In his latest Budget George Osborne has introduced a number of measures to reduce the fiscal burden on the oil and gas industry and to clarify the regime for future years. There were a number of positive changes for industry as well as insulation from the swingeing changes to loss and interest relief that will apply to all other companies
1. Abolition of PRT
The chancellor announced that PRT is to be “effectively abolished” with effect from 1 January 2016.
PRT will in fact remain, but with a reduced rate of 0%.
The reduction in the rate to 0% will be very welcome for those fields which are expected to have a net PRT liability going forward and indeed will represent a welcome cash flow saving for those fields expecting to pay PRT which would be repaid on decommissioning.
The stated motive behind the rate reduction is to simplify the regime for investors and level the playing field between investment opportunities in older fields and infrastructure and new developments.
In practice we believe that the measure will have mixed effects.
There will be some fields where we would expect PRT returns will no longer be needed, but returns will still be required for fields where there is an expectation or indeed a possibility that losses will be carried back into periods before 2016.
Rather than create a level playing field, it would seem that investments in PRT fields now become attractive from a fiscal point of view when compared to non PRT fields in the near term with income being taxed at 0% but spend which could create losses and PRT tax repayments.
2. SCT rate reduction
As widely speculated before Budget day, the Chancellor has announced a reduction in the rate of Supplementary Charge.
Supplementary Charge will reduce to 10% from the current rate of 20% with retrospective effect from 1 January 2016.
Given that there are few companies paying CT and SCT in the North Sea the immediate benefit of a reduction in the SCT rate is likely to be enjoyed by only a small number of companies currently tax paying.
For the significant number of companies with tax losses the immediate impact of a reduction in the SCT rate will be a book hit as the value of any deferred tax asset will be reduced.
The reduction in rates will need to be reflected in the accounts for the next balance sheet date following enactment, which may be in the next few days if Government adopts the procedures used for previous rate changes.
Of course the reduction in the SCT rates does make future projects more attractive and assets more valuable.
3. Investment, Onshore and Cluster Allowance changes
3.1 Extension of Relevant Income definition
Secondary legislation will extend the definition of “relevant income” for Investment Allowance and Cluster Area Allowance (but not the Onshore Allowance) purposes to allow tariff income to activate the allowance.
Up to now production income from a field was required to activate the Investment Allowance for expenditure in respect of a field. This disadvantaged fields with large amounts of tariff income where expenditure was incurred in respect of the tariff activity, as there was no field income to activate the field allowance. This change will be welcomed by the companies in these fields and should help to encourage expenditure on such systems.
3.2 Disqualification of expenditure on assets which have previously generated a field allowance
The government is amending the Onshore, Cluster Area, and Investment allowances to disqualify expenditure incurred on the acquisition of an asset in certain circumstances from generating allowance.
In particular, legislation will be introduced disqualifying the generation of onshore allowance on the acquisition of an asset on which allowance was previously generated, or where allowance was previously generated through the incurring of leasing expenditure on that asset.
Further, the generation of investment allowance on the acquisition of an asset prior to the determination of an oil field, where that asset has already generated allowance will also be disqualified.
These measures will have effect for expenditure incurred on and after 16 March 2016.
These measures tighten up the definition of qualifying expenditure for the various allowances which should have little effect in practice.
HMRC have published a technical note to clarify that companies that retain decommissioning obligations after the sale of an asset will be able to access corporation tax relief for those costs.
Although only dealing with the CT aspects of decommissioning, this is a helpful clarification which confirms the view that a number of companies previously held. In particular the note clarifies that it is not necessary for the seller to remain on the licence, only that they should directly incur the costs. It should help companies dispose of interests in mature fields free of the decommissioning obligation to new companies without the uncertainty over the tax position of decommissioning relief.
Issues still remain with the PRT legislation in that it appears to require a company which retains an obligation to incur costs to remain on the licence to enable effective relief to be available. There is a clear disjoint here which it is hoped can be resolved but would appear to need a change in law.
There is a suggestion that further measures may be introduced to facilitate the transfer of late life assets, which is welcome.
5. Other Matters
5.1 The Government is to provide a further £20million of funding for seismic surveys in 2016-17.
It is hoped that this will in a small way stimulate some further investment in the Basin.
5.2 There are a number of proposed changes to the general corporate tax regime which are specially excluded from applying to ring fence activities. These are:
- restriction on the use of carried forward losses and the increased flexibility on using losses against different sources of income
- the extension of the categories of income subject to royalty withholding taxes (which only apply to trade marks and brand names and not oil related royalties).
5.3 There are other proposed changes where it is not yet clear whether they will apply to ring fence activities. These are:
- instalment tax payment dates for “large” companies
- limitations on the deductibility of interest expense
- hybrid mismatch situations
- transfer pricing adjustment rules
Industry has previously lobbied to be excluded from any tax payment and financing deduction changes on the basis that the ring fence regime is already fit for purpose in these respects, and will no doubt continue to do so.
5.4 The operation of the substantial shareholding exemption (SSE) is to be reviewed to make sure it is still meeting the original objectives.
This relief is very generous and allows many transactions to be undertaken on a tax free basis so it is hoped that no unwarranted restrictions will be put on its application.
5.5 UK Guarantee scheme
It has been announced that the Government will consider using the scheme for oil and gas infrastructure projects.
This could prove a catalyst for getting some of the North Sea’s infrastructure hubs into the hands of companies best suited to managing these assets provided the other tax hurdles of achieving this can be overcome.
CW Energy LLP
March 16, 2016