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The Government has today announced a number of reforms to the North Sea fiscal regime. Measures have been outlined, though for many of the proposals we await draft legislation. Interestingly, no 'next steps' have been published by the Government today. This is the first time since 2005 that there is now no official consultation process in place between industry and HMRC.

Tax rate

Corporation tax (CT) rates remain unchanged in respect of North Sea oil and gas activities. The mainstream CT rate for large companies is 30%, the supplementary charge (SCT) is at 20% and the small companies' rate for ring fence profits remains at 19% per cent.

Capital allowances

The Government has today announced a new temporary 40 per cent first year capital allowance for expenditure on general plant and machinery. 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 will remain at 25% (or 6% for long life assets).

Field Allowance

A new Field Allowance will apply to certain new fields which are given development consent on or after 22 April 2009, which the Government hopes will unlock up to 2 billion barrels of oil. A fixed amount will be available to offset against the Supplementary Charge and will reduce tax payable for qualifying fields.

The allowance will apply to small fields, ultra heavy oil fields and ultra HTHP (high temperature high pressure) fields as follows:

• For small fields, the allowance is £75m for fields with oil reserves (and gas equivalent) of 2.75 million tonnes or less, reducing on a straight line basis to nil for fields over 3.5 million tonnes. In any one year, the maximum field allowance for any one field is £15m.
• For ultra heavy oil fields, the allowance is £800m for fields with gravity below 18 degrees and a viscosity of more than 50 centipoise. In any one year, the maximum field allowance is £160m.
• For ultra HTHP fields, the allowance is £800m for fields with a temperature of more than 176.67 degrees Celsius and pressure of more than 1034 bar in the reservoir formation. In any one year, the maximum field allowance is £160m.

Chargeable gains

Effective 22 April 2009, where North Sea licences are swapped, no gain will arise to the extent that the value of the licence acquired equals the value of the licence disposed of. This brings the treatment of developed assets in line with undeveloped ones.

In addition, gains on the disposal of North Sea licence interests will be exempt from tax to the extent that disposal proceeds are reinvested in other North Sea licences. Previously, gains could only be deferred for a maximum of 10 years.

Change of use

In order to maximise use of existing North Sea assets or infrastructure, as well as encourage investment in renewable energy, legislation will be introduced in Finance Bill 2009 regarding the change of use of the North Sea from predominantly oil and gas exploration and production, to other uses such as carbon sequestration (CCS), renewable energy and gas storage.

The change of use measures will apply to expenditure incurred on or after 22 April 2009 for ring fence corporation tax (RFCT) and to chargeable periods beginning after 30 June 2009 for PRT purposes.

Decommissioning

Relief for decommissioning costs for ex-ring fence assets which are used for a 'change of use' purpose will be given on the same basis as if the assets had remained within the ring fence. The legislation will allow companies to set off decommissioning costs of change of use ex-ring fence assets against their ring fence profits. The decommissioning losses can be carried back against ring fence profits to 17 April 2002.

As regards PRT, relief will be given for all of the costs of decommissioning in respect of ex-PRT assets.

Removal of a disposal for PRT purposes

Where a PRT asset is used for some other purpose, part of the cost relieved for PRT will no longer be clawed back where the asset is put to use for a qualifying change of use activity.

Taxation of income and expenditure

Income from change of use activities will be removed from the scope of PRT.

Capital allowances

As expected, no changes have been proposed to levels of capital allowances on change of use activities and deemed disposals arising on change of use.

Accelerated decommissioning relief

The Government has introduced legislation to prevent oil and gas companies from claiming tax relief for decommissioning costs in advance of the actual decommissioning being undertaken (some companies have entered into intra-group arrangements designed to accelerate access to decommissioning allowances). The rules will have effect from 22 April 2009.

Cushion gas

After months of dialogue between HMRC and industry, HMRC now accept that purchased cushion gas will be eligible for plant and machinery capital allowances.

PRT licence expiry

Changes have been announced to the PRT rules which extend relief for decommissioning costs where a company is no longer a licensee. The rules apply to chargeable periods beginning after 30 June 2009 and will work as follows:

• A company will be able to claim decommissioning relief where it ceases to be a participator in a field because a licence expires: and
• Any income that may arise in respect of the assets in question will be chargeable to PRT.

PRT simplification

The Government has sought to simplify the PRT regime by identifying a number of areas where legislation can be improved or removed altogether. These repeals/changes will have effect for chargeable periods beginning after 30 June 2009:

• The statutory information requirement for commingled fields is to be replaced by a simpler 'just and reasonable'' allocation methodology.
• Provisional expenditure allowance, introduced in order to mitigate the timing effects when expenditure relief was deferred, is to be partially repealed.
• Other minor repeals of redundant legislation.

Definition of a consortium within the ring fence

New rules will amend the definition of a consortium to bring it into line with the general corporation tax definition.