Author Archives: Donna Rogers

09 Jun 2016

Deferral of PRT returns


  • Companies need to think about preparing the PRT returns for CP I 2016, the first period for which the zero % rate is to apply.
  • Ongoing discussions between industry and HMRC may shape the form of future returns or indeed the extent to which companies feel it necessary to make returns.
  • Now is a good time to revisit the options available to companies.

If you wish to discuss your companies’  PRT returns with one of our team please get in touch. 


Following the introduction of the PRT zero rate companies are looking at ways of reducing their PRT administration.

As a reminder under current law companies have four options available to them:

  • Deferral of returns for a specific period
  • Indefinite deferral
  • Full opt out
  • Prepare full returns

The first option has been sparingly used as ultimately there is a requirement to submit returns. The second as been adopted by some fields but requires a simplified annual return and again has not been that widely used.

The third option is clearly the preferred option for fields which are not expected to pay, have never paid in the past and where there is no prospect of a UFL being generated.

The reduction in the rate of PRT to zero % potentially increases the number of fields that could now benefit from a Never Payer election.

Unfortunately, to qualify as a Never Payer, current law requires the company to demonstrate there are no future assessable profits (after oil allowance and other reliefs) rather than no future tax, and the burden of proof has often proved too onerous even for fields that may previously have qualified.


Industry have been in discussions with HMRC about relaxing the PRT Never Payer election. The next opportunity to amend the law to relax the conditions for opt out would be in the 2017 Finance Bill.

It is anticipated that that the Never Payer election will be made available to any field group that so elects, as it appears there would be no risk to the HMG tax take although this would require government to be comfortable that the rate of PRT will never be raised.

Companies should carefully review their position to determine whether a field could fall into the Never Payer election. If there have been PRT payments in the past either by the current holder or a previous interest holder it is unlikely that such an election would be beneficial unless there was certainty that losses generated in the future would not under any circumstance be carried back. Companies will need to review not just the expected outcome but also worse case scenarios, including taking into account unexpected events, for example the possibility of early abandonment.

A good example is the Hutton field where damage to a pipeline caused the field to be shut in and as a result abandoned prematurely.

At the other end of the spectrum an opt out should be avoided if there was any possibility of a UFL being generated.

See our April newsletter where the Never Payer (opt out) election is considered.

Meanwhile returns will still be required for the next two, or possibly three, chargeable periods.

If one came to the conclusion that a Never Payer election was to be of benefit, one approach would be to elect to defer returns for, say, two years and then, assuming a change of law in the conditions required for a Never payer field i.e. no tax liabilities, submit a Never Payer election.

HMRC require 28 days to consider a deferral application, but you would want a decision before the PRT compliance timetable starts, i.e. by mid to late July for the chargeable period ending 30 June 2016, so it is advisable to make your elections in the next couple of weeks.

One might also consider again the deferral option if there is only a low probability of a PRT refund arising through loss carry back or UFL claims. In this case you could apply for indefinite deferral of returns. Should the field underperform such that a PRT refund becomes available you would then have the option to recreate all the deferred returns.

Discussions on other compliance saving measures will continue.

If you would like to discuss the issues raised in this note, please call your normal CWE contact.

25 May 2016

Possible delay in enactment of reduction in the SCT rate to 10%

The enactment of the reduction in Supplementary Charge rate to 10% announced at Budget 2016 is probably delayed until the autumn.


  • The progress of Finance Bill is delayed by EU Referendum
  • The timing of the report stage and the third reading (when the change can be accepted as substantively enacted) in the House of Commons is not yet known
  • The effect of the new rate cannot be reflected in the accounts until the rate has been substantively enacted
  • For accounting purposes, tax balances may not be able to be re-calculated using the new rate in the September quarter results such that recognition would be delayed to the December quarter results.

If you think this could affect your business and you would like to understand more details please get in touch:

Here’s the detail:

Possible delay in enactment of reduction in the SCT rate to 10%

We understand that the government has indicated that the progress of the Finance Bill may be delayed by the EU referendum and therefore may not receive Royal Assent before Parliament rises for the summer recess on 21st July.

MPs passed a “carry over” motion in respect of the Bill on 11 April, to enable it to continue to be debated in the new term of Parliament which commences on 5th September.

However there will be less than two weeks before Parliament rises again for the conference season on 15th September, resuming on 10th October.

The Finance Bill has had its second reading and the next step is the Committee stage, but this has not yet been scheduled. Similarly the timing of the report stage and the third reading in the House of Commons is not yet known. This is important as the Report stage/third reading is when the bill would be treated as substantively enacted.

It is therefore conceivable that the Finance Bill may not gain Royal Assent before 21st July or indeed that it will be as substantively enacted before this date.

If this happens it is also possible that it may not get Royal Assent before the end of September and again it is possible that substantive enactment might be delayed until after this date.


Given the Provisional Collection of Taxes Act only allows measures which came into force on Budget Day to remain effective for seven months, the Bill must become law prior to 16th October to avoid those measures lapsing but this only acts as a back stop.

What this means is that there is a possibility that it would not be possible to reflect the recent reduction in the SCT rate for accounting purposes in the September quarter results such that recognition would be delayed to the December quarter results.

Please contact us if you would like to discuss how this could effect your business or have any questions.


29 Mar 2016

Badly Targeted Incentives?

The Chancellor stated that his Budget delivered the biggest boost to the oil and gas industry in over 20 years. So why is the whole industry not celebrating?

A reduction in tax rates provides no immediate benefit to those not currently paying tax as a result of past and current investment, namely the vast majority of the industry at present. On the other hand it provides a windfall benefit to those who are tax paying whether or not they are planning to invest in the UK.

We think it would have been preferable that any Government giveaway should have been targeted directly at encouraging investment in the sector. A Norwegian style rebate of potential tax relief on exploration was always going to be too expensive in the current economic climate, but the cost of the measures, as set out in the Treasury Red Book, could have been used to provide a limited subsidy against targeted investment in the basin.

The reduction in the PRT and SCT rates will no doubt be welcomed by those paying or expecting to pay such taxes in the short to medium term. However are those companies the ones who will be prepared to invest in the North Sea? They might be, but there is no guarantee.

PRT paying fields were developed before 1993 and many own old infrastructure on which many other fields depend. It is vital that there is investment in these assets but will their owners want to invest in them even following the rate reductions? The owners are often groups with large international portfolios and may well have better investment opportunities elsewhere. The UK North Sea is a notoriously expensive place to do business and the hurdle rates that international companies put in place to value investment decisions can be difficult to meet for a UK North Sea investment.

In the short term investment in PRT paying fields has been made more attractive than that in other fields because current expenditure can give rise to immediate recovery of past PRT paid through loss carry backs. A very clever piece of lobbying by those companies and perhaps this will encourage investment!

We believe a better approach for PRT would have been to provide tax reductions by way of investment allowances such that they were only available to those prepared to invest in the assets. The principle has already been set by the reinvestment allowance for capital gains and the Investment Allowance for Supplementary Charge, so it is a shame that the Chancellor did not look at precedent to determine how best to incentivise the sector.

We also don’t think the reduction in the SCT rate is well targeted. For those prepared to invest there is already the investment allowance which ensures that all but real super profits will be sheltered from SCT. It is those companies who are not spending which are likely to pay SCT at the full rates and it is those companies which are therefore likely to benefit the most.

If it was felt that future investment needed the further encouragement of paying lower taxes we think a reduction in the main CT rate would have been more appropriate. Perhaps government should have looked to extent the investment allowance regime into the CT world.

One of the main challenges for the North Sea is trying to help get assets into the hands of those wanting to invest. The confirmation by HMRC that their view of existing law is that sellers who retain the obligation to decommission would be able to obtain CT relief is welcome. However for PRT fields it appears that under existing law the only way for this to work is for such companies to stay on the licence which is unlikely to be a preferred route in many cases.

As it stands the value of PRT assets to the current owners has just gone up overnight as a result of the reduction in the rate, benefitting the owners but making it more expensive for companies wanting to acquire those assets.

Further it is only those companies which have previously paid PRT which can obtain effective relief for investment. Anyone wanting to acquire such interests and invest, without any PRT paying history, must wait until cessation of production to recover the benefit of past PRT paid. A more useful measure would have been an extension of the loss carry back to previous owner rules.

Overall our view is that the rate changes do little for those companies wanting to invest, they also do not help to get assets into the hands of those companies while providing a windfall to companies in harvest mode. We believe that they are likely to provide little or no benefit to the sector as a whole in the long run with no guarantee that savings will be reinvested by the few companies that are actually expected to be tax paying in the medium term.

24 Mar 2016

Budget update – Abolition of PRT and tariffs

When the tax exempt tariff (TETR) rules were introduced over 10 years ago we understand that government secured an undertaking from major infrastructure owners that they would pass on the benefit arising from the fact that new tariffs were taken out of the charge to PRT to the users of the infrastructure.

However, although such tariff income was exempt from PRT the host field was required to disallow part of their cost for PRT to reflect the use of qualifying assets in earning the exempt tariffs. There was still therefore a PRT cost to the host field owners.

Now that PRT has effectively been abolished, i.e. set at a 0% rate, this implies that there is a windfall for a number of the fields earning such tariffs as there will no longer be the increased PRT liability as a result of the disallowed costs for a number of these fields.

Other infrastructure owners earning taxable tariffs may also be in a better position following the reduction to 0%.

Therefore companies in user fields which pay tariffs to PRT infrastructure owners should review their position and revisit their tariff agreements to see whether there is any opportunity to negotiate reduced tariff rates to reflect this PRT windfall.

If companies should like to discuss this area please get in touch with your normal CW Energy contact.

23 Mar 2016

Reduction in PRT and Supplementary Charge rates – effect on instalment payments and reporting

The Chancellor announced in the Budget Statement on 16th March that the rate of Petroleum Revenue Tax (PRT) would be reduced to nil and supplementary charge to 10%. Both these changes are to be back dated and effective from 1 January 2016 and therefore should be taken into account in the instalment payments for periods beginning on or after that date.

For accounting purposes the changes should be reflected in the figures for the first balance sheet date ended after the changes are enacted or substantively enacted. For these purposes substantively enacted is when the change is virtually certain to pass into law.

  1.  Petroleum Revenue Tax

The resolution giving rise to the reduction in the PRT rate from 35% to 0% for the chargeable periods ending after 31 December 2015 was passed in the House of Commons on 22 March under the provisions of the Provisional Collection of Taxes Act 1968.


No further instalment payments are required for PRT paying fields. Any instalments paid in respect of the chargeable period to 30 June 2016 should now be refunded. We would advise companies to write to their PRT inspector setting out the amount of refunds to be processed.

For reporting purposes the reduction in rate will be effective for periods ended on or after 22 March.    

2.   Supplementary Charge (SC)

The reduction in SC from 20% to 10% for the accounting periods commencing on or after 1 January 2016 is expected to be enacted when the Finance Bill receives Royal Assent.


The reduction in the rate of SC will result in lower instalment payments being due. Under the existing regime the first instalment payment for Corporation Tax and Supplementary Charge is required after six months and 13 days after the first day of the accounting period. For example, a company with a 12 month accounting period beginning on 1 January 2016 the first instalment payment would be due on 14 July 2016.

It is possible that the change may not be enacted by this date but we understand that HMRC expect instalments to be calculated using the new rate.    

For reporting purposes we would expect the reduction in rate to be effective for periods ended on or after the date when the Finance Bill has its third reading in the House of Commons which under the normal parliamentary process would be in July.     

If you would like to discuss any of the above changes please speak to your usual contact at CW Energy or contact us on +44(0)20 7936 8300.

16 Mar 2016

March 2016 Budget Statement

In his latest Budget George Osborne has introduced a number of measures to reduce the fiscal burden on the oil and gas industry and to clarify the regime for future years. There were a number of positive changes for industry as well as insulation from the swingeing changes to loss and interest relief that will apply to all other companies

1. Abolition of PRT

The chancellor announced that PRT is to be “effectively abolished” with effect from 1 January 2016.


PRT will in fact remain, but with a reduced rate of 0%.

The reduction in the rate to 0% will be very welcome for those fields which are expected to have a net PRT liability going forward and indeed will represent a welcome cash flow saving for those fields expecting to pay PRT which would be repaid on decommissioning.

The stated motive behind the rate reduction is to simplify the regime for investors and level the playing field between investment opportunities in older fields and infrastructure and new developments.

In practice we believe that the measure will have mixed effects.

There will be some fields where we would expect PRT returns will no longer be needed, but returns will still be required for fields where there is an expectation or indeed a possibility that losses will be carried back into periods before 2016.

Rather than create a level playing field, it would seem that investments in PRT fields now become attractive from a fiscal point of view when compared to non PRT fields in the near term with income being taxed at 0% but spend which could create losses and PRT tax repayments.

2. SCT rate reduction

As widely speculated before Budget day, the Chancellor has announced a reduction in the rate of Supplementary Charge.

Supplementary Charge will reduce to 10% from the current rate of 20% with retrospective effect from 1 January 2016.


Given that there are few companies paying CT and SCT in the North Sea the immediate benefit of a reduction in the SCT rate is likely to be enjoyed by only a small number of companies currently tax paying.

For the significant number of companies with tax losses the immediate impact of a reduction in the SCT rate will be a book hit as the value of any deferred tax asset will be reduced.

The reduction in rates will need to be reflected in the accounts for the next balance sheet date following enactment, which may be in the next few days if Government adopts the procedures used for previous rate changes.

Of course the reduction in the SCT rates does make future projects more attractive and assets more valuable.

3. Investment, Onshore and Cluster Allowance changes

3.1          Extension of Relevant Income definition

Secondary legislation will extend the definition of “relevant income” for Investment Allowance and Cluster Area Allowance (but not the Onshore Allowance) purposes to allow tariff income to activate the allowance.


Up to now production income from a field was required to activate the Investment Allowance for expenditure in respect of a field. This disadvantaged fields with large amounts of tariff income where expenditure was incurred in respect of the tariff activity, as there was no field income to activate the field allowance. This change will be welcomed by the companies in these fields and should help to encourage expenditure on such systems.

3.2          Disqualification of expenditure on assets which have previously generated a field allowance

The government is amending the Onshore, Cluster Area, and Investment allowances to disqualify expenditure incurred on the acquisition of an asset in certain circumstances from generating allowance.

In particular, legislation will be introduced disqualifying the generation of onshore allowance on the acquisition of an asset on which allowance was previously generated, or where allowance was previously generated through the incurring of leasing expenditure on that asset.

Further, the generation of investment allowance on the acquisition of an asset prior to the determination of an oil field, where that asset has already generated allowance will also be disqualified.

These measures will have effect for expenditure incurred on and after 16 March 2016.


These measures tighten up the definition of qualifying expenditure for the various allowances which should have little effect in practice.

 4. Decommissioning

HMRC have published a technical note to clarify that companies that retain decommissioning obligations after the sale of an asset will be able to access corporation tax relief for those costs.


Although only dealing with the CT aspects of decommissioning, this is a helpful clarification which confirms the view that a number of companies previously held. In particular the note clarifies that it is not necessary for the seller to remain on the licence, only that they should directly incur the costs. It should help companies dispose of interests in mature fields free of the decommissioning obligation to new companies without the uncertainty over the tax position of decommissioning relief.

Issues still remain with the PRT legislation in that it appears to require a company which retains an obligation to incur costs to remain on the licence to enable effective relief to be available. There is a clear disjoint here which it is hoped can be resolved but would appear to need a change in law.

There is a suggestion that further measures may be introduced to facilitate the transfer of late life assets, which is welcome.

5. Other Matters

5.1          The Government is to provide a further £20million of funding for seismic surveys in 2016-17.


It is hoped that this will in a small way stimulate some further investment in the Basin.

5.2          There are a number of proposed changes to the general corporate tax regime which are specially excluded from applying to ring fence activities.  These are:

  • restriction on the use of carried forward losses and the increased flexibility on using losses against different sources of income
  • the extension of the categories of income subject to royalty withholding taxes (which only apply to trade marks and brand names and not oil related royalties).

5.3          There are other proposed changes where it is not yet clear whether they will apply to ring fence activities.  These are:

  • instalment tax payment dates for “large” companies
  • limitations on the deductibility of interest expense
  • hybrid mismatch situations
  • transfer pricing adjustment rules


Industry has previously lobbied to be excluded from any tax payment and financing deduction changes on the basis that the ring fence regime is already fit for purpose in these respects, and will no doubt continue to do so.

5.4          The operation of the substantial shareholding exemption (SSE) is to be reviewed to make sure it is still meeting the original objectives.


This relief is very generous and allows many transactions to be undertaken on a tax free basis so it is hoped that no unwarranted restrictions will be put on its application.

5.5          UK Guarantee scheme

It has been announced that the Government will consider using the scheme for oil and gas infrastructure projects.


This could prove a catalyst for getting some of the North Sea’s infrastructure hubs into the hands of companies best suited to managing these assets provided the other tax hurdles of achieving this can be overcome.


CW Energy LLP

March 16, 2016

05 Jan 2016

Investment Expenditure Draft Regulations 2016

Investment Expenditure Draft Regulations 2016

Since the original announcement of the extension of the Investment and Cluster Allowances to include certain operating costs in the summer Budget in early July, we had to wait until 8th October for a scoping document, and on 16 December 2015 the government finally published a draft Statutory Instrument containing the detailed provisions.

The detailed provisions generally follow the approach set out in the scoping document, although the leasing section has been expanded and there is now an anti-avoidance provision, preventing any claim where there is an avoidance purpose.

As a result of these proposals, from 8 October 2015 qualifying expenditure for the purposes of Investment and Cluster Allowances now includes certain operating and leasing expenditure, in addition to the costs of a capital nature originally included, as a basis of calculating the Investment Allowance from 1 April 2015.

To determine eligibility for the Allowances, there are detailed conditions determining whether the additional expenditure qualifies set out separately for operating expenditure and leasing costs.

Operating expenditure

Conditions A, B and C replicate Tests 1, 2 and 3 in the scoping document of 8 October which require that the operating expenditure should not be on routine repair or maintenance but also be incurred for the purposes of increasing:

(a) the rate at which oil is extracted from a qualifying oil field or a cluster area;

(b) reserves of oil of a qualifying oil field or a cluster area;

(c) the number of years for which it is economically viable to carry out oil extraction activities in relation to a qualifying oil field or a cluster area;

(d) the number of years for which a facility can be used for the purposes of oil extraction activities in relation to a qualifying oil field or a cluster area; or

(e) the amount of tariff receipts or tax-exempt tariff receipts that are earned by the company in respect of upstream petroleum infrastructure.

There is also the requirement that the expenditure is incurred in the course of:

(a) any of the following activities in relation to a facility—

(i) the replacement of equipment that is no longer capable of being used for the purposes of oil extraction activities;

(ii) modification to increase the capacity to carry out oil extraction activities;

(iii) modification to increase the availability to carry out oil extraction activities;

(iv) modification to enable the handling of reduced volumes that arise as a result of reduced operating pressures;

(v) modification to enable the handling of different fluid compositions; or

(b) any of the following activities in relation to an oil well—

(i)water shut off;

(ii) fracturing;

(iii) the removal of sand, salt, scale or hydrates.  


After the scoping document was issued, it was believed that the first two of the tests would be sufficient to determine what expenditure could be treated as qualifying under the self-assessment regime operating in the UK. However, it is disappointing to see that the other tests, which seem to narrow the scope of qualifying expenditure defining the specific types of assets and nature of works in respect of which the expenditure has been incurred, have been retained in the final document.

Leasing expenditure

There are a number of conditions determining qualifying leasing costs, the most significant being that the lease must be for a period of at least 5 years and relate to a mobile asset whose main function is the production or storage of oil, expenditure on which has not previously qualified for an investment or cluster allowance. There is a further requirement that the asset must be used in a field which received development consent after 8 July, or a project which received a further consent on or after this date (or if the lease is for an asset used in a Cluster, on or after 3 December 2014).

Expenditure will only qualify when paid, so there is no “upfront” relief as there is with capital allowances for certain leasing arrangements. The financing costs inherent in the relief will not qualify and neither will any costs other than those for the provision of the asset, such as personnel and service costs. This may cause compliance difficulties in determining which amounts have to be excluded from composite lease payments.

There is a cumulative limit of qualifying expenditure to the “initial value” of the asset when expenditure on it was first incurred by the company which will restrict claims where expenditure has been incurred before 8 October 2015.


On the basis that the inclusion of leasing costs should put leased assets in the same position as purchased assets these restrictions are disappointing. This was one of the areas of concern at the time of the scoping document; however, regrettably Industry representations appear to have been ignored.      

There will be a six week consultation period on the wording of the statutory instrument. Once enacted these changes will have effect in respect of expenditure incurred on or after 8 October 2015, the date of publication of the scoping document.


Overall despite the shortcomings in the details of the proposal, the extension of the scope of the qualifying expenditure for Investment and Cluster Allowance is a welcome development for which industry have been lobbying. It is to be hoped that the detailed conditions can be softened during the consultation phase.






10 Nov 2015

Loan relationships between connected companies – a change in accounting policy

For accounting periods commencing on or after 1 January 2015, companies that are changing the basis of preparation of their accounts from Old UK GAAP to IFRS or New UK GAAP (applying either FRS 101 or FRS 102), need to consider carefully the transitional adjustments needed for tax purposes when restating the brought forward balances.

Some companies which have changed their basis of accounting have experienced uncertainties in connection with the treatment of connected party loans arising on either non-interest bearing loans or where loans were entered into on non-market terms. We have for example seen some advisors suggesting that accounting adjustments on connected party debt may need to be brought in for tax purposes. This has not been our view (see for example our newsbrief dated August 2013

HMRC have now issued updated manuals dealing with the impact of the changes in accounting policy and have clarified in their manuals the application of the loan relationship rules when there is a loan relationship between connected companies and where a company changes its accounting policy. This guidance confirmed that the connected company loan relationships legislation that requires the use of an amortised cost basis in accordance with Section 313 CTA 2009 for tax purposes means that there is no initial measurement of such assets and liabilities at fair value for tax purposes. Therefore, there should be no adjustment in respect of these items for tax purposes when a company moves to New UK GAAP or IFRS. Companies will need to ensure that any such adjustments in the accounts are identified and appropriatly dealt with from a tax point of view.

03 Nov 2015

Proposals for Further Limits on Interest Deductibility

On 5 October 2015, the OECD issued its Report on ‘Limiting Base Erosion Involving Interest Deductions and Other Financial Payments’ (under the BEPS Action Plan 4). This report has been eagerly awaited because the use of interest deductibility was seen by the OECD as a key factor in base erosion and profit shifting that was being carried out by multinationals.

Briefly, the Report recommends that countries adopt the following to prevent excessive interest (and other similar payments) from arising to reduce taxable profits:

  • A fixed ratio rule that would apply to restrict interest deductions claimed by an entity (or a group of entities operating in the same country) to a fixed percentage of EBITDA, suggesting a single fixed ratio for all industries of somewhere between 10% and 30%.
  • Supplementing the fixed ratio rule with a worldwide group ratio rule thereby providing additional capacity to claim interest based on the external net interest/EBITDA of the worldwide group, with a possible inclusion of a 10% uplift to prevent double taxation and/or an alternative group ratio rule based on debt equity levels.

The Report recommends countries adopt:

  • a de minimis threshold which carves-out companies which have a low level of net interest expense (to be applied to the total net interest expense of the local group)
  • an exclusion for interest paid to third party lenders on loans used to fund public-benefit projects, subject to conditions
  • the carry forward/back of disallowed interest expense and/or unused interest capacity (within limits).

The OECD is further considering the mechanics of a worldwide group ratio rule, and also have singled out the banking and insurance sectors as having specific features that must be further looked into.

HM Treasury, which is broadly supportive of the proposed recommendations, published on 12 October a consultation paper ( Responses are requested by 14 January 2016. 


It seems likely that the UK will amend domestic legislation in line with these restrictions, possibly from 1 April 2017.

The rules are unlikely to impact stand alone domestic groups but subject to any de minims companies which are members of international groups are likely to see further restrictions on interest deductions.

The UK oil industry already faces additional restrictions on the ability to claim interest deductions within the ring fence as compared to other UK industries. As a result the industry was able to obtain secure exemption from the UK World Wide Debt cap rules (section 318 TIOPA 2010) that were introduced in 2010. We therefore suggest companies should make representations that any further restrictions introduced would be inappropriate for ring fence debt. Please contact your usual CWE contact for further assistance.

08 Jul 2015

Budget July 2015

On the occasion of George Osborne’s first Conservative Budget there was little to affect ring fence activities.

The only announcement was that the scope of the Investment and Cluster Allowances is to be broadened to include certain discretionary non-capital expenditure and to include the costs of long term leasing of production units, with the aim of maximising economic recovery.

The Red Book went slightly further in stating that the government wanted to make the most of the UK’s oil and gas resources, including the safe extraction of shale gas. Apart from the expansion of the scope of the Investment Allowances, there is also a proposal for a sovereign wealth fund for communities that host shale gas development.

The draft secondary legislation to give effect to the extension of the Investment and Cluster Allowances is intended to be published late summer / early autumn for technical consultation with the aim of being laid before Parliament when the MPs return from the summer recess.

It has also been confirmed that government will now focus on solutions for encouraging exploration, infrastructure access, and barriers to new entrants for late life fields, all of which are seen by industry as critical to achieving maximum economic recovery.


The extension of the scope of Investment and Cluster Allowances follows the discussions between industry and government on the type of expenditure which should qualify for the allowances.

Qualifying expenditure was originally restricted to capital expenditure but it was always recognised that other expenditure should qualify and it is hoped that the secondary legislation will deal with this.

The question of how to define qualifying expenditure has yet to be resolved, with industry preferring a purposive test on the lines of the PRT supplement rules, whereas government seemed keen on a list based approach, where only specific expenditure would qualify. We will comment further on these rules when the draft SI is published.

Other items

A. The loan relationship and derivative rules are to be amended in a number of ways.

Firstly, only those debits and credits which go through the profit and loss account are to be included in taxable income, whereas debits and credits included elsewhere in the accounts such as in reserves, will be ignored.

Secondly, taxable amounts arising where arrangements are made to restructure the debts of a company in financial distress with a view to ensuring its continued solvency will be excluded from charge.

There will also be a new anti-avoidance rule for the loan relationship and derivative contracts regimes targeting arrangements entered into to obtain a tax advantage. This will replace a number of the existing specific anti- avoidance rules

B. Transfer of stock in trade or intangible assets

Changes are to be made to the rules on intercompany transfers to ensure that the “correct value” is brought in for tax purposes. This will apply such that transactions between related parties can be adjusted for tax to ensure that the result is the same as if the sale had been made to a third party.

C. The rate of corporation tax is to be reduced progressively down to 18% from the current 20%, but it is assumed that there will be no change to the ring fence corporation tax rate of 30%.


It is not thought that these changes will have any significant impact on the oil and gas sector.