HMRC’s latest update on its guidelines for compliance focuses on key VAT oil & gas concepts such as place of supply rules, fixed establishment and single/multiple supply for offshore oil and gas services. The guidance provides a reminder to businesses operating in the sector that they should be aware of these key concepts and marks a significant moment for businesses operating across the UK and Ireland’s offshore ecosystem. Whilst there is a clear concentration of activity in Scotland, particularly around Aberdeen as a major industry hub, the implications stretch far beyond one geography, impacting operators, contractors, and service providers across the entire region.
This update is more than a technical clarification. It is a direct signal that HMRC is sharpening its focus on offshore VAT compliance, particularly where territorial boundaries intersect with complex service delivery models. Businesses must now reassess not only their VAT treatment but also their customs exposure, as these two regimes are increasingly intertwined.
UNDERSTANDING OFFSHORE VAT: THE 12 NAUTICAL MILE RULE EXPLAINED
At the core of HMRC’s guidance is a reaffirmation of how territorial limits influence VAT treatment.
- Services performed within 12 nautical miles of the UK coastline are generally treated as supplied in the UK and therefore potentially subject to UK VAT.
- Services performed beyond 12 nautical miles may fall outside the scope of UK VAT, depending on the nature of the service, whether it is land-related, and the location of the customer
These distinctions create immediate complexity for offshore operators whose activities often span both sides of the boundary within a single project lifecycle.
WHY THIS MATTERS IN PRACTICE
Many offshore services are not static. A single contract can involve:
- Mobilisation within UK waters
- Operational activity beyond 12 miles
- Return logistics and reporting back onshore
This creates a scenario where VAT treatment cannot be applied uniformly, and granular analysis is essential.
KEY OFFSHORE SERVICES UNDER HMRC SCRUTINY
HMRC’s guidance specifically highlights several service categories that require careful VAT assessment:
- Engineering, repair, and maintenance services
- Inspection and certification activities
- Subsea and seabed operations
- Vessel-based offshore support
- Drilling and decommissioning services
- Installation and construction activities
- Consultancy and advisory linked to offshore infrastructure
Each of these services may be treated differently for VAT purposes depending on whether they are considered “land-related” or fall under general B2B place of supply rules.
COMMON VAT PITFALLS IN OFFSHORE PROJECTS
Through our work across the sector, we consistently see businesses encountering similar risks:
- Misinterpreting the 12-mile rule, leading to incorrect VAT treatment
- Incorrect classification of services as land-related or general services
- Bundled or composite contracts masking the true nature of supply
- Insufficient evidence to support offshore activity claims
These issues often arise not from finance teams, but from operational and project teams making real-time decisions without full visibility of VAT implications.
EVIDENCE: THE FOUNDATION OF DEFENSIBLE VAT TREATMENT
Robust documentation is essential to support VAT positions. HMRC expects clear, auditable evidence including:
- Vessel logs and GPS data confirming location of activity
- Daily operational reports detailing work undertaken
- Alignment between contracted scope and actual delivery
- Precise and descriptive invoicing
Without this, even technically correct VAT positions can be challenged.
CUSTOMS & DUTY: THE OVERLOOKED OFFSHORE RISK
While VAT often takes centre stage, Customs implications are just as critical for offshore activities. VAT and Customs don’t operate in isolation and, the use of Customs Special Procedures or reliefs is often identified as the most effective strategy to eliminate or reduce exposure to both customs duties and import VAT.
They intersect constantly in offshore operations, which is why our Indirect Tax team works as one, bringing together VAT and customs expertise to deliver a fully aligned, cross border perspective for clients.
OFFSHORE INSTALLATIONS AND CUSTOMS TERRITORY
A recurring compliance issue in offshore operations is the assumption that offshore activity does not involve import or export movements, without first confirming whether the installation is located inside or outside the UK customs territory. UK customs legislation and HMRC guidance make it clear that this distinction is fundamental.
The UK Customs territory includes Great Britain, Northern Ireland and UK territorial waters extending up to 12 nautical miles from the coastline. Offshore installations located beyond this limit fall outside the UK customs territory. As a result, goods moved from onshore UK locations to those installations will normally constitute exports, requiring export declarations, consideration of export controls, and VAT zero-rating. Goods moved back to the UK may constitute imports, triggering Customs duty and import VAT unless a customs special procedure or relief applies.
Challenges typically arise where offshore projects are treated as being outside customs scope altogether, leading to missed import or export obligations when installations are in fact located beyond the territorial sea. In those cases, HMRC scrutiny extends beyond missing declarations to whether VAT and customs duty treatment has been correctly applied and supported.
Given the volume of equipment, spares, and materials moving between offshore bases and offshore assets – particularly in energy and infrastructure projects – this assessment should be embedded into supply chain design and contract structing from the outset, rather than addressed retrospectively.
As Allan Bird, Customs Lead at Cooper Parry, explains:
“The real issue is where businesses assume offshore activity has no indirect tax implications and therefore no import or export analysis is required. Establishing whether an installation is beyond 12 nautical miles is the starting point – and VAT and duty treatment must be aligned with that position from day one, not corrected later. The costs of getting this wrong can be significant.”
This is exactly why a joined-up indirect tax approach is essential. Without it, businesses risk treating offshore movements and services in silos, leading to gaps in compliance, missed relief opportunities, and unnecessary cost.
GOODS MOVING OFFSHORE: WHERE RISKS ESCALATE
Movement of goods to and from offshore locations can trigger:
- Export and import declarations
- Customs duty and import VAT liabilities
- Proof of export requirements
- Safety, security and regulatory controls
- Customs classification, valuation and origin obligations
KEY RISK AREAS INCLUDE:
- Import VAT liabilities arising where the importer is not the owner
- Customs duty on returned goods
- Loss of VAT zero-rating due to weak export evidence
- Incorrect valuation of offshore goods transfers
- Misclassification of equipment and spare parts
- Incorrect origin treatment
- Failure to utilise available customs procedures and reliefs
Allan Bird highlights:
“We regularly see businesses paying irrecoverable import VAT or unnecessary duty simply because an effective customs strategy was not considered at the contract stage. In offshore operations, those errors scale quickly into material cost leakage.”
CUSTOMS RELIEFS: PRACTICAL STRATEGIES TO REDUCE COST
There are several powerful, underutilised mechanisms available to mitigate duty and VAT exposure where offshore movements are structured correctly:
- Inward Processing Relief (IPR) – Enables duty and import VAT suspension on goods imported for repair or processing.
- Outward Processing Relief (OPR) – Enables UK goods sent offshore for processing to be re-imported with reduced duty exposure.
- Temporary Admission (TA) – Can permit short-term use of specialist equipment without full import charges.
- Returned Goods Relief (RGR) – Eliminates duty on qualifying goods returned to the UK.
- Customs Warehousing – Defers duty and import VAT where goods are held onshore while inactive or awaiting next deployment phase.
- Preferential Origin Planning – Reduces duty exposure through strategic sourcing.
- Correct Export Documentation – Essential for maintaining VAT zero-rating and audit defence
As Allan notes:
“The difference between a well-structured customs strategy and a reactive one is often the difference between controlled cost and unexpected liability.”
STRENGTHENING OFFSHORE PROJECT CONTROLS
To reduce risk exposure and improve compliance, businesses should implement stronger controls across:
- Goods movement tracking and evidence trails
- Contract clarity (distinguishing services vs goods supply)
- Supply chain assessment, transactional mapping, and documentation consistency
- Customs classification, valuation, and origin governance
- Alignment with customs brokers
- Operational understanding of VAT and duty implications
These controls help ensure tax treatment reflects commercial reality and statutory boundaries, rather than operational assumptions.
SECTOR TRENDS DRIVING INCREASED SCRUTINY
The offshore sector is evolving rapidly:
- Decommissioning activity is accelerating
- Renewables projects are expanding offshore footprints
- Existing oil & gas fields are extending operational life
This means more projects are crossing jurisdictional boundaries more frequently, increasing the likelihood of VAT and customs exposure.
At the same time, HMRC is applying greater scrutiny to offshore activities than many other sectors, recognising the inherent complexity and risk.
WHY BUSINESSES MUST ACT NOW
HMRC’s updated guidance is a clear prompt for action.
Failure to review current treatment can lead to:
- VAT under or overpayments
- Customs duty assessments
- Penalties and interest charges
- Commercial disputes between operators and contractors
Offshore VAT and customs compliance is now a known HMRC risk area, making proactive review essential.
HOW WE SUPPORT OFFSHORE BUSINESSES
VAT ADVISORY
We help businesses navigate offshore VAT complexity through:
- Place of supply reviews for offshore services
- Detailed contract analysis (including land-related and composite services)
- Optimisation of billing and invoice descriptions
- Evidence mapping and documentation readiness
CUSTOMS & INTERNATIONAL TRADE
Our customs specialists provide:
- End-to-end review of offshore goods movements
- Assessment of customs obligations, duty exposure and import VAT risks
- Design and implementation of customs strategies including IP, OP, CW, TA, and RGR
- Complex product classification
- Customs valuation support covering methodology and documented policy covering leased assets, free of charge equipment, repairs, and related-party transactions
- Efficient customs agent management
- Record keeping, export documentation and VAT zero-rating assurance
- HMRC audit support, enquiry management, and technical defence
A JOINED-UP INDIRECT TAX APPROACH
We bring together VAT, customs, and international trade expertise to deliver a fully integrated view of risk and opportunity. This ensures that offshore operations are not just compliant, but optimised.
PRECISION MATTERS OFFSHORE
Offshore operations demand precision, not just in engineering, but in tax treatment.
With HMRC’s updated guidance now in play, businesses need to ensure their VAT and customs frameworks are fully aligned with operational reality, not assumptions made on the ground.
The opportunity is clear: reduce risk, unlock efficiencies, and gain confidence in compliance across every stage of offshore activity.
If you’d like to sense-check your current approach or simply have a conversation about where risks or opportunities might sit, get in touch. Our exciting VAT & Customs analytics tools that we rolled out earlier this year can provide razor sharp detailed analysis of millions of transactions to highlight risks and, in some cases, illuminate opportunities around increased working capital and actual VAT and Customs savings.
We’re always happy to talk, whether that’s a quick discussion or a deeper dive. You can reach out to me directly or connect with our wider Indirect Tax team at Cooper Parry, where our VAT and customs specialists work side by side to give you a fully joined up view.
No pressure, just practical, straight-talking advice where you need it most.
