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Oil and gas firms count the cost of growth

Companies operating in the UK oil and gas sector could be incurring millions of pounds in unnecessary costs at a time when their focus is on continued growth and development.

Recent analysis by Deloitte of the legal group structures of FTSE 350 companies has shown that more than 50 per cent of organisations that sit within the FTSE 350 listed groups are dormant, estimated to cost the average business £250,000 per year in unnecessary administrative costs and management time.

Furthermore, research across a sample of the largest groups in the UK oil and gas sector illustrated that, on average, 31% of a group structure is dormant.

Whether these dormant organisations are a result of earlier restructuring or M&A activity, which, in the oil and gas sector has shown sustained activity following stronger commodity prices and credit markets, their associated costs can have a significant impact on business efficiency.

Judith Howson, an assistant director in the restructuring services team at Deloitte said:

“Our research across a sample of the largest groups in the UK oil and gas sector has shown that, on average, around 31% of a group structure is dormant which equates to an average of 22 dormant subsidiaries per group, costing each group an estimated £66,000 annually.”

“Most business leaders do not realise how much it costs to keep an oversized legal structure running, and only the statutory filing costs are considered.”

“Streamlining operations can often be put into the ‘too difficult’ pile and, as a result, many businesses miss the opportunity to simplify the legal structure of their group.”

“A way round this can be to go for the ‘low hanging fruit’, winding up companies that are not trading, but having in place a clear plan for the operational companies.”

The journey towards that plan can then be completed by a series of easier steps at an appropriate time, often triggered by something else such as a change in accounting system or tax legislation.

Having a legal structure that is aligned to an operating structure will not only reduce costs for companies in the oil and gas sector but will also help to drive business efficiency. The regulatory burden of having unnecessary companies increases risk and diverts management time from value generating activity.

“Companies should be aware that the recent change to the tax return system, which requires companies to file tax returns and supporting documents online, has also seen a shift in how companies handle returns for dormant subsidiaries,” added Howson.

“Prior to April 2011, the administrative burden associated with filing a corporation tax return for a company with very limited activities was relatively small. However, with the introduction of iXBRL, the software language used for the now mandatory online filing requirement, the cost and effort required to file a simple tax return has increased dramatically.”

Penalties for mis-reporting, following the introduction of the Senior Accounting Officer Regulations in 2010, means there’s even more pressure on companies to ensure reporting is carried out correctly and having a simplified group structure makes life easier for whoever is responsible.

“With further changes to the UK reporting framework afoot, with the new IFRS accounting standard expected to be mandatory for accounting periods ending after 1 January 2014, now is the time to think about simplifying your group structure to minimise risk, compliance costs and demands on management time.”

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