Decommissioning developments; more options.
Draft clauses for the next Finance Bill were published recently which included a number of measures directed at the oil industry, intended to assist sales of “late life” assets.
In particular the Finance Bill includes legislation to give effect to the long awaited transferable tax history (TTH) scheme, and proposals to deal with the PRT treatment of “retained” decommissioning obligations following a licence sale.
These changes are to be effective for field transfers obtaining OGA consent on or after 1 November 2018.
For corporation tax (CT) and supplementary charge (SCT) the TTH changes are intended to facilitate the transfer of mature field interests to companies which would otherwise be unable to obtain effective relief for decommissioning costs on the transferred assets, because they would not have paid enough corporation tax.
The effect of the TTH rules is that a seller will be able to transfer some of its past tax payment history on a licence sale. This transferred history acts as if it were tax paid by the buyer such that the buyer will be able, subject to the detailed restrictions in the legislation, to obtain a repayment of CT and SCT paid by the seller.
The draft legislation closely follows the approach set out in the outline which was published at the time of the Autumn 2017 Budget (see our newsletter dated 22 November last year, https://cwenergy.co.uk/2017-autumn-budget/). The requirement for independent verification of the amount of TTH being transferred has, however, been dropped; with the TTH amount now being capped by reference to the decommissioning cost estimate set out in the most recent decommissioning security agreement (DSA) for the transferred field.
The legislation does allow TTH to be applied to intra group transfers but only where the field interest transfer is in anticipation of a subsequent third-party asset or corporate sale which must complete within 90 days of the intra group transfer completing. The legislation also permits TTH to be transferred by the original purchaser to a new purchaser on the onward sale of some or all of the acquired field interest.
TTH must be attached to a particular field. However once activated it is treated in the same way as if the profits representing the TTH were earned by the buyer in the accounting periods in which they actually accrued to the seller, and can be accessed by decommissioning losses from any of the buyer’s fields, subject to the normal loss offset rules.
Activation of TTH only occurs once the purchased field has finally ceased production and only to the extent the cumulative profits from the purchased field are less than the purchased field’s total decommissioning costs. The buyer’s profits from the field must be tracked each year with the amounts included in the relevant tax return. The buyer must also appoint a “senior tracking officer” who must certify to HMRC annually that the tracked profits have been computed in accordance with the legislation.
There is no doubt that the TTH scheme is an innovative proposal to help with the difficulties that can prevent the transfer of late life assets, and it is clear that the Government has listened carefully to the representations made by industry. The draft legislation includes a number of features which will mean that the scheme can have the widest application possible, including the generous limit on TTH which can be transferred, and the ability for the scheme to apply to hive downs, and on-sales.
However, the key restriction on TTH is that it can only be activated to the extent that the decommissioning costs incurred in respect of the transferred field assets exceed the profits from that same field.
This restriction has been introduced to prevent tax history effectively being traded as a commodity or to enhance seller’s own decommissioning relief. We therefore expect TTH to be used relatively infrequently and that alternative structures will continue to be commonplace in asset and share sales, reflecting the particular circumstances of the seller and buyer and the asset in question.
There are a series of detailed administrative provisions which could be onerous, but it is hoped that these will not deter the facility being used where appropriate.
There remain a number of areas of uncertainty such as the interaction of the rules with Investment Allowance. A number of workshops are to be held with Government to review the detailed legislation.
The PRT changes deal with two distinct commercial structures for transferring field interests with the intention that in both cases it will be the buyer who will be able to obtain PRT relief for its “share” of costs.
The first part of the measure deals with a situation where the buyer “incurs” decommissioning costs following the acquisition of an interest in a field but under the commercial arrangements all or part of the cost is to be funded by the seller. The changes ensure that the PRT subsidy rules will not apply in such cases and the buyer will be able to obtain relief.
The second part of the measure is aimed at arrangements where the obligation to incur decommissioning is not passed on to the buyer but retained by the seller, for example as a result of the seller remaining a party to the JOA or DSA.
This new rule provides that the seller is not to be treated as incurring expenditure where it is not a licensee in the field area at the end of the transfer period, but any such expenditure is deemed to be incurred by the buyer.
The switch off of the subsidy rules is a welcome modification. Interestingly the switch-off does not apply if the asset changes hands by means of a share sale but it is generally easier to refute any contention that an adjustment to the sale price for the shares is a subsidy for the target company.
The second measure is clearly aimed at preventing a seller being able to obtain effective PRT relief against their historic profits in preference to the buyer’s future profits (and so “missing out” a period of profits which have been subject to 0% PRT).
Although in our experience the possible PRT “upside” available if a seller retains decommissioning is rarely a material consideration in structuring the deal, HMRC have been concerned that the introduction of the 0% rate for PRT and the ability for 0% periods to be missed out undermines the integrity of the PRT system.
Although this legislation will deny relief for a seller who retains the decommissioning obligation without retaining an interest in the licence we assume HMRC are confident that this will not give rise to a claim under the DRD on the basis that a seller who was not a licensee would not have had a claim under existing law.
As with the TTH rules there are a number of uncertainties with how the new rules will operate, for example, the precise scope of the deeming rule when sellers retain the decommissioning obligation while not remaining as a licensee.
We will be reviewing the draft legislation in full over the next few weeks and will share further comments in due course.