Yearly Archives: 2014

17 Dec 2014

Ring Fence Expenditure Supplement

Companies with December year ends will no doubt be putting the finishing touches to their corporation tax returns and year end claims and elections. Those companies will also need to look at whether it is beneficial to make, keep  in place, or withdraw ring fence expenditure supplement (RFES) claims for 2012. The normal time limit for withdrawing the claim is two years after the end of the claim period.

The process of deciding the optimum position can be difficult, particularly if it requires looking forward a number of years.

Companies will also now need to consider the draft legislation published last week setting out details of the potential additional four periods of RFES that might be available, in determining the best course of action.

In our earlier Newsbrief on the Autumn Statement we set out how we thought government might achieve their stated aim of providing an additional four periods RFES for losses and RFES arising after 5 December 2013. Having reviewed the draft legislation is clear that the actual approach adopted is quite different and may, in certain circumstances, produce unexpected results.

05 Dec 2014

Autumn Statement 2014 – Oil and Gas tax measures

Following the announcement of immediate changes to the regime in the Autumn statement, the Government announced today the results of the fiscal review discussions and their proposals to make changes to the regime designed “to support the government’s twin objectives of maximising the economic recovery of hydrocarbon resources whilst ensuring a fair return on those resources for the nation”.

There were nearly 60 respondents to the call for evidence and the Government have summarised those responses in their paper published today called “Driving investment: a plan to reform the oil and gas fiscal regime” in which they also set out a number of further proposals to take forward next year.

The aim of these proposals is summarised by Treasury as committing the Government to:

  • Introduce a basin-wide ‘Investment Allowance’ to reduce the effective tax rate further for those companies investing in the future of the UKCS. A consultation on this proposal will be published in early 2015.
  • Introduce financial support for seismic surveys in under-explored areas of the UKCS, working with industry on options for shared funding models. Stakeholders will be engaged to discuss this and details will be set out at Budget 2015.
  • Work on options for supporting exploration through the tax system, such as a tax credit or similar mechanism, in a way that is carefully targeted and affordable. The government will open discussions with industry and the new Oil and Gas Authority in 2015, with further consultation with industry.
  • Develop options to improve access to decommissioning tax relief and work with the Oil and Gas Authority to consider options for reforming the fiscal treatment of infrastructure, with further consultation with industry in 2015.

So despite the current low oil prices there are no plans to make any immediate radical changes to the existing regime which remains in place subject to yesterday’s proposed changes.

We will need to wait until we see the detailed consultation documents but our initial thoughts are as follows.

As a general comment, while the proposals are referred to by Treasury as a radical plan to reward investment, we see them more as tinkering at the edges, and are not convinced that they are sufficiently radical to achieve the objectives set out by Government.

The drastic rise in the SCT rate from 20% to 32% in 2011 was a political move to raise much needed cash whilst limiting increases in fuel duty and a reaction to the rise in oil price from around $70 per barrel to over $100. However in the current proposals there appears to be no commitment to link the rate of SCT to profitability and the 2% reduction announced yesterday leaves the industry in a world which is significantly less attractive than where it was at the time of the 2011 changes.

However along with the token 2% cut in the rate of the Supplementary Charge there is a commitment to reduce the rate of Supplementary Charge “over time” when affordable. Of course one of the consequences of a cut in SCT rates (as opposed to a cut in the rate of ring fence CT) is that it dilutes the value of the field allowances, and will not help current developments which are sheltered from SCT by field allowances.

Although the Government acknowledges that the scheme of field allowances introduced in 2009 has been successful in its aim of promoting investment, they have highlighted the complexity, uncertainty and distortions that the current regime has introduced and are therefore proposing a move to a more straightforward “Basin Wide” investment allowance.

A basin wide investment allowance, while welcome, does not appear particularly well targeted to investments more in need of assistance, meaning that in a resource constrained environment there is less help available for where it is most needed. It would however generate much needed certainty about the tax reliefs that will be available (subject to future changes in law) when an investment decision is first made.

The proposed targeted relief for seismic surveying is likely to assist smaller players and is an area where the cost to Government in providing some upfront relief may be more manageable in the current economic climate.

As there are existing mechanisms for enhanced tax relief for North Sea costs, providing an exploration tax credit presumably would mean some form of cash refund for companies in the exploration phase. This would be a welcome measure for companies which are currently not tax paying. However the relief is going to be highly targeted and clearly not going to be generally available. Until we have a better view of the targets it is difficult to know whether this will have the significant impact needed to improve levels of exploration.

Similarly, given the already extensive CT loss relief rules for decommissioning, the commitment to improve access to decommissioning tax relief is interesting. We presume the Government are thinking of a PRT-style loss carry back to previous owners who might have more CT capacity than the existing owners, to help encourage new entrants. How this would work in practice could however be problematical as previous owners who have retained significant North Sea interests may wish to retain access to all or part of their past capacity. However it is a positive step that Government have recognised that the lack of tax capacity is a real concern and a continuing impediment to assets being transferred.

Reforming the fiscal treatment of infrastructure is long overdue and the case for reform cannot be more pressing giving ageing infrastructure with high running costs given the current low oil prices

With regards to PRT Government have acknowledged that most respondents who commented on this issue suggested a move towards a 0% rate of PRT was desirable. However they have concluded that this would not be the most efficient use of resources. They have nevertheless given an undertaking to keep the rates of PRT “under review”.

We feel it is unlikely that there will be any significant changes to the PRT regime in the near future except possibly in respect of infrastructure taxation as mentioned above, given that the major part of this infrastructure is currently within the scope of PRT. While some changes are clearly needed to the PRT regime as it applies to infrastructure we believe that there are better, targeted ways of achieving this rather than across the board rate reductions.

Hopefully more radical changes will result from the discussions planned for 2015. For the moment however it seems a case of “jam tomorrow”.

What is clear from this announcement, and has been evident in previous reviews (of which there have been many), is that there are a large number of diverse interests in the industry influenced by each company’s particular portfolio. This means that it has been difficult for the industry to speak with a single voice, and no doubt this will continue, with those who are able to shout the loudest perhaps having the greatest success in bringing about change.

It is however hoped that Treasury will be able to see through this and introduce a regime that will give the best result for the industry as a whole. We can only wait and see.

03 Dec 2014

2014 Autumn Statement

In today’s Autumn Statement the Chancellor acknowledged the need for the tax system to offer some help to the oil and gas industry, which is seen as a very important industry for the economy as a whole. He announced a number of changes, and noted that further proposals would be announced by the Chief Secretary to the Treasury, Danny Alexander, tomorrow.

The specific changes announced today; the reduction in supplementary charge, the extension of RFES, and the introduction of a cluster allowance, all of which are dealt with in more detail below, are to be introduced in the spring 2015 Finance Bill, and we would expect them to be enacted prior to the General Election in May, as there is understood to be cross party support for the measures.

While we will have to wait and see what is announced tomorrow, it is expected that there will be a further round of consultations on a number of specific issues that have been identified in the general call for evidence consultation that has taken place this year with a view, presumably, to including such changes in the second Finance Bill of 2015 anticipated at the end of summer / early Autumn following the General Election.

In addition to the above measures mentioned in the Chancellor’s speech a number of other changes are also being introduced now (see “Other Changes” below).

Reduction in Supplementary Charge (SC) rate

The rate of SC is to be reduced from 32% to 30% with effect for profits generated after January 1 2015. Treasury has stated that the aim is to encourage additional investment and drive higher production, and that they aim to reduce the rate further in due course as when the Government can afford to do so.


It is not thought, given the limited number of companies actually paying SC, that this change is likely to cost Government much (the Government estimate is £55m for next year), and can be seen as more of a token gesture of sympathy to the oil industry at a difficult economic time. It is unlikely to have much impact on investment initially as the rate reduction is not much more than 3% of the prior 62% rate, the reduction has a corresponding impact on the value of field allowances, with for many companies the benefit being long into the future. It does however indicate that the Government acknowledges that change is needed. It must be hoped that real lasting effective changes will come out of whatever further consultation takes place next year.

It will not be possible to take account of the drop in rate in calculating deferred taxes until the change has been substantially enacted, which is not likely to be until next spring, although if the effect of the reduction is expected to be material then a company should disclose its impact in its next set of results. 


Ring Fence Expenditure Supplement extension

After a number of years of lobbying the Government have agreed to increase the maximum number of periods for which Ring Fence Expenditure Supplement claims are available from 6 to 10.

However claims 7 to 10 will only be available in respect of losses and pre trading expenditure incurred after 5 December 2013, together with supplement thereon.

We will have to await the draft legislation next week to determine the exact mechanics of this change but, based on the wording of the announcements to date, it seems likely that one will have to maintain two “parallel”  RFES pools, a total pool (which can generate 6 periods of claim)  and a post 5 December 2013 pool. Any post 5 December 2013 loss will need to be included in both. Both pools would be uplifted for each period when a claim was being made on the first pool but the second pool would remain “dormant” until the first pool had generated 6 periods of claim. Once 6 periods of claim had been made the amount of losses in the first pool would become irrelevant and only those losses in the second pool would be eligible for RFES. There presumably will be specific provisions dealing with the offset of profits or unrelieved group ring fence profits, which we would expect to work in the most favourable way such that profits would be set against the first pool to the extent possible and only an excess profit set against the second.


This measure is targeted at providing relief for new expenditures rather than existing losses which seems sensible, although perhaps less generous than hoped for by companies with existing losses. Groups which moved into loss for the first time after 2013 will benefit most from these changes whereas groups which have already made RFES claims (perhaps in modest amounts) will not benefit to the same extent. An alternative methodology where each year’s spend can be uplifted would have more merit but it seems that this approach has been rejected, not least we understand because of its perceived computational complexity. However this new proposal would seem to have many of the same computational complexities.

It is of course possible for groups which are still in an overall loss position and have used their 6 periods to obtain additional periods of RFES on new spend by arranging for that spend to be incurred by a new entity. There are issues with this type of planning and this new measure will therefore ensure, at least for the next few years, that such planning does not need to be considered. 

Now that it is clear that the additional claims will not apply to pre December 5 2013 losses companies will need to carefully review their position and projections before the end of the year to determine whether claims already made should be withdrawn.

It appears that there is to be no extension to the time limit to of two years in which claims can be withdrawn (in most cases) which is unhelpful.

It is unclear why the measure is backdated to 5 December 2013 (the date of the 2013 Autumn Statement) but perhaps this is simply to align the change with the onshore allowance which was introduced from that date. The use 5 of December will, however introduce a degree of computational complexity which is unwelcome.

The Treasury estimate that the cost of these measures will be £20 million over the next 6 years with no cost until 2016/17. This seems to be a very conservative estimate of the benefit, although perhaps reflects the period over which these losses will arise.

New Cluster Allowance

Cluster Allowance

After extensive consultation and discussions the final form of the cluster allowance has now been decided. It will be given at the rate suggested in the consultation process, i.e. 62.5% of qualifying relievable capital costs in a cluster. The percentage can be altered by regulations. “Relievable” means that the expenditure is incurred for oil-related activities, namely oil extraction activities as defined in s274 CTA 2010, or activities consisting of the acquisition, enjoyment or exploitation of oil rights. The rules will broadly follow those adopted for the onshore “shale” allowance introduced last year.


Unlike the onshore allowance the rate of allowance which has been set was not increased from the indicative rate given in the consultation document which could be disappointing for some companies.

There is no specific definition of capital so it is considered that the normal case law precedents apply. This has been an area of contention for the additionally developed (“brown field”) allowance but is perhaps less likely to be an issue here where the costs concerned will initially primarily be exploration and development costs which will typically all be capital.

Qualifying costs are those in respect of capital expenditure incurred in relation to a cluster area on or after 3rd December 2014. Once an area has been determined as a cluster area all subsequent qualifying capex will qualify for the allowance.

The cluster area allowance is generated when the costs are incurred by the company incurring those costs in the cluster concerned.

A “cluster area” is defined to mean an offshore area which DECC determines to be a cluster area. The determination process is similar to that for existing field determinations, giving affected licensees the right to make representations on any proposed determination.

A cluster area will not include any previously authorised oil field unless this has been decommissioned before the cluster is determined.

Companies will have an option before a cut-off date (yet to be specified but suggested in the consultation process to be 1st January 2017) to exclude a field from the cluster determination if another allowance would be more beneficial.


The criteria which will determine what is a cluster e.g. whether there is an HPHT or uHPHT prospect in the area, are not set out in the legislation but presumably will be specified in secondary legislation. The Treasury have suggested that these will be set at pressure more than 690 bar and temperature more than 149° Celsius, lower limits than those originally proposed.

We assume that the absence of a requirement for an HPHT field in the legislation is that this can be used as a more general allowance and that other types of areas will ultimately be capable of being determined as a cluster.

There seems to be an element of subjectivity in the determination of a cluster area as this can only be determined by DECC. The taxpayer is allowed to make representations but unless the criteria for establishing a cluster are made more specific it is difficult to see on what grounds any objection could be made.

The cluster allowance activated in any period is the smaller of the closing balance of unactivated allowance at the end of the period and the company’s relevant income from that cluster for that period. As with other field allowances the activated allowance is deductible from the company’s profits subject to the supplementary charge.


The Treasury have listened to a number of the representations that were made through the consultation period: for example there no longer needs to be commercial alignment between all of the participants in the cluster; if one participant in the cluster fails to meet its obligations it will not have a detrimental effect on the other participants; and there will be no loss of allowance if the HPHT prospect fails to meet the relevant requirements. There is however still no possibility of relief if there is never any income generated from the cluster.

A reimbursement of costs on the acquisition of a licence does not qualify if any part of the original cost qualified for a cluster allowance to the seller.

There are detailed rules which apply to determine the level of allowances in periods where there are transfers of interests and in particular there is a requirement for part of the allowance to be transferred with a cluster licence. The transferor can elect specify the amount to be transferred within a minimum and maximum range. If no election is made the minimum amount will automatically transfer.

Other Changes

In addition to the items mentioned in the Chancellor’s speech the following changes were also announced.

  • Abolition of the Fair Fuel Stabiliser price based trigger point for both the supplementary charge and fuel duty.
  • Provision of funding for the Oil and Gas Authority to ensure that it will have the resources it needs to carry out its function effectively.
  • Establishment of a new £5 million fund to provide independent evidence directly to the general public about the robustness of the shale regulatory regime, and ensure that the public is better engaged in the regulatory process.
  • Allocation of £31m for a system of subsurface research test centres, to establish world leading knowledge applicable to a number of energy technologies including shale and carbon capture and storage.
  • A commitment to bringing forward proposals for a shale long-term investment fund, in the next Parliament.


The Fair Fuel Stabiliser was generally thought not fit for purpose, being fixed in sterling rather than dollars, and being based on price rather than profit.

The other measures are not directly fiscal but are to be welcomed as they seek to address some of the previously identified issues particularly around the difficulty of progressing shale gas exploration.

Non “Oily” matters

There is a proposal to limit the level of banking profits that can be sheltered by brought forward losses.


There are many companies in the oil and gas sector that are carrying forward significant levels of losses but this measure seems specifically directed at the banking sector as a result of them having been “bailed out” by the UK Government, and it is not thought that such a restriction is ever likely to be imposed on the oil and gas sector which by its long term nature is always likely to go through periods of loss making particularly as a result of major developments in difficult locations.

The rate of the above the line R&D credits is to be increased from 10% to 11% with effect from April 1 2015.


There doesn’t appear to be any proposal to change the rate applicable to ring fence profits. The benefit of this relief has always to a certain extent been limited in the oil & gas sector due to the propensity to capitalise most R&D type costs. However this increase should be of some benefit to the industry, albeit HMRC recently rather disappointingly notified the industry that they were not proposing to do anything about the instalment payment cash flow disadvantage that arises for ring fence companies if a credit rather than an enhanced deduction is taken.


20 Nov 2014

CWE Staff News

Welcome additions

We congratulate Kate and Mark on the birth of their first child – a boy, Matthew Edward, weighing in at 8lbs. We hope they all get on well together and look forward to seeing Kate back at work next year.

We are also pleased to welcome Chris Waterton to the firm; Chris is well known within the industry having worked for Santa Fe, Oryx, Kerr McGee and Centrica as well as being a past chairman of OTAC.

Chris joins us to replace Laval who will be retiring at the end of this year after more than 24 years with CW Energy (and many years of service before that with the Oil and Gas team at Arthur Young).  There is no doubt that we will miss Laval’s vast experience but the experience and expertise that Chris has built up over the years will ensure that we can continue to provide our clients with the best possible  service.

Chris, Laval and the rest of the team will be working hard together over the rest of the year to ensure that the transition will be as seamless as possible.

We wish Laval all the best for his future retirement.

20 Nov 2014

UK Double Tax Treaty withholding tax rate changes

Japan and Canada

Many of the UK double tax treaties provide for a zero rate of withholding tax on interest paid by a UK company but there are still a few treaties which only provide for a non-zero reduced rate of relief.

The two main examples are Japan and Canada which to date have given rise to difficulties with financing from those countries but there have been recent changes in both treaties.

From 1 January 2015 the situations where interest can be paid at a zero rate of withholding under the UK Japanese Double Tax treaty by a UK company to a Japanese lender have been extended. A Protocol to the treaty was agreed in 2013 and will enter into force on December 12, 2014.

Under the existing treaty the rate of withholding was generally 10%. This rate was reduced a number of years ago to 0% for loans from Japanese financial institutions. Under the revised treaty the rate of withholding will now be 0% unless the interest is related to the results of the lender in which case the rate is 10%.

The UK and Canada also agreed a protocol to amend their treaty on July 21, 2014 (still to enter into force). The amended treaty includes provisions eliminating withholding tax on cross-border interest. However in this case the exemption will only apply if the interest is paid to a person with whom the payer deals at arm’s length.

The exchange of notes makes it clear that connected persons are deemed for the purposes of the treaty as not acting at arm’s length such that the existing rate of withholding of 10% will continue to apply to group loans.

The changes to these treaties are welcome and should provide companies headquarted in those countries more scope to organise their borrowings.

15 Aug 2014

Derivative contracts changes

At Budget 2013, the Government announced consultation on a package of proposals to modernise the corporation tax rules governing the taxation of corporate debt and derivative contracts.

It is likely that there will be no significant recasting of the current regime as a result of this process.

However one of the changes that has come out of that consultation is a change to the way in which the Disregard Regulations will apply to fair value profits in respect of contracts which act as a hedge.

Currently the effect of these Regulations is, inter alia, that fair value profits and losses on derivative contracts which are designated or intended to act as a hedge against an underlying transaction are automatically “disregarded” subject to the ability to “elect out”.

From 1 January 2015 many UK companies who have not already adopted IRFS will be required to apply one of EU-Endorsed IFRS, FRS 101 or FRS 102 which include a requirement to apply fair value accounting in respect of certain derivatives. As a result of the consultation process the rules are to be changed  and draft regulations have recently been published.

Where a company adopts fair value accounting for the first time in a period of account commencing on or after 1 January 2015, they will have to elect in for the disregard rules in paragraphs 7,8 and 9 to apply (such that fair value movements are ignored in computing the taxable profits for a period). Previously companies did not need to take any action as the disregard rules applied automatically.

The time limit for making the election will be six months from the start of the period for very large companies (essentially companies within the SAO rules, ones with turnover in excess of £200m or a balance sheet total in excess of £2billion) or twelve months from the end of the period for other companies (assuming that there relevant contracts in place at the start of the relevant period). These companies will then be subject to an initial lock-in period of three years. Thereafter companies will be able to make or revoke an election at any time.

For companies who are currently applying fair value accounting, grandfathering rules effectively mean they are treated as having elected into the disregard regulations (as they are to apply from 1 January 2015) such that no action is required to preserve the disregard treatment. However these companies will have the ability to “revoke” this deemed election should they wish to be taxed on fair value movements at any time in the future on a prospective basis.

The exception is for companies who have previously made an “opt out” election which are effectively treated as remaining outside the disregard. These companies would however have the ability to elect for a disregard treatment under the new rules, again on a prospective basis.


Companies who are looking to adopt fair value accounting for the first time will need to carefully consider their options. Although the new regulations offer greater flexibility there is a three year lock in for new adopters.

In deciding what option to take new adopters also need to be aware of the effect of the change of accounting  policy transitional rules which may spread the recognition of fair value profits and losses as at the date of adoption.

For companies which are already within the scope of the Disregard Regulations there is no need to take any action at the present time. The change in approach may however offer additional flexibility in the future.

Consultation on the changes to the regime will run until 12 September.

If you would like to discuss your options please contact Paul Rogerson 020 7936 8309 or Stewart Norman 020 7936 8315 or your normal CW Energy contact.

03 Jul 2014

Amendments to Finance Bill 2014; offshore bareboat chartering

Last week saw the publication of the latest proposed amendments to the Finance Bill, including those in relation to offshore bareboat chartering.

In our commentary on the Budget we noted that revised provisions in relation to the new rules on offshore bareboat chartering were to be published after the Budget to reflect the narrowing of the scope of the legislation from that originally proposed in December. However the draft clauses as published seemed to have potentially wider application than the stated scope.

To recap, the proposed legislation defines certain profits of offshore contractors and then;

  1. creates a new “ring fence” for these contractors’ profits and
  2. caps the amount in respect of any relevant bareboat lease payments which can be allowed as a deduction against those ring fence profits.

The latest published drafts reflect changes to both these elements.

The contractors’ profits targeted are defined in relation to the income from certain assets, and industry lobbying has successfully narrowed the scope of the proposed legislation.

The government undertook to restrict the affected profits to those derived from accommodation vessels and drilling rigs although the draft legislation itself was more widely drawn.

The latest amendments reflect a change to the previous draft to address concerns that any asset with accommodation facilities was potentially caught.

Under the revised drafting the rules will only apply where the asset is a structure that can a) be used for drilling, or b) used to provide accommodation for individuals working on another structure used in connection with oil exploration or production, and the use for accommodation is not incidental to some other use.


While HMRC has stated that FPSOs are not meant to be caught by these measures, and the concern that they would be brought in if accommodation was available on the vessel has been eliminated, it is still possible that they could be caught if they can be used for drilling purposes. 

The calculation of the cap has been further refined. The cap is calculated in part by reference to expenditure on the asset and the latest draft specifically addresses the position where there is capital expenditure on the asset in, or the asset is acquired part way through, the relevant accounting period, and allows the cap to increase to reflect this expenditure.

The provisions have also been amended to provide that any prior expenditure that relates to anything that is no longer part of the asset is excluded from the calculation of the cap.


While these amendments to the draft clauses are to be welcomed there are still some areas of concern, in addition to the drilling capability issue referred to above, that have been raised by industry, which have not been addressed. However it would seem that these provisions are now in their final form and any problems that arise in practice will need to be raised with HMRC when the operation of these rules is reviewed next year.

CW Energy LLP

July 3 2014


18 Jun 2014

VAT Domestic Reverse Charge on sales of gas in the UK

From 1st July 2014, VAT on sales of gas supplied though a natural gas system in the UK to a UK VAT registered buyer will no longer be charged by the seller but will instead be accounted for by the buyer making a domestic reverse charge (DRC) for the value of the gas supplied.

The reason for this change is to counter possible MTIC fraud whereby there was the risk of the seller not passing over VAT collected to HMRC.

Whilst there are exceptions for certain sellers such as directed utilities, sales to UK buyers by the majority of independent gas producers will be affected.

The DRC will apply to all wholesale supplies of gas and electricity between counterparties established in the UK including balancing mechanism imbalance settlement charges, and other gas balancing or gas reconciliation charges. Sales where the buyer does not resell the gas or electricity are not affected as are sales which are zero rated.

Supplies unaffected by the DRC mostly relate to charges such as system charges for capacity, distribution and transmission, or virtual trades.

The main effect of the provisions is that the seller will no longer charge VAT to the buyer and will not show the VAT component of the supply on its invoices. Instead the buyer will account for input and output tax on its VAT returns.

According to HMRC, when making a supply to which the domestic reverse charge applies, suppliers must:

  • show all the information normally required for a VAT invoice
  • annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT

The amount of VAT due under the domestic reverse charge must be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

A typical wording might be “Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked reverse charge”.

Where there is a self-billing arrangement in place it will be the responsibility of the buyer to apply the revised accounting procedure, and to account for the VAT on the supply.

Given the short timescale in which these provisions have been introduced HMRC have said that they will apply a light touch in dealing with errors that occur in the first six months after introduction, where there is no loss of tax.

CW Energy LLP

18th June 2014

09 Apr 2014

Finance Bill 2014

The Finance Bill has now been published and contains no material changes from what we had expected.

The important issues were set out in our briefings on the Autumn Statement and the Budget , however there is one change  worthy of note.

The change reflects  industry representations on time limits for the making of elections in respect of the proposed onshore allowance. The Finance Bill permits elections for unattributed expenditure or transferring allowances  between sites  no earlier than the beginning of the 3rd accounting period of the company after that in which the expenditure was incurred or the allowance was generated. The original draft legislation delayed the elections until the 4th accounting period at the earliest. Furthermore the Finance Bill rules treat the transferred allowance as if it were generated at the beginning of the accounting period in which the election is made rather than in the accounting period following the election, as originally proposed.

We shall continue to monitor the progress of the relevant issues for the industry as the Bill progresses.

19 Mar 2014

Budget 2014

George Osborne presented his fifth Budget against a background of cautious optimism with UK growth set to be higher than forecast and the deficit reducing. However his measures overall were muted bearing in mind that the economy is still seen as fragile.

The prospect of Scottish Independence aside, the North Sea now seems to be lower down the political agenda, and the Chancellor said as much by acknowledging that the North Sea is now a mature basin. He also noted that the OBR have revised down the forecast tax receipts by a further £3 billion over the coming years, although whether this is as a result of lower production or higher costs is not clear.

As far as oil and gas measures were concerned, most announcements were measures which were in the pipeline as a result of lobbying or had been announced in the Autumn Statement. Others were small but welcome changes requested by individual companies or field groups.

One welcome announcement was the final view of the scope of the bareboat charter restrictions, which thankfully has been much reduced since its original version, although it is disappointing that this measure has not been withdrawn altogether.

One further disappointment is that it had been thought that an announcement might have been made in respect of the RFES regime, where a number of possible changes had been requested.

Oil and Gas measures

Wood Review

The Chancellor said that the Government will take forward all recommendations of the Wood Report. The interim advisory panel has been established with its first meeting to be held in April.

Over the summer the interim body will be set up under the auspices of a new CEO and should be up and running by October 2014. The Government will then task the interim body to review how best to encourage exploration and reduce decommissioning costs, with its report and recommendations to be made in time for Budget 2015.

Maximum Economic Recovery UK (MER UK) principles are to be enshrined in legislation and should be in force by spring 2015.

Oil and Gas Fiscal regime review

Following on from the Wood Report the Treasury will review the whole of the North Sea tax regime with the stated purpose of ensuring that the regime continues to incentivise economic recovery as the basin matures. This process will include a formal call for evidence from Industry later this year.

Initial conclusions will be set out in the 2014 Autumn statement, with any proposals for change open for consultation.


Although it is pleasing to hear that the government intend to take up all the proposals from the Wood review, the prospect of a full review of the tax system to be carried out by Treasury does not sound encouraging, and one wonders what the government expects to achieve from this. Surely a better process would be to ask industry what changes they would like to see to achieve these ends so that these can be properly and openly debated. Given the recent introduction of the Decommissioning Relief Deed regime the government’s scope for changing the law may be somewhat limited particularly in the area of PRT.

Loss buying rules

Following industry representations that the targeted anti-avoidance rules that were introduced in FA 2013 were likely to have a detrimental effect on the amount of exploration activity that smaller new entrants to the North sea would be prepared to undertake, an exemption from the rules is to be introduced for costs that qualify for RDA allowances, with effect for sales of companies completing on or after April 1 2014.

These new rules will operate such that if there is a change in ownership of a company before it has commenced to trade the targeted anti-avoidance rules will no longer apply to deny future tax relief for any RDA costs incurred by the company during the previous period of ownership.


The change is to be welcomed, and potential buyers of non-trading companies will take some comfort from the fact that Government has effectively endorsed such transactions in assessing whether to invest in non-trading companies where the original owners have not had sufficient resources to bring about a successful development programme. The normal rules for claiming RDAs on such costs will however still apply.

Companies undertaking exploration and appraisal activities should now be able to assume that they will be able to obtain some future tax value from the costs they incur even if they are not ultimately successful although the changes do not of course guarantee the position.

Onshore planning and permitting costs 

Current MEA rules include in the definition of mineral exploration and access expenditure, costs of obtaining planning permission to carry on mineral extraction activities where that application is unsuccessful. Costs of successful applications are part of the cost of acquiring a mineral asset, and at best qualify for 10% p.a. writing down allowances.

For expenditure after the date of Royal Assent of the Finance Act 2014 (typically late July) this regime will be extended such that all expenditure, whether successful or unsuccessful, on planning permission will qualify as expenditure on mineral exploration and access.


For expenditure relating to UK oil and gas licences this should mean that all costs of obtaining planning permission qualify for immediate 100% relief. It is not however clear what impact this change might have on other costs associated with obtaining licence interests.     

Reinvestment relief and substantial shareholding exemption

As previously announced (see also our Autumn Statement commentary ) the reinvestment relief and substantial shareholding exemption rules are being amended to afford the same level of relief to companies and assets in the exploration and appraisal phase to those which are already trading.

Draft legislation has previously been made available and has been subject to industry comment, but it has now been announced that the effective date for these changes is to be April 1 2014 rather than the originally announced date of Royal Assent of FA 2014.


It is understood that many of the detailed drafting comments that were made in respect of the original draft legislation have been taken on board to ensure that the measure will work as intended. Representations have also been made that there seemed to be no good reason not to back-date the changes to the introduction of the original provisions, but the bringing forward to April 1 2014 of the effective date is to be welcomed and will presumably allow certain transactions to go ahead in the near future. 

Cluster Allowance 

Following lobbying by industry a new allowance against supplementary charge profits is to be introduced in respect of ultra high pressure and high temperature clusters.

The allowance is to be similar in structure to the onshore “pad” allowance which was announced as part of the Autumn Statement in 2013.

The allowance will be based on a fixed percentage of a company’s qualifying capital expenditure in respect of the cluster.  The actual rate of allowance is to be agreed following consultation with industry but the announcement states that it will be at least 62.5% of the capital expenditure incurred by the company on qualifying projects.


The original field allowances introduced in 2009 included an allowance for new UHTHP fields capped at £800m per field.  It is thought that this new allowance will be more generous than the existing regime, although details of the parameters of the cluster still need to be agreed.   

Bareboat charter 

The government have announced that they are to proceed with the bareboat chartering measure announced at the time of the Autumn Statement.  However the scope of the proposal is to be materially restricted from what was originally proposed.

The draft legislation is to be published on 1 April and industry will have an opportunity to comment.

The regime will now only apply to drilling rigs and accommodation vessels.

The proposed legislation is aimed at ensuring that a larger portion of the profits of contractors operating in the UK sector of the North Sea are subject to UK tax.

It will achieve this aim by

(a)    the creation of a new “ring fence” for relevant contractors’ profits  and

(b)   capping the amount in respect of the relevant bareboat lease payments which can be allowed as a deduction against those ring fence profits.  The cap will be calculated by reference to the historic capital cost of the asset which is subject to the lease, and will consist of a proxy for capital expenditure at a total rate of 7.5% per calendar year (as opposed to 4% of the original cost plus finance costs at 5% on borrowing of half the cost, i.e. 6.5%, as originally proposed) .

Any excess deductions would be available for offset against other income of the relevant company or indeed group relieved against other profits of the relevant group.

The profits which are ring fenced would be subject to the normal rate of corporation tax and not the upstream ring fence rate.

The measure is to be reviewed after 12 months.


It is encouraging to see that the government have taken on board the strong concerns of industry as to the potential adverse effects of the original proposal and will not be including a number of  large assets previously targeted for this measure such as FPSOs and heavy lift vessels.  However it is unclear why the government has decided that drilling rigs and accommodation vessels should still be included.

Ring Fence Expenditure Supplement

In our commentary on the Autumn statement  (see: we noted that 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 from qualifying expenditure incurred on or after 5 December 2013.The number of claim periods for such losses will be increased from 6 to 10 periods.

Industry had been hoping for a similar extension in the number of periods available for offshore fields or a modification in the methodology for calculating such allowances, and also an extension to the time limit for making claims.

There are however no further changes announced at this time.


We believe that industry will continue to lobby for a change to the existing RFES regime as it is clear that in its current form it does not achieve its original objective. 

Oil and gas tax rates

A change is to be introduced in FA 2015 to fix the rate of ring fence corporation tax on a once and for always basis (subject of course to any change introduced in a subsequent Finance Act), rather than have the rate specifically provided for each year.


This change is not considered very significant although it does perhaps support our previously held view that Government had no intention of bringing down the ring fence rates of corporation tax even though it thought it appropriate to do so for the rest of UK business. It will be interesting to see if the Wood Review consultation (see comments above) changes this conclusion.

Other Measures

A number of other anti- avoidance rules not specifically aimed at the oil industry are included within the Budget as well as further changes to the DOTAS scheme. Further, tax at stake in respect of disputed schemes is to be paid to HMRC pending resolution of the dispute.

Anti – Avoidance Schemes involving the transfer of corporate profits

These measures are aimed at arrangements where all or a significant part of the profits of a company in a group are paid over directly or indirectly by transfer to another company.

Changes were announced in December last year to counteract the operation of so-called “total return swaps” where a company enters into a derivative contract with another group company such that under the contract all of the profits of the company are paid to that other company.

This new measure is being introduced to tackle arrangements which achieve the same objective as a total return swap but without the use of derivative contracts.

The effect of the measure will be to disallow any payment in respect of the transfer of profits.

The announcement states that the measures are intended to deny deductions for what in substance represents the distribution of profits which a company has already made (rather than a cost in earning those profits).

The scope of the regime will cover payments linked to profits, securitisations, reinsurance, hedging arrangements and funding arrangements.

The measures only apply however where there is a tax avoidance purpose behind the arrangements

Guidance has been issued setting out details of the type of arrangement which the rules will catch.