On the occasion of George Osborne’s first Conservative Budget there was little to affect ring fence activities.
The only announcement was that the scope of the Investment and Cluster Allowances is to be broadened to include certain discretionary non-capital expenditure and to include the costs of long term leasing of production units, with the aim of maximising economic recovery.
The Red Book went slightly further in stating that the government wanted to make the most of the UK’s oil and gas resources, including the safe extraction of shale gas. Apart from the expansion of the scope of the Investment Allowances, there is also a proposal for a sovereign wealth fund for communities that host shale gas development.
The draft secondary legislation to give effect to the extension of the Investment and Cluster Allowances is intended to be published late summer / early autumn for technical consultation with the aim of being laid before Parliament when the MPs return from the summer recess.
It has also been confirmed that government will now focus on solutions for encouraging exploration, infrastructure access, and barriers to new entrants for late life fields, all of which are seen by industry as critical to achieving maximum economic recovery.
The extension of the scope of Investment and Cluster Allowances follows the discussions between industry and government on the type of expenditure which should qualify for the allowances.
Qualifying expenditure was originally restricted to capital expenditure but it was always recognised that other expenditure should qualify and it is hoped that the secondary legislation will deal with this.
The question of how to define qualifying expenditure has yet to be resolved, with industry preferring a purposive test on the lines of the PRT supplement rules, whereas government seemed keen on a list based approach, where only specific expenditure would qualify. We will comment further on these rules when the draft SI is published.
A. The loan relationship and derivative rules are to be amended in a number of ways.
Firstly, only those debits and credits which go through the profit and loss account are to be included in taxable income, whereas debits and credits included elsewhere in the accounts such as in reserves, will be ignored.
Secondly, taxable amounts arising where arrangements are made to restructure the debts of a company in financial distress with a view to ensuring its continued solvency will be excluded from charge.
There will also be a new anti-avoidance rule for the loan relationship and derivative contracts regimes targeting arrangements entered into to obtain a tax advantage. This will replace a number of the existing specific anti- avoidance rules
B. Transfer of stock in trade or intangible assets
Changes are to be made to the rules on intercompany transfers to ensure that the “correct value” is brought in for tax purposes. This will apply such that transactions between related parties can be adjusted for tax to ensure that the result is the same as if the sale had been made to a third party.
C. The rate of corporation tax is to be reduced progressively down to 18% from the current 20%, but it is assumed that there will be no change to the ring fence corporation tax rate of 30%.
It is not thought that these changes will have any significant impact on the oil and gas sector.