The Chancellor delivered Budget 2021 today. We set out below the key announcements that apply to the oil and gas sector.
Ring fence and supplementary charge to corporation tax rates
Despite the rise in the main tax rate as discussed below, there was no specific announcement on any changes to the oil tax rates. Therefore, the rates will continue to be those currently enacted being 30% for ring fence corporation tax and 10% for the supplementary charge to corporation tax.
The Budget documents confirmed that the Diverted Profits Tax rate for ring fence profits remains at 55%.
The Budget confirmed that changes are to be made to the decommissioning rules (with effect from 3 March 2021) to clarify that certain expenditure incurred by oil companies on decommissioning plant and machinery prior to the approval of an abandonment programme qualifies for decommissioning tax relief.
However, relief for such expenditure will be withdrawn if the asset on which it is incurred is not included in an approved abandonment programme, or covered by a specific agreement, within 5 years of the end of the accounting period in which the expenditure was incurred.
We would expect draft legislation to be published with the Finance Bill on 11 March 2021.
Comment: There has been uncertainty on the application of these rules for a number of years and so this change is generally welcome and should put beyond doubt the availability of relief in many cases. We believe that the requirement for the expenditure to be included within an approved abandonment programme, or covered by a specific agreement, within an arbitrary 5 years is unduly restrictive, however.
Corporation tax main rate
Until 1 April 2023, the corporation tax main rate for non-ring fence profits remains at 19%.
From 1 April 2023, the Corporation Tax main rate for non-ring fence profits will be increased to 25%. This rate will apply to profits of over £250,000. A small profits rate of 19% will apply to companies with profits of £50,000 Companies with profits between £50,000 and £250,000 will be charged at a marginal rate. As with the small companies’ rate in the past, these limits operate on a group basis.
A temporary increase in capital allowances rates will apply for qualifying expenditure on plant and machinery incurred from 1 April 2021 up to and including 31 March 2023.
The rates are 130% on new plant and machinery (the super-deduction) that would otherwise qualify for the current 18% writing down allowance and a first-year allowance of 50% on most new plant and machinery that would otherwise have qualified for the 6% special rate writing down allowances.
This provision does not apply to expenditure on assets used wholly in a ring-fence trade which would generally qualify for a 100% FYA.
Temporary extension of trading loss carry-back rules
A temporary extension to the corporation tax loss relief rules will have an effect on company accounting periods ending in the period 1 April 2020 to 31 March 2022. For companies with a December year-end, this will affect losses generated in the periods ended 31 December 2020 and 31 December 2021. For these periods any trade loss carryback will be extended from the current one year carry back to a three year carry back. The additional two-year carry-back is limited to a maximum of £2m per group per 12 month loss period. For ring fence companies it will mean that losses that are not attributable (wholly or partly) to decommissioning expenditure will be capable of carry-back to the two years prior to the 12 month period currently permitted. The effect of the current one-year carry-back is unchanged (and not limited by the £2m group allowance).
The Finance Bill has not been released but we expect the new rule to take priority over the treatment of ring-fence losses attributable to decommissioning expenditure and thereby may offer additional relief for companies with an appropriate tax profile.
North Sea Transition Deal
The Chancellor made reference to the North Sea Transition Deal in the speech but there were no details other than the documents noting that a further £2 million was to be provided to “further develop industry proposals as part of the government’s support for the North Sea Transition Deal”.
UK Emissions Trading Scheme
The Budget announced that rules that were enacted to facilitate the potential introduction of a Carbon Emissions Tax will be repealed as those rules were not commenced due to the Government deciding to proceed with implementation of a UK Emissions Trading Scheme from 1 January 2021 instead.
Repeal of Interest and Royalties Directive
It was announced at Budget that legislation implementing the EU Interest and Royalties Directive which allowed payments of interest and royalties to be made without withholding tax will be repealed in respect of payments made on or after 1 June 2021.
Now that the UK has left the EU it is not surprising that the rules are to be repealed. They were generally of limited application due to the fact that they only applied to payments between a company that directly held another or was directly held by another.
There were other announcements that included:
- Confirmation that the ‘IR35’ off-payroll working rules to large and medium-sized businesses is to come in to force from 1 April 2021;
- Changes to support the tax-advantaged status of Freeports;
- Changes to hybrids, tax-loss utilisation and corporate interest restriction rules.
It is welcome that the Chancellor has not sought to increase ring-fence tax rates. This can be seen as a strong signal that the need for tax stability has been heard by the Chancellor.
The extension of the rules to the carry-back of losses may allow some to make claims but with the amount set at a maximum of £2 million per annum, the impact may be marginal.
We shall analyse the decommissioning changes and other key rule changes when the Finance Bill is published on 11 March 2021.