Oil and Gas measures
As part of his Autumn Statement today George Osborne introduced a number of mostly beneficial measures for the oil and gas industry.
Whilst the draft legislation for the new onshore allowance was published today further details on the other measures will not be revealed until next week when the Finance Bill 2014 draft clauses are published.
1. New onshore field allowance
Further to the consultation exercise for a shale gas allowance there is to be a new onshore field allowance, to cover all onshore exploration and production activities. This will replace any other field allowances for which a company might otherwise have qualified in respect of an onshore development e.g. small field allowance. As with the other field allowances, once activated the onshore allowance reduces the profits of a company subject to the supplementary charge.
The allowance is available for projects approved for development for the first time on or after 5th December 2013 and will be calculated on 75% of the capital costs relating to that project incurred after that date.
The allowance will be available per site, defined as either a drilling or extraction site not used in connection with any oil field, or an oil field. A drilling and extraction site is not defined in the legislation but is understood to be a single “pad” from which a number of wells can be drilled.
The allowance will be generated at the time qualifying ring fence capital expenditure is incurred and activated by production from the site. The expenditure is apportioned on a just and reasonable basis if the expenditure is not exclusively incurred in relation to the ring fence activities on a particular site.
If the cumulative total of activated allowance exceeds the adjusted ring fence profits for a period, the excess allowance is carried forward.
The company can elect to transfer any unactivated allowance to another site which it owns but not until at least 3 years have elapsed since the expenditure was incurred. Similar provisions allow a company to transfer expenditure which does not relate to any site to a site.
If the site has expected recoverable reserves of more than 7 million tonnes no allowance will be available; further, once production from the site has reached 7 million tonnes no further allowance will be available on capital spend after that point.
There are provisions which apply if a company has activated other field allowances to ensure that profits are not reduced twice as a result of applying both allowances, and provisions to change the amount of the allowance when the company’s equity share in a site changes in an accounting period. The Government can also amend the 75% rate and the 7 million tonne limit by statutory instrument at a later stage if required.
After a positive consultation on the proposed shale gas allowance, the introduction of this allowance will be welcomed by the shale gas industry, as the government have taken on board concerns about aspects of the allowance as originally proposed and in particular the transferability of unactivated allowance, although it is disappointing that this option has not been extended to companies in the same group.
It is also welcome that the rate of the allowance, which has not previously been disclosed, is at the upper end of expectations.
Although capital costs are not specifically defined it is understood that these will cover costs which are capital for tax purposes even if they do not attract a capital allowance.
However it is disappointing that a company will no longer be able to claim small fields allowance as an alternative as this onshore allowance will probably not be as generous as the existing field allowance for conventional onshore oil and gas fields. There is however the option for a field group to elect to postpone the application of the new allowance to a field until 1st January 2015.
2. Other measures
A number of other announcements have been made in connection with oil and gas taxation
Ring Fence Expenditure Supplement
Legislation is to be introduced in Finance Act 2014 to increase the number of periods for which ring fence expenditure supplement can be claimed for onshore ring fence oil and gas losses and qualifying expenditure incurred on or after 5 December 2013.
The number of claim periods will be increased from 6 to 10 periods.
Comment: Industry has been lobbying for changes in the manner in which RFES is calculated, the number of periods for which it is available, and the time limit for making claims.
It is unclear whether the new onshore regime will be based on a single onshore pool concept or whether an alternative year by year pool regime will be introduced.
We understand that an announcement will be made in connection with the other representations related to offshore losses at the time that the draft Finance Bill clauses are published next week, but it is perhaps unlikely that any changes to the offshore regime will be introduced for 2014.
Companies who are looking to finalise their 2011 returns at the moment will want to look carefully at the statement made next week to determine the optimum claim strategy.
Capital Gains Tax changes
Two changes are to be made to the current capital gains tax regime as it applies to oil and gas companies which will have effect from the date that Finance Bill 2014 receives Royal Assent (probably in July 2014)
First, reinvestment relief is to be extended to cover gains made by companies which are carrying on exploration and appraisal activities but have not yet commenced to trade.
Second, the scope of the substantial shareholding exemption (SSE) is to be expanded. Currently where assets are hived down to a Newco and the shares sold the period for which the seller is treated as holding the shares of Newco and the period for which Newco can be treated as a trading company for SSE is extended to include the period of time when the transferor used the assets in its trade. In addition Newco must be carrying on an actual trade at the date of its disposal. This means that a transfer of exploration or appraisal assets into a Newco and the sale of that company before the 12 month holding period required by the SSE rules will not qualify for the SSE despite the fact that such activities are treated as trading for the purposes of the SSE. This anomaly is to be corrected.
Comment: This announcement is to be welcomed. In both cases we believe the effect of the current law was unintended. It is perhaps disappointing however that the rules will only be changed with effect from the enactment date of the 2014 Finance Act. This contrasts for example with the change which was made to reinvestment relief to allow reinvestment on a group basis which was backdated to the introduction of the reinvestment relief scheme.
Companies may wish to lobby for these changes to at least be made effective from today’s date.
Relaxation of Targeted anti-abuse rules
Government have indicated that they intend to review the options available to mitigate the impact of the profit transfer targeted anti-abuse rule on oil and gas exploration and appraisal and similar activity in other sectors.
As currently drafted the rules could lead to a restriction on deductions for pre trading capital and revenue costs where, for example, a company which has not commenced to trade is sold and at any time after that sale a trade is triggered by the injection of a profitable asset.
Representations have been made that the existence of this rule substantially increases the risks associated with exploration and appraisal activities because it increases the uncertainty that tax relief will ultimately be available for these costs and this in turn could have an adverse effect of the level of such activities.
Comment: The Profit Transfer TAAR is widely drawn and can potentially be applied where there is a transfer of assets into a non-trading company after a change of ownership even where the purchase of that company was not tax motivated.
The government have announced that they intend to introduce measures to
- cap the amount deductible for intra-group bareboat lease payments , and
- introduce a new ring fence to protect the resulting revenue.
There is to be a consultation with industry in early 2014. (Finance Bill 2014)
Comment: The details of this proposal will need to be carefully reviewed not least because the “costings” set out in the Autumn Statement suggest that the Government expects to generate significant revenues from this change.