There were a number of measures included within the draft Finance Bill published on Tuesday directed specifically at the UK oil and gas industry.
1. Cap on relief for decommissioning costs
It was announced at the time of the 2011 Budget that a cap would be introduced to restrict the relief on abandonment expenditure for supplementary charge purposes to 20%, notwithstanding the increase in the supplementary charge rate to 32%. This is to be achieved by increasing the supplementary charge profits by an amount calculated as (SC-20%/SC), where SC is the rate of supplementary charge for the period in question, multiplied by the amount of decommissioning expenditure which is deducted in computing the supplementary charge profits for the period. The adjusted profits for supplementary charge purposes will then all be taxed at the 32% rate.
Decommissioning expenditure for these purposes includes expenditure incurred in connection with:-
- Demolishing plant and machinery (P&M)
- Preserving P&M pending reuse or demolition
- Preparing P&M for reuse
- Arranging for reuse of P & M, or
- Restoration of land (including landscaping)
The restriction will apply to expenditure incurred in connection with decommissioning carried out on or after Budget Day 2012.
There are provisions for determining when decommissioning expenditures are used where they form part of a loss. Where such a loss is group relieved the claimant and surrendering company must identify the extent to which a decommissioning cost is included within the loss.
Following the Budget 2011 announcement it was pointed out to HMRC that the effect of this restriction would be to reduce the overall effective rate of relief for a fully PRT paying field to 69%, notwithstanding that the combined CT, SCT and PRT rate of tax had been increased to 81% as a result of Finance Act 2011. HMRC indicated that this was not their intention and the draft Finance Bill 2012 includes a further measure to ensure that the overall effective rate of relief for decommissioning costs for a fully PRT paying field is preserved at the pre Finance Act 2011 level of 75%. This is achieved by means of decreasing the supplementary charge profits using the same fraction as set out above, but in this case multiplied by the PRT reduction that arises as a result of decommissioning expenditure taken into account in the relevant PRT assessment.
HMRC have chosen to redefine the scope of decommissioning expenditure rather than use one of the existing definitions, for example that in section 163(4A) CAA 2001, in this new definition land restoration is included but decommissioning is not restricted to activities carried out in order to comply with an approved abandonment programme.
There are rules for determining how one establishes how to attribute a PRT reduction to losses which include decommissioning expenditures and these rules include the flexibility for companies to choose the order in which such offset shall be regarded as being made. This would be relevant, for example, where the field was not fully PRT paying because of oil allowance.
2. Capital Gains and the Supplementary Charge
As the liability to supplementary charge is based on a different definition of ring fence profits from the charge to ring fence CT, some in industry have suggested that it did not cover ring fence capital gains. HMRC have moved to legislate for their view that ring fence capital gains are within the scope of the supplementary charge. The legislation applies to disposals from 6th December 2011, the date of publication of the draft Finance Bill.
The guidance notes published with the legislation make it clear that HMRC’s view is that this change has been made simply to clarify the position and that, notwithstanding the change; they are of the view that the existing law did bring ring fence capital gains within the charge to SCT. Presumably any company wanting to challenge this view will have to litigate to determine whether this is indeed the case.
The draft explanatory notes suggest that ring fence gains include all gains on the disposal of an oil licence. This of course is not correct as only disposals of licences which include determined fields (material disposals) fall within the scope of the ring fence.
For those companies who have realised such gains but made an election to hold these over, it is clear that these held over gains will now be taxed at the increased supplementary charge rates.
3. Election to transfer capital gains
HMRC have also moved to close a loophole which was opened up when the capital gains tax gains and loss transfer rules were amended in Finance act 2009 (section 171A).
The change prevents transfers of ring fence gains arising on a material disposal in the period into companies which do not carry on a ring fence trade. This change will also be effective for any gains accruing on or after December 6th 2011.
As originally enacted the rules in s171A enabled a capital gain or loss to be moved from a seller into another group company by means of a deemed transfer of the asset immediately prior to sale. The changes made in Finance Act 2009 allowed the actual loss or gain to be transferred. This opened up the possibility of transferring capital gains within the charge to SCT, into an entity which was not carrying on ring fence trade. Without a ring fence trade SCT cannot apply, and therefore the gain would only be subject to CT. This measure prevents any transfer of gains in these circumstances.
4. Ring Fence Expenditure Supplement
The Statutory Instrument giving rise to an increase in the rate of RFES from 6% to 10% has now been laid before the House of Commons and will come into force on 23 December 2011 with effect for accounting periods beginning on or after 1 January 2012.
CW Energy LLP
7th December 2011