What are the implications for the Oil & Gas Sector following the Chancellor's first Autumn Statement.
The last few Budgets and Autumn Statements contained measures which fundamentally changed taxation of oil and gas companies in the UK, with significant tax rate reductions and incentives for those companies continuing to invest in the North Sea. The announcements on Wednesday 23 November, in what will be the last Autumn Statement, did not contain any of the dramatic tax changes seen in recent years. However, some will be pleased this may herald the start of a period of stability for the North Sea tax regime.
This Autumn Statement demonstrated a recommitment to the long term plan set out in the Driving Investment document issued in 2014. That document set a clear timeline for fiscal change. Many of those plans have been executed – reducing the rate of the Supplementary Charge Tax to corporation tax (SCT), a basin wide Investment Allowance and a review of PRT. However, there remains an elephant in the room in terms of areas that were identified as issues two years ago – decommissioning tax relief, encouraging exploration and supporting infrastructure. Today’s recommitment does not set out the areas for focus nor a timeline for Government to work with industry to tackle these issues.
We set out details of the reform to the administration of Petroleum Revenue Tax (PRT) following the zero rating at the start of the year that will remove the burden of twice yearly reporting for companies able to opt out. We also include comments in respect of two key corporate tax changes in respect of reductions to interest deductions and restrictions on loss utilisation - both of which will have a major impact on UK companies. Although not expected to directly impact UK upstream activities, they have the potential to create a significant increase on the tax burden for other parts of the sector, notably downstream business, commodity traders and the wider supply chain.
Petroleum Revenue Tax (‘PRT’) was zero rated from 1 January 2016 and inthe latest Autumn Statement, the Government announced a simplification of the administrative regime. Government expect around a quarter of the 100 PRT fields will be in a position to opt out of the regime. The remainder will continue in the regime to maintain the capacity for decommissioning relief.
The changes are two-fold:
The rules will apply where a group has net interest expenses of more than £2 million and where net interest expenses exceed 30% of UK taxable earnings (the fixed ratio rule) as well as the group’s net interest to earnings ratio (group ratio rule).
This is all in line with a consultation document issued earlier this year, albeit there is an indication the exemption for public benefit infrastructure will be widened. Frustratingly no additional detail was provided in the Autumn Statement and industry will need to wait until the issuance of the Draft Finance Bill on 5 December before details emerge. In particular, for this sector, on the application of the ring fence exemption.
The rules will limit the ability to use carried forward losses to 50% of profits in a period. There will be a £5 million allowance per group. It is expected these rules will not apply to ring fence losses, although no detail was provided. As with the interest restriction proposals, we will need to wait until 5 December, when the Draft Finance Bill is published, for detail on how the rules will operate.
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