Philip Hammond presented his Budget today.
This note sets out the main announcements that are targeted at oil and gas companies operating in the UK and UKCS.
TTH for late life assets
The main item directly affecting the oil and gas industry was the announcement regarding the proposed introduction of transferable tax history (TTH). The intent of the proposals is to facilitate the transfer of mature field interests to companies which would otherwise be unable to obtain effective relief for decommissioning costs either because they had not paid much if any corporation tax in the past, or were not expected to have sufficient tax capacity in the future to enable effective relief for decommissioning costs to be available.
Draft clauses are to be published for consultation in spring 2018 with a view to legislation being introduced as part of Finance Act 2018/2019 to apply retrospectively to deals approved by the OGA on or after 1 November 2018.. An outline of the proposals was published as part of the Budget package and can be accessed here .
The Government appears to have taken on board most, but not all, of the suggestions of the expert panel (of which CWE was a member), which was set up earlier this year and sat over the summer. The proposed change will not operate as a panacea for all of the taxation difficulties that can arise on the transfer of late life assets, and alternative strategies may still need to be followed, but the measure is to be welcomed as an additional tool for facilitating transactions with particular fact patterns.
It is interesting to note that government have estimated that this measure will actually raise £70m of taxes in the years up to 2022-23, as a result of extended investment and production in mature fields.
PRT in respect of retained decommissioning liabilities
There are difficulties in obtaining PRT relief where decommissioning obligations are retained on a field transfer. In order for the seller to secure relief it must be a participator in the field at the time the expenditure is incurred. If the buyer is to obtain relief for costs which are economically funded by the seller the PRT subsidy rules need to be managed. These issues were also addressed in the expert panel discussions and a technical consultation document dealing with possible ways of removing these hurdles is also to be published in the spring 2018.
One of the current approaches adopted is for sellers to remain on the license or perhaps to come back on the licence at the time of decommissioning. This may be commercially unattractive for the seller.
It has been noted that the current methods for a seller to retain the tax benefit of retained decommissioning costs arguably leave the Treasury exposed to larger PRT repayments that might otherwise be expected and it is assumed that any proposed changes of law will seek to deal with this. The two potential ideas discussed to date involve a change to the PRT subsidy rules or the introduction of deemed field transfers.
Losses on change of ownership
The industry has been lobbying for a number of years for more clarity on when the major change in the nature or conduct of a trade (MCINOCOT) rules might apply to the transfer of companies with ring fence trades. HMRC has now committed to give clearances on such transactions in certain cases, and to publish some further guidance in the Oil Taxation Manuals. This latter commitment is reiterated in the document published by Treasury today on TTH.
While the progress on this issue to date has been slow we already have some experience of the clearance process which has been a helpful development. The commitment to providing further clarity is much welcomed.
It is hoped that the publication of further guidance will further assist in enabling companies to invest with more certainty about their future tax affairs. It is hoped that the new guidance will not only give examples of what HMRC believe would not amount to a MCINOCOT, but also examples of what would.
Taxation of tariff income
The next Finance Bill is to include provisions to clarify whether tariff income should be included, for corporation tax purposes, within ring fence profits or not. This clarification will help facilitate the introduction of an improvement in the investment and cluster area allowance regimes to enable the allowances to be activated by tariff income. It is understood that a draft Statutory Instrument will be published for consultation early in 2018, although it has not yet been decided from when any change will be effective.
When PRT was abolished for new fields in 1993 the corporation tax provisions dealing with tariff income were not amended to reflect this. Most, but not all, North Sea players have continued to take the view that all tariff income, from assets which are also used in the company’s ring fence trade, falls within the ring fence. It is understood that the proposed change in the law will confirm this position. It is assumed that the change will not apply retrospectively for companies that have treated such tariffs as being outside the ring fence. We understand that draft legislation will issued on 1 December 2017.
CW Energy LLP
November 22 2017