Finance Act 2012 provided for the introduction of a Brown Field Allowance (BFA) by Statutory Instrument. The government have now announced the parameters for the BFA which will be available to set against SCT profits. The BFA is to apply to the development of new, previously un-accessed, reserves in an existing field that is approved by DECC on or after 7 September 2012 (“additionally developed oil fields”).
A maximum allowance of £250m (or £500m in a PRT paying field) is to be given, based on the expected capital cost per tonne of developing the additional reserves, representing a total potential tax saving of £80m (or £160m for PRT fields). For these purposes PRT paying fields are those that are paying or are expected to pay PRT at any time during the life of the incremental project, as determined by HMRC.
For relief to be available the expected capital cost per tonne of the incremental development must be more than £60. The maximum relief is available at the rate of £50 per tonne (tax value of £16 per tonne) if the expected cost is £80 per tonne or more, with a straight-line taper to zero at £60 per tonne. Thus, if the cost per tonne was £80 and the incremental reserves were 5m tonnes the maximum allowance for a non PRT field would be obtained whereas, if the cost per tonne was £70 for a non PRT paying field, incremental reserves of 10m tonnes or more would be needed to obtain the maximum allowance.
A pre-requisite for relief is a revised development consent (a “development consent addendum”). The expected reserves, which is thought to mean the P50 reserves, and expected capital cost figures of the incremental project have to be included in a draft development plan which must be approved by DECC. The cost estimates, which can include contingencies of up to 20%, must then be verified by a suitable independent third party, and a final development plan, containing the cost and reserve estimates must then be approved by DECC.
As with other field allowances a maximum of 20% of the allowance can be activated each year. The first year in which a BFA can be activated is the year of expected first production from the incremental reserves project, although the quantum which can be activated is based on income from the existing reserves as well as from the incremental reserves. If the field already qualified for a different field allowance, income from the field is first used to activate the original allowance before it can activate a BFA.
The cost of the measure has been estimated by HM Treasury to be £100m per annum, but the government expects this to be far outweighed by taxes from the incremental production stimulated by this measure.
CW Energy LLP