Yearly Archives: 2013

05 Dec 2013

Autumn Statement 2013

Oil and Gas measures

As part of his Autumn Statement today George Osborne introduced a number of mostly beneficial measures for the oil and gas industry.

Whilst the draft legislation for the new onshore allowance was published today further details on the other measures will not be revealed until next week when the Finance Bill 2014 draft clauses are published.

1. New onshore field allowance

Further to the consultation exercise for a shale gas allowance there is to be a new onshore field allowance, to cover all onshore exploration and production activities. This will replace any other field allowances for which a company might otherwise have qualified in respect of an onshore development e.g. small field allowance. As with the other field allowances, once activated the onshore allowance reduces the profits of a company subject to the supplementary charge.

The allowance is available for projects approved for development for the first time on or after 5th December 2013 and will be calculated on 75% of the capital costs relating to that project incurred after that date.

The allowance will be available per site, defined as either a drilling or extraction site not used in connection with any oil field, or an oil field. A drilling and extraction site is not defined in the legislation but is understood to be a single “pad” from which a number of wells can be drilled.

The allowance will be generated at the time qualifying ring fence capital expenditure is incurred and activated by production from the site. The expenditure is apportioned on a just and reasonable basis if the expenditure is not exclusively incurred in relation to the ring fence activities on a particular site.

If the cumulative total of activated allowance exceeds the adjusted ring fence profits for a period, the excess allowance is carried forward.

The company can elect to transfer any unactivated allowance to another site which it owns but not until at least 3 years have elapsed since the expenditure was incurred. Similar provisions allow a company to transfer expenditure which does not relate to any site to a site.

If the site has expected recoverable reserves of more than 7 million tonnes no allowance will be available; further, once production from the site has reached 7 million tonnes no further allowance will be available on capital spend after that point.

There are provisions which apply if a company has activated other field allowances to ensure that profits are not reduced twice as a result of applying both allowances, and provisions to change the amount of the allowance when the company’s equity share in a site changes in an accounting period. The Government can also amend the 75% rate and the 7 million tonne limit by statutory instrument at a later stage if required.


After a positive consultation on the proposed shale gas allowance, the introduction of this allowance will be welcomed by the shale gas industry, as the government have taken on board concerns about aspects of the allowance as originally proposed and in particular the transferability of unactivated allowance, although it is disappointing that this option has not been extended to companies in the same group.

It is also welcome that the rate of the allowance, which has not previously been disclosed, is at the upper end of expectations.

Although capital costs are not specifically defined it is understood that these will cover costs which are capital for tax purposes even if they do not attract a capital allowance.

However it is disappointing that a company will no longer be able to claim small fields allowance as an alternative as this onshore allowance will probably not be as generous as the existing field allowance for conventional onshore oil and gas fields. There is however the option for a field group to elect to postpone the application of the new allowance to a field until 1st January 2015.

2. Other measures

A number of other announcements have been made in connection with oil and gas taxation

Ring Fence Expenditure Supplement

Legislation is to be introduced in Finance Act 2014 to increase the number of periods for which ring fence expenditure supplement can be claimed for onshore ring fence oil and gas losses and qualifying expenditure incurred on or after 5 December 2013.

The number of claim periods will be increased from 6 to 10 periods.

Comment: Industry has been lobbying for changes in the manner in which RFES is calculated, the number of periods for which it is available, and the time limit for making claims.

It is unclear whether the new onshore regime will be based on a single onshore pool concept or whether an alternative year by year pool regime will be introduced.

We understand that an announcement will be made in connection with the other representations related to offshore losses at the time that the draft Finance Bill clauses are published next week, but it is perhaps unlikely that any changes to the offshore regime will be introduced for 2014.

Companies who are looking to finalise their 2011 returns at the moment will want to look carefully at the statement made next week to determine the optimum claim strategy.   

Capital Gains Tax changes

Two changes are to be made to the current capital gains tax regime as it applies to oil and gas companies which will have effect from the date that Finance Bill 2014 receives Royal Assent (probably in July 2014)

First, reinvestment relief is to be extended to cover gains made by companies which are carrying on exploration and appraisal activities but have not yet commenced to trade.

Second, the scope of the substantial shareholding exemption (SSE) is to be expanded. Currently where assets are hived down to a Newco and the shares sold the period for which the seller is treated as holding the shares of Newco and the period for which Newco can be treated as a trading company for SSE is extended to include the period of time when the transferor used the assets in its trade. In addition Newco must be carrying on an actual trade at the date of its disposal. This means that a transfer of exploration or appraisal assets into a Newco and the sale of that company before the 12 month holding period required by the SSE rules will not qualify for the SSE despite the fact that such activities are treated as trading for the purposes of the SSE. This anomaly is to be corrected.

Comment: This announcement is to be welcomed. In both cases we believe the effect of the current law was unintended. It is perhaps disappointing however that the rules will only be changed with effect from the enactment date of the 2014 Finance Act. This contrasts for example with the change which was made to reinvestment relief to allow reinvestment on a group basis which was backdated to the introduction of the reinvestment relief scheme.

Companies may wish to lobby for these changes to at least be made effective from today’s date.  

Relaxation of Targeted anti-abuse rules

Government have indicated that they intend to review the options available to mitigate the impact of the profit transfer targeted anti-abuse rule on oil and gas exploration and appraisal and similar activity in other sectors.

As currently drafted the rules could lead to a restriction on deductions for pre trading capital and revenue costs where, for example, a company which has not commenced to trade is sold and at any time after that sale a trade is triggered by the injection of a profitable asset.

Representations have been made that the existence of this rule substantially increases the risks associated with exploration and appraisal activities because it increases the uncertainty that tax relief will ultimately be available for these costs and this in turn could have an adverse effect of the level of such activities.

Comment:  The Profit Transfer TAAR is widely drawn and can potentially be applied where there is a transfer of assets into a non-trading company after a change of ownership even where the purchase of that company was not tax motivated. 


The government have announced that they intend to introduce measures to

  • cap the amount deductible for intra-group bareboat lease payments , and
  • introduce a new ring fence to protect the resulting revenue.

There is to be a consultation with industry in early 2014. (Finance Bill 2014)

Comment: The details of this proposal will need to be carefully reviewed not least because the “costings” set out in the Autumn Statement suggest that the Government expects to generate significant revenues from this change.


CW Energy

23 Sep 2013

Decommissioning Deeds

Now for the tricky bit!

Now that the pro forma Decommissioning Relief Deed is in its “final” form we understand the Government intends to enter into the Deed with the first batch of companies in a four day window starting on Monday October 14th. In order to be able to do this various details supporting a company’s entitlement and capacity to enter into the Deed have to be provided to HMT by 27th September.

The Treasury have indicated that it will be difficult at this time to accommodate companies who did not volunteer to be within the first batch. It is unclear what the timetable will be for other companies but a company would need to consider applying a soon as practical if it intends to be able to take advantage of the Deed and post Security on a net of tax basis for 2014 given that we understand the security arrangements have to generally be agreed by the end of November.

Buyers of licence interests who have had to post security in connection with the purchase of those interests should also be revisiting those agreements as soon as practical to determine whether there is an immediate need to sign up to the Deed.

Of course companies in a field group have two potentially conflicting requirements. They will be keen to ensure that the cost of security they are obliged to provide is minimised whilst trying to secure that other partners provide as full protection as possible.

For fields which have paid PRT, other than perhaps those which have been fully PRT paying for all partners for many years, evaluating the potential impact PRT will have on the level of security is likely to be complex. For example the level of security required by each partner will turn very much on that partner’s capacity as well as that of their predecessors. The fact that one can choose whether to utilise one’s own capacity or that of the defaulter will also be relevant and it is therefore also possible that the relative level of security required in respect of a potential default by one company will vary depending on the identity of the non defaulting party. Negotiations within the field group to agree an acceptable level of security could be protracted for certain field groups.

These potential difficulties mean that it is important that companies obtain as much detail of the “field position” as soon as is practical and that companies carefully map out and evaluate the matrix of possible outcomes.

For fields which are outside the scope of PRT or have never paid PRT the process of amending the DSA to reflect the Deed should be more straightforward, although even here care will be needed. For example, the timing of when monies are released from security to fund decommissioning may be crucial in ensuring effective security where post tax security has been given.

Please let us know if you would like to discuss any aspect of the process.

23 September 2013

15 Aug 2013

Planning for Accounting changes

Many companies have made the change from UK GAAP to IFRS but there are a significant number of individual company accounts which are still being produced under UK GAAP.

As readers will be aware existing UK GAAP is to be replaced.

From 1 January 2015 those companies which are not already obliged to produce IFRS accounts will now have a choice;


  • they can choose to adopt full IFRS
  • they can choose to apply UK GAAP based on the recognition and measurement requirements of EU IFRS but with the disclosure exemptions set out in FRS 101. This might be appropriate for companies whose results are consolidated into full IFRS accounts but who do not want to have to deal with the burden of the extended disclosure requirement of full blown IFRS. Companies voluntarily moved to IRFS in the past would have the option of adopting this route
  • they can choose to apply new UK GAAP under FRS 102

When a company changes its reporting from UK GAAP to IRFS or to new UK GAAP (FRS 102), it is not just the format and disclosure in the accounts that will be different but for many companies the numbers will also change. The change in accounting policy is likely to have a knock on effect on the tax returns for the relevant accounting period, particularly in the area of loans, exchange gains, derivatives and for oil and gas companies potentially the measurement of stocks and under-lift and over-lift.

If companies are contemplating making a change they should consider the tax implications at an early stage.

Taking as an example the position on derivatives; all of the accounting conventions will now include a requirement to carry derivatives at fair value. Most companies will then look to rely on the disregard regulations to manage the volatility in the tax charge that would otherwise result from the use of fair value, but there is an alternative which may be advantageous.  Where derivatives are held at the commencement of the accounting period and an election is made prior to that date companies may choose not to operate under the disregard regulations and instead the initial adjustment in value on transition to the new accounting policy will be spread over 10 years for tax. The need to consider the likely values and make the election prior to the commencement of the accounting period means that time is of the essence.

We have also been looking at the existing rules dealing with connected companies debt. The law requires the use of the amortised cost basis of accounting for connected companies loan relationships. On adoption of one of the new accounting standards, a connected company loan which is currently being carried at cost may be required to be initially measured at fair value for accounting purposes. Subsequently loans will either be measured at amortised cost or may, depending on their terms, continue to be carried at fair value through the P & L.

HMRC have confirmed that the difference arising from the change on initial recognition should not normally be brought into tax, contrary to the view of certain parties. This issue will be further considered as part of the recent Condoc on ‘Modernising the taxation of corporate debt and derivative contracts’.

In the meantime, companies could consider amending certain terms of the loan to avoid differences on the adoption of the new standard from applying. The foreign exchange position could produce an unexpected result and should be carefully reviewed.

Any company which is intending to change their accounting policy in the foreseeable future should identify the extent to which this will impact their tax position.

15 Aug 2013

Research and development expenditure and tax incentives

This year’s Finance Act introduces an ‘above the line tax credit’ (ATL) for certain expenditure on R&D.

We thought it was therefore a good time to remind companies of the beneficial tax incentive offered by the ‘tax credit’ or enhanced deduction for certain expenditure on R&D  particularly as our experience shows that many oil companies are not taking up the benefit in respect of their Upstream activities.

There are two broadly equivalent incentives available.

For large companies since April 2008 an additional deduction is given equal to 30% of the expenditure.  CT relief via the enhanced expenditure alternative is therefore at 80.6%, i.e. £100 of spend will generate a tax benefit of £80.6 (130 at 62%) for a company carrying on a ring fence trade.

As an alternative the ‘above the line tax credit’ (ATL) was introduced in this year’s Finance Act 2013.

The ATL credit will be available on a claim at a rate of 10% of the qualifying expenditure for non-Ring Fence trading activities and 49% for ring fence activities.  The ATL credit acts as income that is taxable in the computation of trade profits and also as an amount of tax credit that is set off against the corporation tax liability.  So in respect of ring fence qualifying expenditure of 100 a credit of 49% on a £100 spend the overall effect is tax relief is £80.6 as illustrated below:



Without R&DWith R&D and ATLEffective relief
ATL income49.0
Tax at 62%186.0154.4
ATL credit(49.0)
Net Tax186.0105.480.6


Many upstream companies have not been claiming relief

The rules allow that where R&D meets certain criteria, some of the relevant R&D cost qualifies for the ATL or uplift.  Aside from certain pharmaceutical related expenditure, there are 3 types of qualifying expenditure; staff costs, costs of externally provided workers and consumable items.  Separately, contributions by large companies to independent R&D for the purpose of funding research and development carried on by the recipient qualify for the ATL credit or enhanced deduction if they are made to a qualifying body, an individual, or a partnership each member of which is an individual.

The R&D that qualifies excludes oil and gas exploration and appraisal, and the qualifying expenditure excludes amounts which are capital. The R&D work must also be seeking to make an advance in science or technology. The combination of these restrictions has deterred many companies from considering whether they have an entitlement to the ATL or uplift. However, whilst the type of costs potentially eligible may be routinely capitalised, a careful examination of the activities of staff may be worthwhile.  Where technical staff are working outside of individual capital projects to develop solutions and advance understanding it may be that the work should not be allocated to any particular capital project, and instead may qualify for the ATL or enhanced deduction. For example projects that seek to find new E&A techniques and new ways of enhancing recovery but which are not themselves part of any specific E&A activity could qualify.  Typically companies may not have identified scientific activities as separate from their E&A projects masking the opportunities afforded by the tax incentives.

Re-examining the possibilities

We can assist with any review of the possibilities; in the identification of areas where eligible costs may exist, advising on how to plan for the future to maximise the benefits, and how to handle the issue with HMRC. We have experience of a number of these claims and the legislative and practical requirements that must be met.

ATL compared to the enhanced deduction

For companies that have identified their qualifying expenditure there is a choice as to whether to claim the ATL credit or the enhanced expenditure deduction.  The ATL is first set against the corporation tax liability of the company for the period. An excess ATL credit not used against the company’s corporation tax liability in the period may be surrendered to other group companies, carried forward or repaid.  However there is a limit on the amount of credit that may be surrendered or repaid; only the amount of the PAYE and NIC included in the staff costs that made up the claim can be reclaimed or surrendered such that the excess must be carried forward.  The effect of these rules is that ATL is likely to be the most beneficial route where the company is fully tax paying.  In a case where there are losses in place the enhanced expenditure deduction is likely to be beneficial (particularly for a ring fence company which has losses that can be enhanced with ring fence expenditure supplement).

Please get in touch if you wish to discuss whether there are likely to be benefits for your company.

05 Jun 2013

New addition to the CWE team!

We are delighted to announce that Kate Leshcheva joined the CW Energy team on 3 June as a tax manager.  Kate had previously worked with EY in Aberdeen and London in their Energy tax group as well as more recently working with Gazprom Marketing & Trading Ltd.

Kate’s area of expertise includes all aspects of upstream corporate tax with particular emphasis on PRT as well as the tax aspects of downstream operations.

Kate’s experience will further strengthen our team and will be invaluable in ensuring that CW Energy can continue to provide up to date and accurate support and advice to all our clients.

If you would like to speak to Kate she can be contacted on +44 (0) 20 7936 8307 or via e-mail at

07 May 2013

Brown Field Allowance update

A draft statutory instrument and explanatory note was published on the 28th March setting out further details of the Brown Field Allowance (BFA), described as the “Additionally Developed Oil Fields Allowance” in the Instrument.

Finance Act 2012 provided for the introduction of the BFA by statutory instrument and details of the original proposed scheme were set out in our news brief of September 2012.  In substance the arrangement follows the details set out in that note but there have been a number of changes.

Firstly there is an explicit exclusion for projects which involve enhanced oil recovery using carbon dioxide from the scope of the relief.

Second, the original proposal was that a BFA could not be activated until there was production from the incremental development.  This rule has been modified in the draft statutory instrument in that now the allowance cannot be activated until the beginning of the year which was notified to DECC as the year in which incremental production as a result of the project was expected to commence. In addition activation is delayed until the project has been substantially completed.

There is still some lack of clarity in the wording of the draft statutory instrument in that “substantially completed” in the above test is not defined, and there is no clear definition of what “reasonably expected capital expenditure”, which is used in determining the level of allowance available, means. It is hoped that these issues will be clarified before the final statutory instrument is issued.

In addition a statutory instrument was published on the 26th March 2013 introducing 1st April 2013 as the appointed date for various prospective amendments to the regime introduced by Finance Act 2012. The most important of these is that wording has been introduced to make it clear that a company can hold more than one field allowance in respect of any particular field.   There was some uncertainty when the original field allowance rules were introduced as to how the various field allowances interacted and government expressed the view at the time that it was not possible to utilise more than one allowance for an individual field (although it was unclear whether this was supported by legislation).  This amendment puts the position beyond doubt and whilst we believe it has been made specifically with the possibility that a BFA will be available for a field where some other field allowance has already been made available, it does appear to apply to any field allowances provided the appropriate conditions are met. A further prospective amendment sets out that where a company already holds another field allowance for the field, the amount of the company’s relevant income for the field is reduced by the amount of any earlier field allowance activated for the accounting period but where a company began to hold two or more field allowances at the same time, the company may determine the order in which the relevant income is to be utilised.

DECC have also issued revised guidelines in February 2013 on the application of the BFA.  If companies would like to discuss this issue please contact Paul Rogerson (020 7936 8309) or your normal CW Energy contact.

7th May 2013

26 Apr 2013

Accounting for Field Allowance

Many companies will have recently finalised their accounts for 2012.

The treatment for tax provision purposes of the various field allowances which are now available has caused a lot of discussion this year. The alternative treatments that we have seen have ranged from recognising the full potential benefit of the allowance as soon as it looks like it was going to be available, to arguing that recognition should follow the activation of the allowance in accordance with the statutory scheme.

What seems clear is that there is no prescriptive treatment set out in the relevant accounting standards for either UK GAAP or IFRS, and that first principles need to be applied.  CW Energy’s role in connection with this issue has been to support our clients in presenting an appropriate treatment in their accounts and to help explain that view to their auditors. We have seen a whole range of treatments accepted by different audit firms, and indeed different treatments accepted by the same audit firm for different companies.  This is perhaps not surprising as an appropriate treatment will have to reflect the facts and circumstances of the company, including their future profit and investment expectations.

With the doubling of small field allowances in 2012 and the introduction of a brown field allowance the amounts involved can be fairly significant and the level of field allowance could be material in determining the tax provision for a company. It is therefore important that companies carefully consider what options are available to them.  For companies who have already taken a view it will be important to review their position at the next reporting event.

If companies would like to discuss this issue please contact Paul Rogerson (0207 936 8309) or your normal CW Energy contact.

25th April 2013

20 Mar 2013

Budget 2013

George Osborne delivered his fourth Budget in difficult circumstances. The drive to collect more taxes continues with more anti-avoidance rules, including the previously announced general anti-avoidance rule (GAAR), and two new targeted anti-avoidance rules (TAARs).

However it was pleasing to hear a reaffirmation that the Government intends to start to sign decommissioning relief deeds with oil companies this year, continuing the process of providing certainty for decommissioning much desired by industry.

There was also a welcome statement of help for the embryonic shale gas industry, with promises to assist with the planning process where this would otherwise slow down development of this new resource.

This note sets out a brief summary of the main measures that we believe will be of most interest to our clients.


The Budget statements confirm that the Government intends to sign Decommissioning Relief Deeds with all companies which might potentially have to incur decommissioning liabilities. A further draft of the deed was released to industry earlier this week and we will be commenting on this in due course.

It has also been confirmed that the technical amendments to the legislation which were included in the draft Finance Bill clauses released in December last year will be enacted together with some additional provisions. Revised clauses have not yet been published. We will comment further on the detailed provisions once the Finance Bill is published.

The measures previously put out for consultation, and on which we commented in out newsletter of January 22nd ( ) to be included in the Finance Bill, are as follows:-

  • Enabling legislation empowering Government to enter into the Deeds and pay “compensation” out of money provided by Parliament, if there are changes to the availability of relief for decommissioning expenditure (other than in respect of the rate of tax) subsequent to Finance Act 2013, and stating that any such payments should themselves be free of tax
  • Expenditure on decommissioning onshore installations that have been used in connection with the production of offshore oil and gas will qualify for the same reliefs as currently apply to expenditure on offshore plant and machinery
  • A new measure to give reliefs for expenditure under the MEA code for “restoration” costs which mirror those currently applying for offshore plant and machinery decommissioning expenditure
  • There will be restrictions on the quantum of relief available where decommissioning services, either in respect of decommissioning plant and machinery or on restoration, are provided by affiliates, or where there is an avoidance purpose
  • Amendment of the provision which provides for a reduction in SCT profits where the effective relief for decommissioning costs has been restricted to 20% for SCT purposes and those decommissioning costs have given rise to PRT relief to ensure the legislation has its intended effect
  • Amendment of the law to ensure that all decommissioning guarantee fees qualify for corporation tax relief regardless of whether they are paid in respect of a PRT taxable field; that receipts under such guarantees do not restrict otherwise qualifying expenditure; and that any income derived as a result of meeting a defaulter’s decommissioning expenditure is brought into charge
  • The removal of the inheritance tax charge on any property held as decommissioning security.

In addition two further changes, in respect of matters that the industry has been lobbying for are to be introduced. These are:-

  • Clarification is to be introduced that decommissioning trust funds do not give rise to a loan relationship. Without this there was a risk that increases in value in the trust could be taxed twice, once in the trust at the “penal” trust rate of      45% (from April 1st, currently 50%) and again in the hands of the company which booked the value of that increase in its accounts
  • There was doubt whether plant and machinery acquired as part of a field acquisition, subsequent to that plant having become disused, could be said to have been brought into use by the new owner such that the relief would be available. New legislation will make the position clear by deeming such assets to have been brought into use by the purchaser.


While we won’t know until the revised Finance Bill clauses are published whether all of industry’s comments on the draft clauses published last December have been accepted, confirmation that all of these measures  are to be included in the Finance Bill is welcome. The introduction of the two new reliefs reflects industry concerns and is also welcome. The industry has also lobbied for the rate applicable to profits in the trust to be reduced to zero or at least the normal CT rate but the Government has not yet agreed to that request.

Relief for shale gas

The Government have proposed a new field allowance for shale gas and will extend the number of periods for which Ring Fence Expenditure Supplement (RFES) can be claimed for shale gas costs from 6 to 10.

The form of the field allowance is not known, but will be published for consultation before the summer.


It is to be hoped that the form of the field allowance will mean that profits from shale gas will effectively be exempt from the supplementary charge, and therefore only subject to tax at 30%.

An extension of the number of periods of RFES has been requested by the industry generally. Whilst this has not been generally forthcoming it is welcome that Government has seen fit to grant this for shale gas projects, which could mean that an extension may be available for industry as a whole if Government could be persuaded that there are sufficient new projects which would merit this incentive. As the extension of the number of RFES periods is exclusive to shale gas project costs, this will mean that a separate pool will need to be maintained for these costs if a company has other ring fence activities.

Although the detail of the regime remains subject to consultation the implication from this announcement is that expenditure in connection with the appraisal and development of a shale gas project would be fully deductible against existing ring fence profits which a company might have. The field allowance would also presumably be available to shelter the SCT liability on those profits in the absence of sufficient shale gas profits.  

There are also going to be a number of non-tax initiatives, as follows:-

  • The Government is to provide technical planning guidance for shale gas by July 2013, to provide clarity on the planning rules as they relate to shale gas developments. The aim is to align the planning regime with the licensing and regulatory regimes as the shale gas industry develops.
  • There will be a new department, the Office for Unconventional Gas and Oil, although it’s not clear precisely what its responsibilities will be.
  • The Government will consider whether the largest shale gas projects should have the option to apply to the major infrastructure regime.
  • The Government will also provide proposals by summer 2013 for local communities to benefit from shale gas projects in their area.


As a large part of the shale gas deposits are understood to be onshore presumably the aim is to speed up the development process such that the developments can go ahead with the minimum of delay due to planning constraints. The inclusion of major project in the major infrastructure regime will mean that such requirements will be dealt with at the national rather than the local level. As a balance to this, there will be a regime to enable the local community in which the shale gas project takes place to benefit from that project, although it is not clear how this benefit will be manifested.

Further anti-avoidance rules on losses

Two further sets of anti-avoidance rules have been proposed concerning relief for losses and deductions in situations where there is a change in ownership.

At present, the principal anti-avoidance rules prevent the carry forward of certain types of losses where there is a change of ownership of the relevant company and :

(a)    Within three years of the change of ownership there is a major change in the nature or conduct of the company’s trade or

(b)   Where the change in ownership occurs after the company’s activities in a trade become small or negligible and before any significant revival of the trade

These are augmented with rules introduced with effect from 2009 to restrict the ability to circumvent these rules by disclaiming capital allowances.

The new measures look to close loopholes in the existing rules, and also to introduce two targeted anti avoidance rules (TAARs) directed at arrangements which are intended to circumvent the application of the major change rules.

1. Loss loophole closure

There is a loophole under the existing legislation where there is a change in ownership of a company X to which a trade has previously been transferred and, after a change in ownership of X, it subsequently transfers its trade to another company, Y, within the transferee group. In these circumstances, under current law, it would be possible for there to be a major change in the conduct of the trade now carried on by Y without the anti-avoidance rules applying.

The proposal is that the nature or conduct of the trade now in Y can be taken into account to determine whether the anti-avoidance rules are in point.


Whilst we understand that this potential loophole was identified a number of years ago we are not aware of a large number of companies relying on it in practice.

The second change deals with the change in ownership of companies with carry forward non-trading loan relationship debits, non-trading deficits, or non-trading losses on intangible assets.  These companies are to be brought within the normal major change rules.

2. Targeted Loss Buying Rules

There are three new restrictions being introduced in connection with a change of ownership of a company and the ability of the new owner group to utilise reliefs which economically were incurred while under the ownership of the previous group.

  1.  Capital allowances pool “buying”

Under rules introduced in FA 2010 where there is a change of ownership of the company and at the date of change of ownership the book value of its assets is less than the amount of the plant machinery qualifying pool, and the change of ownership has an “unallowable purpose”, then the offset of allowances after the change is effectively restricted against profits of the business which was carried on by the company at the change of ownership.  For these purposes a transaction has an unallowable purpose if the main purpose, or one of the main purposes, is to obtain a tax advantage.

Changes are to be made to these rules such that where the excess of tax written down value over book value is £50m or more these rules will apply regardless of whether there is an unallowable purpose. Where the excess is between £2m and £50m the rules will apply if the benefit is not an “insignificant” benefit. HMRC have indicated that insignificant in this context will be subject to consultation but would normally mean 5% or less.  Below £2m the existing rule, which require an unallowable purpose, will apply.

  1. TAARs

There are two further measures described as a “Deduction Transfer TAAR” and a “Profit Transfer TAAR”.

These rules are intended to supplement the existing major change rules to catch circumstances where companies are able to arrange matters such that they do not fall within those provisions, i.e. by ensuring that deductions are claimed after the change of ownership rather than before when they would then have formed part of the losses at the date of change.

The deduction TAAR applies where there is a change of ownership and the main purpose or one of the main purposes of the arrangements connected with the change is to obtain relief for a “deductible amount” in circumstances where those amounts are ones which, at the date of change, can be regarded as highly likely to arise as deductions for an accounting period ended on or after the change.

This first TAAR prevents these deductions from being group relieved or set against other income.

The Profit Transfer TAAR looks to prevent deductions from being available against profits from assets transferred into the target company after the date of change of ownership.

Deductible amounts for these purposes include expenses of a trade, property business, management expenses and non-trade debits from loan relationships, derivative contracts, and intangible assets.

Notably the list does not include trading losses in place at the date of change of ownership, presumably because they are already covered by the existing legislation.

In both cases the TAAR only applies where the purpose or one of the main purposes of the arrangements connected to the change is to claim relief for the deductions.

In determining whether there is a tax avoidance purpose HMRC have included guidance as to the factors that will be taken into account

These include:

  • The amount paid for the acquired company relative to the tax value of the deductions
  • Changes made to the business carried on by the acquired company prior to its acquisition
  • The nature of the business carried on by the transferred company relative to the business carried on by the new group
  • The planned conduct of the transferred business following the transfer.


The draft legislation will not be issued until 28th March but it appears from the documents included within the Budget publications that these rules do not apply to restrict the use of losses which are in place at the date of change of ownership, but rather to restrict the use of deductions created after that date.  HMRC would seem to be comfortable that the existing change in nature or conduct of trade rules are sufficient to police the transfer of companies with existing losses. It would therefore appear that these targeted anti-avoidance rules are being introduced to deal with arrangements entered into which are intended to fall outside of the scope of these existing rules. 

The introduction of these TAARS suggests that the type of transaction targeted may not have been one which would fall within the scope of the GAAR which is also being introduced in this year’s Finance Act.

The type of transaction which these rules may be aimed at would be an arrangement whereby capital allowances were disclaimed prior to a sale (bearing in mind that this transaction may fall foul of the existing plant and machinery anti-avoidance rules as extended by the measure mentioned above), or possibly where a company has been sold prior to the commencement of trade with a view to triggering the trade by means of injecting a producing source into the company.

These new rules introduce a further level of complexity and risk where a group is looking to purchase a company with losses or tax allowances.  These types of transactions are particularly common in the oil industry as assets often change hands via a corporate transaction prior to fields paying back, such that there are still unused losses or allowances in the company.


“Above the line” R&D credits

The change to the way relief for R&D credits for large companies is to given, as previously announced and covered in our earlier newsletter, is confirmed, but with a credit of 10%.


The earlier proposal had been for a credit of 9.1% and following lobbying by industry it had been agreed that for ring fence trades the credit should be 49% to reflect the different level of tax that ring fence trades suffer. There is no mention of whether there is to be a commensurate change to the rate applicable to ring fence companies.

CT rate

The non-ring fence CT rate is to be reduced to 20% from April 2015 and there will no longer therefore be a distinction between the mainstream and small company rates. As a consequence the tapering rules for dealing with profits on the transition from the small company to mainstream rates are to be abolished.


It is not clear whether this change means the 19% small companies rate applicable to ring fence profits is being abolished.  

CW Energy LLP

March 20, 2013

22 Jan 2013

Draft Finance Bill 2013 and Draft Decommissioning Relief Deed

On December 11th the Government published the draft Finance Bill 2013 clauses and a draft Decommissioning Relief Deed (‘the Deed’), together with the responses to the Consultative Document on the Deed.

This marks the latest stage in the continuing consultation on the changes needed to the current fiscal regime in order to provide greater certainty as to the level of tax relief which will be available in respect of decommissioning expenditures.

The draft Finance Bill clauses accommodate the introduction of the Deed, clarify the tax relief for decommissioning costs in certain other areas, and include some other, mainly decommissioning related, changes.

A.    The Draft Deed

The following sets out the main features and our understanding of the principles behind the Deed, but does not go into the detail of the drafting and other changes to the Deed which we think will be needed to achieve these principles to properly protect industry.

What does the Deed do?

The Deed provides for payments to be made by Government to a company where the actual tax relief received by the company in respect of decommissioning expenditure is lower than a specified notional amount of tax relief- the “Reference Amount”.

Who can enter into the Deed?

The parties to the Deed are the Government Counterparty, currently envisaged to be the Treasury, and any company which is currently liable to carry out, or may in future be subject to a duty to carry out, decommissioning.

When will the Deed become effective?

It is intended that the Deed will become effective on signature by an individual company and that it will be irrevocable unless terminated by both parties by written agreement.

How does the Deed work?

Mechanically the Deed works by comparing two amounts in respect of “Decommissioning Expenditure”; the “Decommissioning Relief” and the “Reference Amount” for each relevant tax.

Where the actual Decommissioning Relief is less than the Reference Amount the “Government Counterparty” undertakes to make a payment, a “Difference Payment”, to the company of that amount.  Any Difference Payment is calculated separately for ring fence corporation tax (RFCT), supplementary charge (SCT), and petroleum revenue tax (PRT).

Decommissioning Relief is the amount of tax relief received in respect of Decommissioning Expenditures incurred by the company (or in certain cases for PRT purposes by a past holder of the relevant field interest).

The Reference Amount is a notional level of relief in respect of Decommissioning Expenditures which is broadly calculated with reference to the scheme for providing tax relief in respect of Decommissioning Expenditure represented by the statutory code in place at the time that Finance Act 2013 obtains Royal Assent.

What expenditures qualify for a guaranteed level of relief (Decommissioning Expenditure)?

For corporation tax and supplementary charge the definition refers back to “general decommissioning expenditure” for the purposes of the Capital Allowances Act.

For PRT the Deed relates  to expenditure on “closing down, decommissioning, abandoning, or wholly or partly dismantling or removing qualifying assets” or “carrying out qualifying restoration work consequential on the closing down the field or any part of it”.

Where PRT losses are carried back in a field to an old participator on cessation of production under the rules in Schedule 17 Para 15 FA 1980, expenditure incurred by the new participator is treated as Decommissioning Expenditure of the old participator for the purposes of the Deed.

Default and Non Default Situations

Another key concept within the Deed is that the level of guarantee in respect of Decommissioning Expenditure differs depending on whether the Decommissioning Expenditure is incurred by a company as a result of an obligation which has fallen on it as a result of the default of another company which is a party to a JOA or other similar agreement, so called Imposition Decommissioning; or any other Decommissioning Expenditure, so called Ordinary Decommissioning.

Very broadly relief available in respect of Imposition Decommissioning expenditure is more certain, and in certain circumstances at a higher level, than would be available in respect of Ordinary Decommissioning.

If an affiliate of a defaulting company picks up the liability the expenditure will not be treated as incurred under an Imposition and will therefore be treated as Ordinary Decommissioning expenditure.

How is the Reference Amount determined?

A.  Ordinary Decommissioning Reference Amounts

In the case of Ordinary Decommissioning expenditure the Reference Amount is calculated for each relevant tax as follows:-

1. Ring fence corporation tax

The Reference Amount is the amount of relief that would be available for RFCT purposes in respect of Decommissioning Expenditure under “Existing Legislation”.

In respect of tax capacity there is one important modification in that, if the reason that the company has insufficient tax capacity is because it had already utilised all or part of its capacity as a result of having to incur Imposition Decommissioning expenditure, then the Reference Amount is increased to take into account the tax relief which the company would have received had it not already used up its Tax Capacity in this way.

2. Supplementary charge

A similar approach is taken in respect of the calculation of the Reference Amount in respect of supplementary charge, except that the intention is that the rate of relief will be capped at a maximum amount of 20%.

In order to allay industry’s fears that the Government might choose negate the effectiveness of the Deed by increasing the rate of supplementary charge whilst reducing the ring fence corporation tax rate, in these circumstances the Deed provides for the 20% cap to be increased by an equal amount to any reduction in the rate of ring fence corporation tax.

3. Petroleum Revenue Tax

The PRT Reference Amount works in the same way as for RFCT and SCT.  It is the amount of relief that would arise in respect of allowable Decommissioning Expenditure in respect of the field under Existing Legislation. If PRT has been abolished the calculation is to be done by reference to the law at the time of abolition and on the assumption the decommissioning expenditure was incurred at the time of abolition.

This amount is then reduced to reflect the RFCT and SCT liability which would have arisen on PRT  repayments equal to the PRT Reference Amount calculated using the RFCT and SCT rates which would have had applied in respect of the RFCT and SCT Reference Amount for that Decommissioning expenditure.

B. Imposition Reference Amounts

1.Ring fence corporation tax

The Reference Amount is simply calculated by multiplying the  Decommissioning Expenditure by 30%.

The Deed states that in calculating the allowable Decommissioning Expenditure, one has to reduce the actual amount of Decommissioning Expenditure by any actual PRT relief received in respect of that expenditure plus any PRT  Reference Amount received.

2.Supplementary charge

A similar approach is adopted for SCT. The rate applied is fixed (rather than capped as in the non-imposition case) at 20%.

3.  Petroleum Revenue Tax

In respect of Imposition Decommissioning expenditure the concept is that in addition to the company’s tax capacity in respect of the field (taking into account any previous owners’ capacity), the Reference Amounts should also reflect the defaulting party’s capacity to receive PRT relief in respect of Decommissioning Expenditure.

Specifically the Deed provides that the Reference Amount in respect of any particular amount of Imposition Decommissioning expenditure is to be based on the rate of relief which is set out in a certificate produced by HMRC, in respect of that expenditure.  This certificate will take into account the relief which the company or its predecessor could enjoy in respect of all or part of the field interest, in respect of those costs, together with the relief available to any defaulting party and its predecessors  in respect of the costs in connection with all or part of the interest in the field.

The Reference Amount is reduced to reflect RFCT and SCT relief available in respect of the Decommissioning Expenditure.

In determining the Reference Amounts the fact that a previous owner may no longer exist is to be ignored.

Mechanics of the certificate

It is acknowledged that further thought is needed in respect of the PRT certification process and a place marker to that effect is included within the draft Deed.

Limitations on the level of Relief

There are limits to the overall amounts payable under the Deed. The guidance notes to the draft Deed state that in respect of PRT the amount relievable under the tax code and recoverable under the Deed is restricted to the greater of the Claimant’s and the defaulting party’s chains of PRT histories.  However the wording in the present draft is not very clear as to whether this goal is achieved.

For non-default situations the Deed is intended only to provide for payments to be made as a result of shortfalls in tax relief that arise from changes in tax law and not as a result of any other circumstances which may result in the company receiving less tax relief than it theoretically may have done based on existing legislation.

Similarly if the tax relief available has reduced because of a change in law which has reduced the profits taken into account for the purpose of tax no payment will be made under the Deed.

Billing and payment

The current proposal is that a company will be required to make a claim under the Deed in order to receive payment of any Difference Amount. The earliest point in time that a claim can be made is submission of a tax return (and there will be a time limit after which claims cannot be made).

Given the tax returns for RFCT and SCT are typically filed up to 12 months after the end of the accounting period in which expenditure is incurred there could be a significant delay from the point in time that company was obliged to incur expenditures and when the payment is received. However, in the case of PRT a claim under the Deed can be made as soon as the PRT expenditure claim has been made.


A company may not assign its rights under the Deed except to or in favour of a bank or financial institution in relation to the financing of its business activities.

The Government Counterparty may assign or transfer its rights and obligations to any “successor in relation to those rights and responsibilities”.


There are a number of anti-abuse provisions included within the Deed  which seek to limit any payments due under the Deed in certain circumstances.


It appears that there is still a lot of work to be done to make sure that the provisions of the Deed achieve the Government’s objectives of, primarily,  enabling  companies to provide security for decommissioning on a net of tax basis. It is crucial if the Deed is to be successful in this role that there are no major weaknesses in its approach otherwise certain companies are likely to continue to resist net of tax provisions in certain circumstances. We have identified a number of issues where we believe the drafting needs to change, and will be discussing these with interested parties over the next few weeks.

B.    Draft decommissioning related legislation

1.       Decommissioning Deed Enabling legislation

The Government will be empowered to enter into Decommissioning Relief Agreements with ”Qualifying companies” providing that in circumstances where there is a shortfall of tax relief for “Decommissioning Expenditure” as compared to the Reference Amount the Government will pay the difference to the company.

The clause also confirms that any payments made under the Deed will not be subject to tax in the hands of the recipient.

As part of the procedure to verify Reference Amounts HMRC are given powers to relax their confidentiality restrictions so that where a company is a party to a Deed, it will be able to make disclosures to that company to enable that company to enable its PRT Reference Amount to be determined.


 These provisions are required to enable the Government to enter into the decommissioning relief agreements with companies. The intent is that any company that might be called upon to fund decommissioning costs could potentially claim under such an agreement.

2.       Definition of “Decommissioning Expenditure”

As part of the link between the decommissioning relief agreements and tax legislation there is a new definition of decommissioning expenditure which encompasses the four categories of decommissioning costs used in the definition in s163 CAA 2001 for plant and machinery, plus an additional item relating to the restoration of any land.  As such it mirrors the definition of decommissioning expenditure used for the purposes of capping the rate of SCT relief for decommissioning costs.


During discussions on this matter it was clear that the Government wanted a consistent definition for decommissioning costs between the Deed, the provisions restricting relief for supplementary charge purposes, and the provisions allowing relief. As currently drafted this objective does not appear to have been achieved.

3.       Annual Report to Parliament on Decommissioning Deeds

The Treasury will be required to report to Parliament every year, from 2015, setting out the number of decommissioning relief agreements entered into in that year, and the total number of agreements in force at the end of the year.

The Treasury will also have to report how many payments have been made under any decommissioning relief agreements, stating the total amount of payments that have been made under the agreements both for that year and cumulatively, together with an estimate of the maximum amount liable to be paid.


It is understandable that Parliament would like to keep abreast of the Government’s exposure to payments under these arrangements, but it is not clear how the estimates of likely future payments will be made as these will, unless Government changes the law relating to relief for decommissioning, only occur in the event of default by one of the parties in a field where inadequate security has been provided, and such situations are difficult to predict. It is also not clear over which period this estimate is supposed to be made.

4.       Consequential restrictions to PRT claims

There are provisions included within the legislation to restrict the actual relief available for PRT expenditure where that expenditure has given rise to a claim under a decommissioning relief agreement. This can arise where the claim was made on the assumption that costs of the company (or another company) are relievable in a particular way, but where in fact relief is available to be claimed in a different way.

Further, where a claim has been made under a Deed on the basis that certain profits would have been reduced those same profits cannot also give rise to a repayment in respect of other costs. The rules also apply to deem the predecessor company to have received tax relief for costs which are the subject of a claim.


It follows that if a company has made a claim under a Deed that the costs forming the basis for the claim should not also give rise to actual PRT relief.

Similarly if tax capacity has been taken into account in a claim under the Deed that capacity cannot also be taken into account in any other claim.

5.       Changes to PRT loss carry back rules in the event of default

Where there is a default in respect of decommissioning costs, and another company (the contributor) is required to pick up the defaulter’s decommissioning costs, for PRT purposes the Schedule 17 rules that carry certain losses back to a previous participator are turned off in respect of any costs incurred by the contributor (including their own share of costs if relevant).


There is a particular difficulty where there has been a change of ownership of a field and losses are generated on decommissioning which exceed the new participator’s profits. Although the excess loss can be carried back and set against the profits of a previous participator in most cases, there are circumstances where the loss making company may not receive effective relief for its expenditure.  This could be where, for example, contractual arrangements under which the licence interest was transferred to the new participator, or indeed a subsequent new participator, did not provide for the benefit to be passed back, or where a previous participator no longer exists.  In order to ensure that a coherent scheme exists in the case of default, in these circumstances the Reference Amount for the purposes of the Deed takes into account the tax capacity of a relevant previous participator, regardless of any contractual arrangement, or whether that company exists.  The effect therefore is that rather than repayments being made in respect of that proportion of a loss which would have previously been carried back to the old participator under the tax system, the contributor receives effective relief under the Deed via a Difference Payment.

In any event it is important to note that the switching off of the paragraph 15 rules only applies in the case of default and therefore it remains an important commercial consideration to ensure that appropriate provision is included within any sale and purchase agreements to ensure new participants are able to obtain effective PRT relief for abandonment costs in circumstances where there is a likelihood of losses being carried back to the previous owner.

The switch off of Schedule 17 may lead to a loss of relief for a participators own costs which would not appear to be protected by the Deed.

6.       Costs paid to a connected party

Decommissioning relief under the P&M provisions will be restricted where decommissioning services are provided by a connected party.  For the connected party payer, claims for relief are restricted to the cost to the connected party provider of providing the service. This is, however, subject to certain relaxations.

These provisions also include restrictions on deductions where transactions are entered into to obtain a tax advantage, with the remedy being to negate that tax advantage.

7.       Removal of charge to Inheritance Tax on Decommissioning trusts

A further element of the package was a proposal to remove the Inheritance Tax charge on decommissioning security trust funds.  The effective date of this is to be 20 years before the date of the 2013 Budget, due to take place on 20th March 2013.


 The imposition of Inheritance Tax has always been seen as anomalous by the industry, particularly given the commercial nature of such funds and that other specific trusts had previously been so exempted. Industry bodies, in particular Brindex, have lobbied for a change for many years and it is pleasing to see that this anomaly is finally to be removed.  However income within any UK resident trusts will continue to be taxed at the trust rate of income tax

8.       Onshore installations and site restoration

There is to be an extension of the special tax reliefs for offshore plant and machinery decommissioning expenditure to certain expenditure on onshore installations and site restoration.

The meaning of general decommissioning expenditure for plant and machinery purposes is to be extended to include work carried out in connection with onshore assets used for the purposes of offshore oil and gas production.  For these purposes the relevant onshore instillation means any building or structure which is or has been used for purposes connected with the extraction of mineral deposits in or under the bed of the territorial sea or a designated area of the Continental Shelf.  As a result of these amendments costs of decommissioning such onshore installations will be eligible for the 100% FYA under section 164 CAA 2001 and the extended loss carry back rules in section 42 CTA 2010.


The extended relief does not cover assets connected solely with the production of onshore fields. This relief is likely to apply predominantly to the onshore terminals for offshore fields such as St Fergus and Sullom Voe.

9.       Expenditure on Site Restoration

The existing MEA rules dealing with restoration costs are to be rewritten for the purposes of ring fence trades.  A new s416ZA is to be introduced which substantially mirrors the approach taken for plant and machinery allowances in respect of “general decommissioning expenditure”. As a result site restoration expenditure, whether incurred before or after the company ceases its mineral extraction trade, will be treated as expenditure qualifying for a 100% MEA allowance and the extended loss carry back.


There has been some doubt as to the basis on which some costs can be claimed, in particular the costs of removing drill cuttings, and whether the heading under which relief was sought affected the ability to carry the losses back. There is no definition of restoration included within the new clause but we understand that costs such as removing drill cuttings are intended to be included.

While these clauses essentially constitute a tidying up exercise, the inclusion of the losses generated by such costs to the extended carry back provisions is welcome and should remove uncertainty in this area. 

10.    Decommissioning expenditure taken into account for PRT purposes

FA 2012 introduced provisions to cap SCT relief for decommissioning expenditure incurred after March 21 2012 to 20%. This was achieved by requiring the profits subject to SCT to be grossed up by a suitable factor applied to the decommissioning costs that had given rise to effective relief in an accounting period, such that when the grossed up profits were taxed at 32% it had the effect of only giving relief for the decommissioning costs at 20%. Where the decommissioning costs also give rise to effective PRT relief a further adjustment to the SCT profits was required, this time to reduce the profits subject to SCT by a suitable factor applied to the decommissioning costs that had given rise to effective PRT relief, with the intention that the overall effective relief for decommissioning costs which had given rise to PRT relief would be 75%, which was the overall effective rate before the SCT rate was increased from 20% to 32%.

The drafting in Finance Act 2012 was extremely complex and after a detailed review   CWE had pointed out to HMRC that the provisions didn’t achieve this objective whenever there were CT losses that were being carried forward or carried back to reduce SCT profits in a different period. The provisions are therefore being changed to ensure that they do have the intended effect in all circumstances.


This amendment is welcome and we believe that the provisions do now have the intended effect, subject to the definitions of allowable decommissioning expenditure for CT and PRT purposes being the same. It is however surprising that, given that this change is correcting an anomaly in the original legislation, it is only effective from the date of Royal Assent of Finance Act 2013, and has not been back-dated.

11.   Abandonment Guarantees and Abandonment Expenditure

11.1 Abandonment Guarantees and Non Taxable Fields

Since Finance Act 1991 was enacted specific relief has been available for CT purposes for expenditure on abandonment guarantees, but the availability of this relief was linked to relief for the cost being available under the PRT code. When PRT was abolished for new fields in 1993 the CT provision was not updated. These changes rectify that omission and now provide that CT relief is available not only if the expenditure on obtaining an abandonment guarantee does qualify for PRT relief, but also where it would have done so had the field in question not been a non-taxable field for PRT purposes. The change is effective for expenditure incurred on or after the date of Royal Assent of the Finance Act 2013.


It is a little surprising that this change is not being made retrospectively as it is correcting a clear anomaly in the legislation, although in practice companies have typically taken the view that relief is in any event available under basic principles. It is however understood that HMRC have no intention of challenging claims for relief until the new law becomes effective.

11.2 Subsidy Rules

To facilitate the “guaranteed” nature of decommissioning expenditure in conjunction with the Decommissioning Relief Agreements referred to above, the PRT subsidy rules are being “turned off” in the case where decommissioning expenditure is met directly or indirectly by a guarantor under an abandonment guarantee. Similarly, the specific subsidy rules for CT (and income tax – although these are unlikely to have been of any practical relevance) which deny relief for any expenditure met by a receipt under an abandonment guarantee are also to be dis-applied in these circumstances.


While the specific CT decommissioning subsidy rules are being repealed, no change is proposed to the general subsidy rules in Chapter 1 Part 11 CAA 2001. It would therefore appear that relief will still be denied in certain cases, although we do not believe this is the intention.

A number of the PRT provisions in FA 1991 and CT provisions in CTA 2010 (plus income tax) dealing with relief for payments made to guarantors by defaulting participators, and any subsequent recoveries by guarantors, under abandonment guarantees, are abolished as these are now to be dealt with under the decommissioning security agreement provisions and some rewritten provisions for corporation tax (and income tax).

The rewritten provisions bring into charge to ring fence CT (and income tax) any net benefit received by a person (the “contributing company”) who is themselves carrying on a ring fence trade and has met someone else’s decommissioning costs. A net benefit is the excess of the sum of a) any receipts from a guarantor of the original defaulter, plus b) any recoveries from the defaulter, plus c) any tax relief obtained by the contributing company on the default payments it has had to pick up.


These provisions would therefore appear to give sellers an incentive to push for the overfunding of decommissioning security as they (and Government) would benefit from any overfunding in the event of a default.

12.            Other Non-Decommissioning Related Draft Finance Bill Clauses

12.1        “Above the Line” R&D Credits

Rather than obtain a “super deduction” of an additional 30%, on top of the actual expenditure in respect of qualifying R&D spend, against taxable profits, there will be an option for expenditure incurred from the date of Royal Assent of the Finance Act 2013 to receive a taxable credit from the Government. This latter option will become obligatory in 2016. For R&D that qualifies for a ring fence trade the credit will be 49% of the expenditure, whereas for R&D qualifying for other trades the credit will be 9.1% of the expenditure.


The intention behind this change is not to significantly change the quantum of benefit available, but to make it more “visible” and therefore hopefully encourage more R&D activity. For a large company with non ring fence profits that incurs 100 of qualifying R&D spend, the choice is to take an additional deduction of 30, which at a tax rate of 23% is worth 6.9, or to take a tax credit of 9.1, which will give rise to a tax liability at 23% of 2.1, i.e. a net benefit of 7. Following lobbying by the oil and gas industry a company with ring fence profits that incurs allowable R&D has the choice of taking a deduction of 30 that will save 18.6 of tax at the combined 62% rate of tax, or to receive a credit of 49 which will give rise to a tax liability, at 62%, of 30.4, i.e. a net benefit of 18.6. Ring fence qualifying expenditure of 100 will therefore give rise to an overall tax saving of 80.6 (62 plus the 18.6 above), or 99.6 if PRT relief was also available.

12.2        Tax rates

The main ring fence corporation rate is to remain at 30% for the 2014 financial year despite the main rate for other industries dropping to 21% for that year. The small company ring fence rate will remain at 19% (20% for other industries).


It seems very unlikely that ring fence profits will be taxed at the same rate as applies to the rest of corporate tax payers for the foreseeable future.

12.3        General Anti Avoidance Provision

A GAAR provision will be introduced for arrangements entered into on or after the date of Royal Assent of the 2013 Finance Act. The provision will apply to SCT and PRT, as well as corporation tax.


The extent of these provisions will no doubt be subject to much debate over the coming months but, given the arrangements must be “abusive”, as defined, and have as one their main purposes the obtaining of a tax advantage, it is not thought that many transactions undertaken by upstream oil companies will fall foul of these provisions.

12.4       Non sterling capital gains tax calculations

Disposals of interests in shares on or after the date of Royal Assent to the 2013 Finance Act are to be computed in the company’s functional currency, and then translated into sterling at the spot rate on the date of disposal. Costs or proceeds paid or received in a currency other than the company’s functional currency at the relevant time should be translated into the company’s functional currency at the spot rate at the time they are paid or received for the purposes of calculating the functional currency gain or loss. If the company changes its functional currency any costs incurred prior to that are converted from the old to the new functional currency at the spot rate at the date of change.


As the change only applies to disposals of shares, and not other assets, and most share disposals are now protected by the substantial shareholding exemption, this new provision is unlikely to have any impact on the oil and gas sector.

CW Energy LLP

January 22, 2013

22 Jan 2013

Ring Fence CT liabilities 2011

Corporation tax and supplementary charge interest.

Readers will be aware that the rate of supplementary charge increased from 20% to 32% from 24th March 2011. Due to the transitional provisions the additional 12% SCT liability arising during 2011 as a result of this increase was treated as separately payable over three additional instalments.

Following the submission of the 2011 CT returns we have noticed when reviewing the acknowledgement of CT return form received from HMRC that the interest calculated on overdue tax for a number of our clients appears to have been calculated incorrectly in a number of cases.  The issue seems to be that HMRC software has not been updated to deal with the additional instalment obligations in 2011 and we understand that calculations of the interest on these instalments is being made manually.

We have also noticed that at least one major software package has also not been updated to correctly reflect the additional instalment obligation.

In the cases we have seen it appears that the interest charged on the HMRC notice is excessive. We would therefore recommend that companies carefully check the interest calculations sent to them by HMRC to make sure that they are not overstating the position.

If anyone would like to discuss this issue please contact Paul Rogerson 020 7936 8309 or their normal CW Energy contact.