CW Energy LLP

Budget 2014

George Osborne presented his fifth Budget against a background of cautious optimism with UK growth set to be higher than forecast and the deficit reducing. However his measures overall were muted bearing in mind that the economy is still seen as fragile.

The prospect of Scottish Independence aside, the North Sea now seems to be lower down the political agenda, and the Chancellor said as much by acknowledging that the North Sea is now a mature basin. He also noted that the OBR have revised down the forecast tax receipts by a further £3 billion over the coming years, although whether this is as a result of lower production or higher costs is not clear.

As far as oil and gas measures were concerned, most announcements were measures which were in the pipeline as a result of lobbying or had been announced in the Autumn Statement. Others were small but welcome changes requested by individual companies or field groups.

One welcome announcement was the final view of the scope of the bareboat charter restrictions, which thankfully has been much reduced since its original version, although it is disappointing that this measure has not been withdrawn altogether.

One further disappointment is that it had been thought that an announcement might have been made in respect of the RFES regime, where a number of possible changes had been requested.

Oil and Gas measures

Wood Review

The Chancellor said that the Government will take forward all recommendations of the Wood Report. The interim advisory panel has been established with its first meeting to be held in April.

Over the summer the interim body will be set up under the auspices of a new CEO and should be up and running by October 2014. The Government will then task the interim body to review how best to encourage exploration and reduce decommissioning costs, with its report and recommendations to be made in time for Budget 2015.

Maximum Economic Recovery UK (MER UK) principles are to be enshrined in legislation and should be in force by spring 2015.

Oil and Gas Fiscal regime review

Following on from the Wood Report the Treasury will review the whole of the North Sea tax regime with the stated purpose of ensuring that the regime continues to incentivise economic recovery as the basin matures. This process will include a formal call for evidence from Industry later this year.

Initial conclusions will be set out in the 2014 Autumn statement, with any proposals for change open for consultation.


Although it is pleasing to hear that the government intend to take up all the proposals from the Wood review, the prospect of a full review of the tax system to be carried out by Treasury does not sound encouraging, and one wonders what the government expects to achieve from this. Surely a better process would be to ask industry what changes they would like to see to achieve these ends so that these can be properly and openly debated. Given the recent introduction of the Decommissioning Relief Deed regime the government’s scope for changing the law may be somewhat limited particularly in the area of PRT.

Loss buying rules

Following industry representations that the targeted anti-avoidance rules that were introduced in FA 2013 were likely to have a detrimental effect on the amount of exploration activity that smaller new entrants to the North sea would be prepared to undertake, an exemption from the rules is to be introduced for costs that qualify for RDA allowances, with effect for sales of companies completing on or after April 1 2014.

These new rules will operate such that if there is a change in ownership of a company before it has commenced to trade the targeted anti-avoidance rules will no longer apply to deny future tax relief for any RDA costs incurred by the company during the previous period of ownership.


The change is to be welcomed, and potential buyers of non-trading companies will take some comfort from the fact that Government has effectively endorsed such transactions in assessing whether to invest in non-trading companies where the original owners have not had sufficient resources to bring about a successful development programme. The normal rules for claiming RDAs on such costs will however still apply.

Companies undertaking exploration and appraisal activities should now be able to assume that they will be able to obtain some future tax value from the costs they incur even if they are not ultimately successful although the changes do not of course guarantee the position.

Onshore planning and permitting costs 

Current MEA rules include in the definition of mineral exploration and access expenditure, costs of obtaining planning permission to carry on mineral extraction activities where that application is unsuccessful. Costs of successful applications are part of the cost of acquiring a mineral asset, and at best qualify for 10% p.a. writing down allowances.

For expenditure after the date of Royal Assent of the Finance Act 2014 (typically late July) this regime will be extended such that all expenditure, whether successful or unsuccessful, on planning permission will qualify as expenditure on mineral exploration and access.


For expenditure relating to UK oil and gas licences this should mean that all costs of obtaining planning permission qualify for immediate 100% relief. It is not however clear what impact this change might have on other costs associated with obtaining licence interests.     

Reinvestment relief and substantial shareholding exemption

As previously announced (see also our Autumn Statement commentary ) the reinvestment relief and substantial shareholding exemption rules are being amended to afford the same level of relief to companies and assets in the exploration and appraisal phase to those which are already trading.

Draft legislation has previously been made available and has been subject to industry comment, but it has now been announced that the effective date for these changes is to be April 1 2014 rather than the originally announced date of Royal Assent of FA 2014.


It is understood that many of the detailed drafting comments that were made in respect of the original draft legislation have been taken on board to ensure that the measure will work as intended. Representations have also been made that there seemed to be no good reason not to back-date the changes to the introduction of the original provisions, but the bringing forward to April 1 2014 of the effective date is to be welcomed and will presumably allow certain transactions to go ahead in the near future. 

Cluster Allowance 

Following lobbying by industry a new allowance against supplementary charge profits is to be introduced in respect of ultra high pressure and high temperature clusters.

The allowance is to be similar in structure to the onshore “pad” allowance which was announced as part of the Autumn Statement in 2013.

The allowance will be based on a fixed percentage of a company’s qualifying capital expenditure in respect of the cluster.  The actual rate of allowance is to be agreed following consultation with industry but the announcement states that it will be at least 62.5% of the capital expenditure incurred by the company on qualifying projects.


The original field allowances introduced in 2009 included an allowance for new UHTHP fields capped at £800m per field.  It is thought that this new allowance will be more generous than the existing regime, although details of the parameters of the cluster still need to be agreed.   

Bareboat charter 

The government have announced that they are to proceed with the bareboat chartering measure announced at the time of the Autumn Statement.  However the scope of the proposal is to be materially restricted from what was originally proposed.

The draft legislation is to be published on 1 April and industry will have an opportunity to comment.

The regime will now only apply to drilling rigs and accommodation vessels.

The proposed legislation is aimed at ensuring that a larger portion of the profits of contractors operating in the UK sector of the North Sea are subject to UK tax.

It will achieve this aim by

(a)    the creation of a new “ring fence” for relevant contractors’ profits  and

(b)   capping the amount in respect of the relevant bareboat lease payments which can be allowed as a deduction against those ring fence profits.  The cap will be calculated by reference to the historic capital cost of the asset which is subject to the lease, and will consist of a proxy for capital expenditure at a total rate of 7.5% per calendar year (as opposed to 4% of the original cost plus finance costs at 5% on borrowing of half the cost, i.e. 6.5%, as originally proposed) .

Any excess deductions would be available for offset against other income of the relevant company or indeed group relieved against other profits of the relevant group.

The profits which are ring fenced would be subject to the normal rate of corporation tax and not the upstream ring fence rate.

The measure is to be reviewed after 12 months.


It is encouraging to see that the government have taken on board the strong concerns of industry as to the potential adverse effects of the original proposal and will not be including a number of  large assets previously targeted for this measure such as FPSOs and heavy lift vessels.  However it is unclear why the government has decided that drilling rigs and accommodation vessels should still be included.

Ring Fence Expenditure Supplement

In our commentary on the Autumn statement  (see: we noted that 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 from qualifying expenditure incurred on or after 5 December 2013.The number of claim periods for such losses will be increased from 6 to 10 periods.

Industry had been hoping for a similar extension in the number of periods available for offshore fields or a modification in the methodology for calculating such allowances, and also an extension to the time limit for making claims.

There are however no further changes announced at this time.


We believe that industry will continue to lobby for a change to the existing RFES regime as it is clear that in its current form it does not achieve its original objective. 

Oil and gas tax rates

A change is to be introduced in FA 2015 to fix the rate of ring fence corporation tax on a once and for always basis (subject of course to any change introduced in a subsequent Finance Act), rather than have the rate specifically provided for each year.


This change is not considered very significant although it does perhaps support our previously held view that Government had no intention of bringing down the ring fence rates of corporation tax even though it thought it appropriate to do so for the rest of UK business. It will be interesting to see if the Wood Review consultation (see comments above) changes this conclusion.

Other Measures

A number of other anti- avoidance rules not specifically aimed at the oil industry are included within the Budget as well as further changes to the DOTAS scheme. Further, tax at stake in respect of disputed schemes is to be paid to HMRC pending resolution of the dispute.

Anti – Avoidance Schemes involving the transfer of corporate profits

These measures are aimed at arrangements where all or a significant part of the profits of a company in a group are paid over directly or indirectly by transfer to another company.

Changes were announced in December last year to counteract the operation of so-called “total return swaps” where a company enters into a derivative contract with another group company such that under the contract all of the profits of the company are paid to that other company.

This new measure is being introduced to tackle arrangements which achieve the same objective as a total return swap but without the use of derivative contracts.

The effect of the measure will be to disallow any payment in respect of the transfer of profits.

The announcement states that the measures are intended to deny deductions for what in substance represents the distribution of profits which a company has already made (rather than a cost in earning those profits).

The scope of the regime will cover payments linked to profits, securitisations, reinsurance, hedging arrangements and funding arrangements.

The measures only apply however where there is a tax avoidance purpose behind the arrangements

Guidance has been issued setting out details of the type of arrangement which the rules will catch.