George Osborne delivered his fourth Budget in difficult circumstances. The drive to collect more taxes continues with more anti-avoidance rules, including the previously announced general anti-avoidance rule (GAAR), and two new targeted anti-avoidance rules (TAARs).
However it was pleasing to hear a reaffirmation that the Government intends to start to sign decommissioning relief deeds with oil companies this year, continuing the process of providing certainty for decommissioning much desired by industry.
There was also a welcome statement of help for the embryonic shale gas industry, with promises to assist with the planning process where this would otherwise slow down development of this new resource.
This note sets out a brief summary of the main measures that we believe will be of most interest to our clients.
The Budget statements confirm that the Government intends to sign Decommissioning Relief Deeds with all companies which might potentially have to incur decommissioning liabilities. A further draft of the deed was released to industry earlier this week and we will be commenting on this in due course.
It has also been confirmed that the technical amendments to the legislation which were included in the draft Finance Bill clauses released in December last year will be enacted together with some additional provisions. Revised clauses have not yet been published. We will comment further on the detailed provisions once the Finance Bill is published.
The measures previously put out for consultation, and on which we commented in out newsletter of January 22nd (https://www.cwenergy.co.uk/news/draft-finance-bill-2013-and-draft-decommissioning-relief-deed/ ) to be included in the Finance Bill, are as follows:-
- Enabling legislation empowering Government to enter into the Deeds and pay “compensation” out of money provided by Parliament, if there are changes to the availability of relief for decommissioning expenditure (other than in respect of the rate of tax) subsequent to Finance Act 2013, and stating that any such payments should themselves be free of tax
- Expenditure on decommissioning onshore installations that have been used in connection with the production of offshore oil and gas will qualify for the same reliefs as currently apply to expenditure on offshore plant and machinery
- A new measure to give reliefs for expenditure under the MEA code for “restoration” costs which mirror those currently applying for offshore plant and machinery decommissioning expenditure
- There will be restrictions on the quantum of relief available where decommissioning services, either in respect of decommissioning plant and machinery or on restoration, are provided by affiliates, or where there is an avoidance purpose
- Amendment of the provision which provides for a reduction in SCT profits where the effective relief for decommissioning costs has been restricted to 20% for SCT purposes and those decommissioning costs have given rise to PRT relief to ensure the legislation has its intended effect
- Amendment of the law to ensure that all decommissioning guarantee fees qualify for corporation tax relief regardless of whether they are paid in respect of a PRT taxable field; that receipts under such guarantees do not restrict otherwise qualifying expenditure; and that any income derived as a result of meeting a defaulter’s decommissioning expenditure is brought into charge
- The removal of the inheritance tax charge on any property held as decommissioning security.
In addition two further changes, in respect of matters that the industry has been lobbying for are to be introduced. These are:-
- Clarification is to be introduced that decommissioning trust funds do not give rise to a loan relationship. Without this there was a risk that increases in value in the trust could be taxed twice, once in the trust at the “penal” trust rate of 45% (from April 1st, currently 50%) and again in the hands of the company which booked the value of that increase in its accounts
- There was doubt whether plant and machinery acquired as part of a field acquisition, subsequent to that plant having become disused, could be said to have been brought into use by the new owner such that the relief would be available. New legislation will make the position clear by deeming such assets to have been brought into use by the purchaser.
While we won’t know until the revised Finance Bill clauses are published whether all of industry’s comments on the draft clauses published last December have been accepted, confirmation that all of these measures are to be included in the Finance Bill is welcome. The introduction of the two new reliefs reflects industry concerns and is also welcome. The industry has also lobbied for the rate applicable to profits in the trust to be reduced to zero or at least the normal CT rate but the Government has not yet agreed to that request.
Relief for shale gas
The Government have proposed a new field allowance for shale gas and will extend the number of periods for which Ring Fence Expenditure Supplement (RFES) can be claimed for shale gas costs from 6 to 10.
The form of the field allowance is not known, but will be published for consultation before the summer.
It is to be hoped that the form of the field allowance will mean that profits from shale gas will effectively be exempt from the supplementary charge, and therefore only subject to tax at 30%.
An extension of the number of periods of RFES has been requested by the industry generally. Whilst this has not been generally forthcoming it is welcome that Government has seen fit to grant this for shale gas projects, which could mean that an extension may be available for industry as a whole if Government could be persuaded that there are sufficient new projects which would merit this incentive. As the extension of the number of RFES periods is exclusive to shale gas project costs, this will mean that a separate pool will need to be maintained for these costs if a company has other ring fence activities.
Although the detail of the regime remains subject to consultation the implication from this announcement is that expenditure in connection with the appraisal and development of a shale gas project would be fully deductible against existing ring fence profits which a company might have. The field allowance would also presumably be available to shelter the SCT liability on those profits in the absence of sufficient shale gas profits.
There are also going to be a number of non-tax initiatives, as follows:-
- The Government is to provide technical planning guidance for shale gas by July 2013, to provide clarity on the planning rules as they relate to shale gas developments. The aim is to align the planning regime with the licensing and regulatory regimes as the shale gas industry develops.
- There will be a new department, the Office for Unconventional Gas and Oil, although it’s not clear precisely what its responsibilities will be.
- The Government will consider whether the largest shale gas projects should have the option to apply to the major infrastructure regime.
- The Government will also provide proposals by summer 2013 for local communities to benefit from shale gas projects in their area.
As a large part of the shale gas deposits are understood to be onshore presumably the aim is to speed up the development process such that the developments can go ahead with the minimum of delay due to planning constraints. The inclusion of major project in the major infrastructure regime will mean that such requirements will be dealt with at the national rather than the local level. As a balance to this, there will be a regime to enable the local community in which the shale gas project takes place to benefit from that project, although it is not clear how this benefit will be manifested.
Further anti-avoidance rules on losses
Two further sets of anti-avoidance rules have been proposed concerning relief for losses and deductions in situations where there is a change in ownership.
At present, the principal anti-avoidance rules prevent the carry forward of certain types of losses where there is a change of ownership of the relevant company and :
(a) Within three years of the change of ownership there is a major change in the nature or conduct of the company’s trade or
(b) Where the change in ownership occurs after the company’s activities in a trade become small or negligible and before any significant revival of the trade
These are augmented with rules introduced with effect from 2009 to restrict the ability to circumvent these rules by disclaiming capital allowances.
The new measures look to close loopholes in the existing rules, and also to introduce two targeted anti avoidance rules (TAARs) directed at arrangements which are intended to circumvent the application of the major change rules.
1. Loss loophole closure
There is a loophole under the existing legislation where there is a change in ownership of a company X to which a trade has previously been transferred and, after a change in ownership of X, it subsequently transfers its trade to another company, Y, within the transferee group. In these circumstances, under current law, it would be possible for there to be a major change in the conduct of the trade now carried on by Y without the anti-avoidance rules applying.
The proposal is that the nature or conduct of the trade now in Y can be taken into account to determine whether the anti-avoidance rules are in point.
Whilst we understand that this potential loophole was identified a number of years ago we are not aware of a large number of companies relying on it in practice.
The second change deals with the change in ownership of companies with carry forward non-trading loan relationship debits, non-trading deficits, or non-trading losses on intangible assets. These companies are to be brought within the normal major change rules.
2. Targeted Loss Buying Rules
There are three new restrictions being introduced in connection with a change of ownership of a company and the ability of the new owner group to utilise reliefs which economically were incurred while under the ownership of the previous group.
- Capital allowances pool “buying”
Under rules introduced in FA 2010 where there is a change of ownership of the company and at the date of change of ownership the book value of its assets is less than the amount of the plant machinery qualifying pool, and the change of ownership has an “unallowable purpose”, then the offset of allowances after the change is effectively restricted against profits of the business which was carried on by the company at the change of ownership. For these purposes a transaction has an unallowable purpose if the main purpose, or one of the main purposes, is to obtain a tax advantage.
Changes are to be made to these rules such that where the excess of tax written down value over book value is £50m or more these rules will apply regardless of whether there is an unallowable purpose. Where the excess is between £2m and £50m the rules will apply if the benefit is not an “insignificant” benefit. HMRC have indicated that insignificant in this context will be subject to consultation but would normally mean 5% or less. Below £2m the existing rule, which require an unallowable purpose, will apply.
There are two further measures described as a “Deduction Transfer TAAR” and a “Profit Transfer TAAR”.
These rules are intended to supplement the existing major change rules to catch circumstances where companies are able to arrange matters such that they do not fall within those provisions, i.e. by ensuring that deductions are claimed after the change of ownership rather than before when they would then have formed part of the losses at the date of change.
The deduction TAAR applies where there is a change of ownership and the main purpose or one of the main purposes of the arrangements connected with the change is to obtain relief for a “deductible amount” in circumstances where those amounts are ones which, at the date of change, can be regarded as highly likely to arise as deductions for an accounting period ended on or after the change.
This first TAAR prevents these deductions from being group relieved or set against other income.
The Profit Transfer TAAR looks to prevent deductions from being available against profits from assets transferred into the target company after the date of change of ownership.
Deductible amounts for these purposes include expenses of a trade, property business, management expenses and non-trade debits from loan relationships, derivative contracts, and intangible assets.
Notably the list does not include trading losses in place at the date of change of ownership, presumably because they are already covered by the existing legislation.
In both cases the TAAR only applies where the purpose or one of the main purposes of the arrangements connected to the change is to claim relief for the deductions.
In determining whether there is a tax avoidance purpose HMRC have included guidance as to the factors that will be taken into account
- The amount paid for the acquired company relative to the tax value of the deductions
- Changes made to the business carried on by the acquired company prior to its acquisition
- The nature of the business carried on by the transferred company relative to the business carried on by the new group
- The planned conduct of the transferred business following the transfer.
The draft legislation will not be issued until 28th March but it appears from the documents included within the Budget publications that these rules do not apply to restrict the use of losses which are in place at the date of change of ownership, but rather to restrict the use of deductions created after that date. HMRC would seem to be comfortable that the existing change in nature or conduct of trade rules are sufficient to police the transfer of companies with existing losses. It would therefore appear that these targeted anti-avoidance rules are being introduced to deal with arrangements entered into which are intended to fall outside of the scope of these existing rules.
The introduction of these TAARS suggests that the type of transaction targeted may not have been one which would fall within the scope of the GAAR which is also being introduced in this year’s Finance Act.
The type of transaction which these rules may be aimed at would be an arrangement whereby capital allowances were disclaimed prior to a sale (bearing in mind that this transaction may fall foul of the existing plant and machinery anti-avoidance rules as extended by the measure mentioned above), or possibly where a company has been sold prior to the commencement of trade with a view to triggering the trade by means of injecting a producing source into the company.
These new rules introduce a further level of complexity and risk where a group is looking to purchase a company with losses or tax allowances. These types of transactions are particularly common in the oil industry as assets often change hands via a corporate transaction prior to fields paying back, such that there are still unused losses or allowances in the company.
“Above the line” R&D credits
The change to the way relief for R&D credits for large companies is to given, as previously announced and covered in our earlier newsletter, is confirmed, but with a credit of 10%.
The earlier proposal had been for a credit of 9.1% and following lobbying by industry it had been agreed that for ring fence trades the credit should be 49% to reflect the different level of tax that ring fence trades suffer. There is no mention of whether there is to be a commensurate change to the rate applicable to ring fence companies.
The non-ring fence CT rate is to be reduced to 20% from April 2015 and there will no longer therefore be a distinction between the mainstream and small company rates. As a consequence the tapering rules for dealing with profits on the transition from the small company to mainstream rates are to be abolished.
It is not clear whether this change means the 19% small companies rate applicable to ring fence profits is being abolished.
CW Energy LLP
March 20, 2013