The Industry has successfully put forward the rationale for rate cuts in addition to the Investment Allowance. At the time of the Autumn Statement there would not have been many that would have considered a further headline rate cut likely in the short term, but with oil prices where they are and the threat placed on jobs the Chancellor has found £1.3 billion to support the Industry. The Office of Budget Responsibility estimates that the measures introduced on 18 March 2015 should increase investment by £4bn in the next 5 years and increase oil production by 15% by the end of the decade.
We hope that this is not the end of the fiscal review on the shape of the oil taxation regime. This Budget does not make the Basin any younger nor does it make the cost challenge any easier so industry will be seeking further collaboration with HM Treasury and the Oil and Gas Authority in order for North Sea oil production to be maximised in the longer term.
The other measures announced in the March 2015 Budget are supportive of investment in UK oil and gas operations by companies, providing an allowance based on investment made (details to follow) and a funding programme for seismic surveys, aimed at promoting the longevity of the UK’s resources.
Following the announcement in the reduction to the Supplementary Charge to Corporation Tax (SCT) in the Autumn Statement from 32% to 30%, the Chancellor announced a further cut to 20%, which takes effect from 1 January 2015. There is also a reduction in the rate of petroleum revenue tax ("PRT") which will fall from 50% to 35% which will take effect from 1 January 2016.
This will reduce the headline rate of corporation tax payable to 50% for non-PRT paying fields (from 60%) and to 67.5% (from 80%) for fields subject to PRT.
Confirmation was received of the rate of the Investment Allowance set at 62.5% and that it will be applied to investment taking place from 1 April 2015. Details of the nature of expenditure which will qualify for the Investment Allowance is yet to be revealed but further details are expected later this week.
The allowance will replace the current series of field allowances and will be based on investment expenditure, similar to the cluster-area allowance. The allowance provides for a deduction of 62.5% of investment expenditure from profits when calculating SCT. This represents a simplification of what was an increasingly complex range of field allowances but more importantly provides clear support across the Basin without the difficulties associated with securing a Brown Field Allowance or Cluster Allowance.
No further details were provided on the timetable for the other tax measures raised in the fiscal review, which included consultation on the treatment of infrastructure, improving access to decommissioning relief and encouraging exploration (other than the £20 million funding for seismic studies).
Passage of Finance Bill 2015
Finance Bill 2015 will be published on 24 March 2015 and is expected to be passed and receive Royal Assent before Parliament is dissolved on 30 March.
The changes announced in the Budget for inclusion in the Finance Bill 2015, are expected to be substantively enacted by 30 March 2015 and hence will take effect for UK GAAP, US GAAP and IFRS reporting purposes for periods ended 31 March 2015.
As such, deferred tax assets and liabilities should take account of the reduced rates with any debits and credits arising from the rate change booked to the income statement (or equity if the deferred tax asset or liability was originally recognised through equity).
Following the introduction of field allowances and the brown field allowance there have been a number of different approaches within the industry as to both the timing of when their benefits should be brought onto the balance sheet and how these benefit should be accounted and calculated.
The accounting treatment for the Investment Allowance will need to be considered by all UK upstream companies particularly where the transitional rules are expected to be in point.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.