and gas sectors, with the balance being mainly a few IT contractors,” continues Stanley.
“There is no doubt these will be the toughest conditions that many contractors have faced in years, and for some even in their careers to date. As a result, many energy contractors are being forced to look further afield for work. This global mobility means that for some, they may find themselves working across multiple tax jurisdictions all in a single year.”
This level of complexity requires accountants to be able to master not only the UK’s complex tax regime, but also to negotiate multiple tax treaties between the UK and the various international regions where oil and gas contractors might work.
Why the oil and gas sector suffers from skills shortages
Stanley’s experience of the last ten years of high oil prices has been high rates for contractors, particularly those in niche engineering and project management roles and retiring employees choosing to stay engaged in the market place by providing their services as contractors.
He explains: “The oil and gas sector is cyclical and during each downturn, entry level hiring is cut, which is then compounded by many workers being made redundant and leaving the industry. This inevitably leads to skills shortages ten years down the line.
“During the last five to ten years the global shortage of certain skills sets has been acute. There just aren’t enough energy based project managers, niche engineers and drillers to meet demand.”
This supply and demand shortfall has subsequently led to many workers choosing contracting because they can command very high day rates. Employees facing retirement have continued working, coming back as consultants on projects and becoming contractors. There are many projects that have been run purely by contractors.
Oil and gas contractors options in response to oil price crash
“As a result of the macro-economic environment, with fracking leading to energy surpluses in the USA and huge oil reserves flooded onto the market by the Gulf states alongside falling demand from China, the oil price has halved,” says Stanley, “and I don’t see it rising much above $60 any time soon.
“This has led to at least three across-the-board rate cuts for contractors and the loss of thousands of contracts and jobs – I’d estimate the reduction in oil and gas contractor numbers to be 35% over the last six months.”
According to Stanley, this fall in numbers can be accounted for in a number of ways: “Many contractors, particularly those with offshore, subsurface and deepwater skills, are highly sought after in the global marketplace. They are simply moving to the Gulf of Mexico, Brazil, West Africa and Asia.
“Those contractors who delayed retirement to stay on as consultants are leaving the industry. This brain drain will cause further problems for the industry in years to come. And there is a third group of contractors who are giving into pressure by clients seeking to ‘hoard skills’ and joining the payroll as employees, waiting out the downturn until the contact market grows again.
“It is the latter two groups who have the most to gain by closing their company tax efficiently, particularly if they have allowed a large cash surplus to build up during the good years.”
What should contractors do if they choose an MVL?
Oil and gas contractors who have chosen to take a break from contracting, and this could also be for reasons such as returning to a staff role, maternity, career break or a return to study as well as retirement, may wish to close their limited company using an MVL.
“In the first instance, a contractor should seek expert advice from their accountant to discuss their options. If an MVL does look like the best option, then the contractor should start the process by speaking to a licensed insolvency practitioner.”
Stanley concludes: “The outlook is not all bad for oil and gas contractors. Prospects look set to improve from 2016 as the impact of tax breaks for North Sea activities and the recommendations from the Wood Review take effect.”