The Chancellor’s Autumn Statement 2014 delivered on Wednesday 3 December announced some eagerly anticipated reforms for the North Sea Oil and gas industry.
A headline rate reduction is a pleasing direction of travel as it appears that Government have accepted that the marginal rate of tax applicable to the North Sea is making the basin uneconomic. However when we put this in context the rate reduction of 2% will cost £55m next year, a drop in the ocean compared to the corporate tax receipts from the North Sea of £4.7bn in 2013/14.
A summary of the measures announced in the Autumn Statement 2014 is set out below, with more to come. Of particular interest will be how Government intends to “reduce the rate further in an affordable way”. The comments that state that the Fair Fuel Stabiliser “will be abolished” suggests that the concept of pegging tax rates to oil price has been abandoned.
The supplementary charge to corporation tax will be reduced to 30% from 1 January 2015. This will reduce the headline rate of tax paid from 62% to 60% (81% to 80% for those fields subject to Petroleum Revenue Tax).
Extension of Ring Fence Expenditure Supplement (“RFES”)
The number of periods in which companies can claim RFES is increased from six periods to ten periods. This brings the supplement available for offshore activities into line with that available for onshore activities.
It appears that the claims in years 7 to 10 are only available for losses or pre-commencement expenditure incurred after 5 December 2013 and as such companies will need to maintain two streams to determine the quantum of RFES available. We assume the back dating of the commencement is to align with the onshore changes.
High Pressure High Temperature cluster area allowance
As expected a new allowance will be introduced for High Pressure, High Temperature projects. The allowance aims to support these challenging projects and also encourage exploration and appraisal activity in the surrounding cluster.
This allowance will equal to 62.5% of the capital expenditure incurred in relation to a cluster from 3 December 2014. Draft legislation was issued this afternoon.
The Treasury has given more details of changes to the oil and gas fiscal regime first outlined in the Autumn Statement upon publishing its consultation findings on Thursday 4 December 2014. Although any real detail is missing the overriding message is positive, and much of industry’s wish list is still on the table for discussion.
It appears that much of the decision making has been postponed so that the new Oil and Gas Authority (“OGA”) can play a key role in working with HM Treasury and HMRC in determining how to deliver the desire to increase economic recovery using fiscal measures.
Lower headline rates
Treasury have stated that they accept that the overall tax burden will need to fall as the basin matures and they have announced an intention to “review commercial conditions on a regular basis”. There is no guidance on either the frequency of the review or the factors that would be taken into account. The corporation tax roadmap which set out the planned rate reductions across a number of future periods does not seem to be replicated here. We expect industry will call for certainty around tax rates and future changes given the long term nature of projects.
Government will be consulting on a new basin-wide Investment Allowance to replace the current system of field allowances some of which derive their value from physical attributes and others from the level capital expenditure. Since all but one field given development approval since the start of 2012 has benefitted from one of the allowances it would appear appropriate to introduce a simpler regime which aids all new projects and existing fields.
The paper released today suggests that the quantum of the new Investment Allowance will be capital expenditure based. There is a lack of clarity around the transition to a new Investment Allowance and there will be concern that some taxpayers will get a reduced amount of allowances under the new regime if grandfathering is not available.
A consultation document will be issued in early 2015. Striking a balance between simplicity for investors and sufficient support for new technologies and brownfield sites will be key to ensuring the success of the allowance.
In order to encourage exploration activity Government will provide “financial support for seismic surveys in under-explored areas of the UKCS”. We expect the OGA will be critical in determining what exploration should be undertaken for the “public good” but it is not clear the extent of Government’s skin in the game.
HM Treasury also announced an intention to consider a tax credit system. This could be similar to the Norwegian-style cash credit system that was introduced to attract new entrants and was a surprise announcement given the initial view of Government that such a system would be unaffordable.
Industry may be disappointed that there appears to be no firm intention to reduce the rate of PRT to 0%. Instead there is an aim to keep the rate of PRT under review.
Further, Government will be consulting on changing the tax treatment of infrastructure assets, with a particular focus on tariff receipts and the treatment of disposals. This is a much needed measure to encourage a new type of investor into the North Sea which have previously been put off by the impact of tax on an asset’s economics.
We have seen many asset deals in the North Sea challenged by the fact that a new investor cannot access full decommissioning tax relief due to the lack of sufficient tax history against which to carry back losses arising at the end of a field’s life.
Many have called for legislation to be introduced to allow those acquiring assets be able to ‘stand in the shoes’ of their predecessors and use the tax history of that asset to access tax relief. Government has not indicated that it will be implementing this solution, but has instead announced its intention to consult on different options to improve access to tax relief.
Passage of Finance Bill 2015
We have confirmed with HM Treasury that there is no intention to move a provisional collection of taxes motion and the changes to the tax rate will be introduced in the Finance Bill.
Given the timing of the next General Election in May 2015 the passage of Finance Bill 2015 will be swifter than usual. The Bill will need Royal Assent by the time Parliament is dissolved on 30 March 2015, therefore we can expect substantive enactment in Q1 2015.
Accounts prepared for the year ended 31 December 2014 year end will not recognise the new tax rate (or the impact of other measures).
The Treasury has set out a timetable for the consultations announced. Discussion of the Investment Allowance and exploration incentives appear to have been prioritised for discussion in early 2015. Disappointingly consultation on tax rate changes for CT and PRT are to be deferred until later in the year.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.