Mainstream corporation tax rate
‘The North Sea Fiscal Regime: A Discussion
PRT on Recommissioned Fields
Mainstream corporation tax rate
The current mainstream corporation tax rate of 30% for large companies will
remain unchanged in respect of North Sea oil and gas activities from 1 April
2008. Instead, new rules will be introduced to set the main rate of
corporation tax on oil and gas ring fence profits for large companies at 30%
from 1 April 2008 (28% for all other large companies).
The same principle also applies in respect of the small companies’ rate,
where the rate will remain at 19% for North Sea oil and gas companies going
forward (other small companies will see their rate of corporation tax
gradually increase to 22% by 1 April 2009).
The Government has today announced major changes to the capital allowances
legislation. However, North Sea oil and gas ring fence activities will
retain their existing capital allowances treatment.
This means that First Year Allowances at 100% (or 24% for long life assets)
will still be available and that the writing down allowance rate will remain
at 25% (or 6% for long life assets). However, as the existing capital
allowances treatment will remain in place for oil and gas companies, we
expect that the announced uplift from 6% to 10% in respect of writing down
allowances on long life assets will not apply.
‘The North Sea Fiscal Regime: A Discussion Paper’
In his 2005 Pre-Budget Report, the Chancellor announced that the Government
would be opening discussions with the oil and gas industry to consider the
North Sea fiscal regime. Discussions were held in 2006 and today the
Treasury has published ‘The North Sea Fiscal Regime: A Discussion Paper’. As
well as providing details about the current North Sea Fiscal Regime, the
paper summarises the discussions held in 2006. It provides initial
conclusions in respect of these discussions and considers possible options
for the North Sea fiscal regime going forward.
Aside from the general views that a fiscal regime should be subject to the
minimum amount of change, recognise the long term nature of the oil and gas
industry and have a non-distortionary impact on investment and expenditure
decisions, comments were made on specific categories. We have summarised
briefly below the industry comments on these categories and the Government’s
Petroleum Revenue Tax
No common view was expressed by industry, but a number of varying
suggestions were made, which included the following:
- A request for certainty that Government would honour
the existing PRT rules for tax relief on decommissioning costs.
- The lack of certainty regarding the above was
adversely affecting investment in some PRT-liable fields and making
asset transfers complex. If Government could provide some certainty,
this could positively impact on investment in the UK Continental Shelf.
- The desire to remove PRT entirely in order to
incentivise additional investment in existing PRT-liable fields and
maximise recovery of oil and gas from those fields.
The Government has initially concluded that it does not favour removing
PRT and rebalancing the fiscal regime through an increase in the
supplementary charge. The Government is continuing to examine other possible
policy options that would facilitate the removal of PRT. So far, the options
discussed would prove difficult to implement. However, the Government
remains keen to discuss various options further with industry and to examine
jointly whether there are solutions to any issues that could exist.
Relief for Decommissioning Costs
Industry proposed that the Government considered extending the number of
years that decommissioning losses could be carried back (currently three
years from cessation of trade, with special rules for capital expenditure
incurred after cessation), or remove the limits altogether. This would
ensure that companies would not decommission prematurely (with a loss of oil
and gas recovery) if they did not have access to other profit streams to
offset the decommissioning costs against.
The Government continues to examine this argument and wishes to discuss this
issue further with industry.
Exploration and Development
Industry suggested a number of measures to incentivise exploration and
development. These included suggestions such as the following:
- An uplift in capital allowances for exploration and
- Reduction/abolition of supplementary charge for new
developments arising from new exploration.
The Government has initially concluded that the current structure of the
fiscal regime has no negative impact on the level of exploration being
undertaken in the UK Continental Shelf. The Government is still examining
whether the current levels of exploration are lower than desirable and, if
so, whether to correct this issue. Government does not believe that fiscal
incentives such as a further uplift in capital allowances would impact on
exploration levels, but possible alternatives e.g. specifically targeting
types of exploration e.g. HPHT may or may not have a positive impact.
The Government has also initially concluded that it may be that new and
existing discoveries are not being developed. The argument is that the
provision of incentives through the fiscal regime could improve development
economics. Although it is not thought that this problem is widespread,
possible policy measures such as reducing the supplementary charge or the
introduction of specific incentives may have greater value than incentives
aimed specifically at exploration.
Change of Use
Companies have raised a number of questions around the tax treatment of a
change of use of North Sea assets from oil extraction to activities such as
wind farms, gas storage and carbon capture and storage. Clarification has
been sought on issues such as capital allowances, the potential change in
the nature of the trade, inside ring fence/outside ring fence boundaries and
availability of decommissioning costs.
Following the 2006 Pre-Budget Report, the Government has set up a Working
Group to discuss these matters further. The group met for the first time on
1 March 2007 and aims to report by the summer.
Price Linked Fiscal Regime
Industry has raised the issue that there should be a specific link between
the level of the supplementary charge and oil prices i.e. if the oil price
goes up, then the supplementary charge will go up and if the oil price
drops, then the supplementary charge will drop.
The Government is not attracted to such a regime for a number of reasons.
All taxes will continue to be reviewed on a Budget-by-Budget basis. In the
2005 Pre-Budget Report, the Chancellor committed to no further increases in
the rate of tax imposed on the North Sea during the lifetime of this
In respect of Research & Development Tax Credits, the Government has in
essence dismissed the argument that the current structure of R&D tax credits
is not suited to some companies within the oil and gas industry due to the
industry practice of subcontracting R&D to small, specialist firms.
The Government does not seem open to current proposals for set-aside funds
for decommissioning. However, it would be open to consider further proposals
in this area.
In respect of separate taxation rates for oil and gas extraction activities,
the Government continues to examine this issue. However, there is the
concern that this would add complexity to the regime, create distortions and
increase compliance costs for both industry and Government.
It is expected that the second stage of discussions between Government and
industry will last until autumn 2007.
PRT on Recommissioned Fields
In the 2006 Pre-Budget Report, it was announced that fields that are liable
to PRT would be removed from the charge to PRT if they were redeveloped
following full decommissioning.
Draft legislation was included in the 2006 Pre-Budget Report. It is not
known whether any amendments to this draft legislation will be made.
However, the Government has said that legislation in this respect will be
included in the Finance Bill 2007.
The publication of the North Sea discussion paper is a positive step, as
it provides much needed clarity around the policy areas and options that
the Government is considering in a North Sea context. This follows a
period of relatively informal consultation, where the objectives were
not always clear.
In addition, the conclusions reached in the discussion paper offer the
possibility of beneficial changes to the corporation tax rules for
industry which could occur after the next period of discussion between
now and September 2007, if industry can demonstrate the benefits and