The new coalition Government set out its stall in a robust Budget speech on 22nd June. However the oil and gas industry seem to have been exempted from the increased tax burden levied elsewhere.
Whilst it would seem that all the technical changes which should have been included in the previous Finance Act will now gradually be enacted, there are no developments on any structural changes to the North Sea regime, in particular the possible abolition of PRT, for example by way of a buyout, which has been a widely debated issue.
This note sets out details of the main measures relevant to our corporate clients operating in the Energy sector in today’s Budget announcements, and our initial comments thereon.
1. North Sea Taxation
There were no surprises with regard to North Sea taxation included in today’s Budget announcements.
The special ring fence CT rate of 30% will continue despite the planned stepped reduction in general CT rates and the reduction in the small companies CT rate, and 100% capital allowances will remain for ring fence expenditure despite the future reductions for non ring fence plant and machinery allowances.
The Government plans to continue consulting with industry on the future of the regime with the aim of “creating a stable and fair environment that encourages continuing investment and exploitation of remaining resources”.
Changes that have been previously announced but not enacted (predominantly because of the calling of the General Election) will all now be enacted, but over the next year and a half. In particular:
- the improvement to the HPHT field allowance rules will be introduced by way of secondary legislation as soon as possible over the summer, but before 29th July;
- the extension to the field allowance for redeveloped fields will all be introduced in the 2011 Finance Act with retrospective effect for development consents on or after April 22nd 2009
- the changes to extend the qualifying assets for reinvestment relief to include E & A and drilling costs will also be enacted in the 2011 Finance Act and will apply to disposals on or after March 24th 2010 (this year’s first Budget Date)
- the correction to the reinvestment allowance grouping rules will be introduced in the Finance Bill due after the summer recess, but with an effective date of April 22nd 2009, when the reinvestment relief rules were first introduced;
- amendments to the 2009 swap rules will apply from Budget Day 2011,
For further detail on these changes please see our March Budget Newsbrief in the News section on our newly redesigned website, or contact your usual CWE adviser.
With many different views within industry as to if and how the regime needs to change, and a fear that as one of the few remaining profitable industries in the UK the Government may have seen it as a target for to raising some of their additional tax revenues, the absence of any changes will be welcomed by most.
The opportunity to consult further on the regime and the fact that the previously announced changes are all to be enacted will also be welcomed by industry.
No doubt interested parties will want to continue to lobby for changes which will be of benefit to their particular portfolio.
2. Capital Distributions
As previously announced the rules concerning the treatment of dividends received by UK companies are to be clarified. Finance Act 2009 introduced an exemption from tax for UK companies on the receipt of most forms of distributions. However, “capital” distributions were excluded from this exemption.
HMRC practice has been to treat all UK distributions as income in nature (subject to certain specific exemptions). This was arguably not correct in law and there has been considerable uncertainty since this doubt was raised as to how certain distributions should be treated.
The dividend exemption introduced in Finance Act 2009 is therefore to be amended with retrospective effect to remove the exclusion from the exemption for capital distributions.
The new law is also to include changes to make it clear that distributions made out of reserves arising from a reduction in capital (whether under the Companies Act or under corresponding overseas provisions) are not to be regarded as repayments of share capital, and therefore they will not be excluded from being treated as distributions.
Distributions which would fall to be treated as giving rise to a deemed disposal for capital gains tax, for example those arising from a redemption of shares, are also to be excluded from capital gains tax treatment where they fall within the amended dividend exemption. However the fact that an actual disposal of shares, for example as a result of a purchase of own shares, gives rise to a distribution, which would be exempt from corporation tax on income under the 2009 dividend exemption, will not prevent that distribution from being brought within the charge to capital gains tax.
These changes are effective for corporation tax purposes for distributions made on or after 1st July 2009 but are applied retrospectively in the case of distributions made out of reserves created by capital reductions whenever they occurred, with an option to elect out of this change for any distribution made before 22nd June 2010.
The changes in Companies Act 2006 to the rules concerning reductions in share capital has lead to many more companies paying up dividends from reserves created by a reduction in capital. This in turn caused HMRC to revisit their previous practice of treating all dividends out of reserves as income in nature. These proposals remove the threat of dividends arising in these circumstances from being brought within the charge to capital gains tax. There is no indication in the Press Release that the value shifting rules will be amended to prevent capital reductions being used to strip down the value of companies prior to a sale or liquidation, where for example the substantial shareholdings exemption is not available, although this possibility has been suggested as part of the ongoing discussion on changes to the capital gains tax regime (as mentioned below).
3. Corporate Capital Gains – Simplification for groups
HMRC and HM Treasury issued a joint consultation document in February 2010 on simplifying capital gains rules for groups of companies.
There were three main areas for “simplification”
· value shifting
· capital losses after a change of company ownership and
· degrouping charges.
Further draft legislation is to be issued later in the year with a view to implementing any changes in Finance Bill 2011.
The proposals concerning the de-grouping charge rules are potentially very significant and the draft legislation will be keenly anticipated.
4. Over and Underpayments of PRT
As announced in the previous Budget, the CT and PRT interest legislation in respect of over and under payment of tax is to be aligned with the rules relating to other taxes contained in FA 2009.
With effect from 1st April 2011 the time limit for an error or mistake claim for PRT will be changed to four years (from the current six) and exclude claims where the return followed general practice or is subject to another statutory claim. There will also be various other changes to the mechanism of the claim procedure including an exclusion for the requirement for such a claim to be as a result of a mistake in a return.
The intention is that there will be one set of administrative provisions to align the rules for interest payable or repayable for all taxes. It will be interesting to see how these will apply to the “appropriate repayment” rules in para 17 Sch 2 OTA 1975 where there is a mechanism to cap the amount of interest on a repayment.
5. Capital Allowances
The rate of plant and machinery writing down allowances for chargeable periods ending on or after 1st April 2012 will be reduced to 18% per annum for main pool items and to 8% per annum for special rate pool items. As mentioned above the rates of allowances applicable to oil and gas ring fence activities will be unchanged.
FA 2010 included cushion gas in gas storage fields in the list of items in the special rate pool, so the rate of writing down allowance on cushion gas will accordingly reduce from that date.
6. Asbestos victims trusts
Trusts set up before 23rd March 2010 to compensate victims of asbestos are to be exempt from Capital Gains Tax, Inheritance Tax, and Income Tax with effect from 6th April 2006.
The fact that the Government is prepared to grant tax exemptions to such trusts is encouraging in that they hopefully recognise there is an anomaly which will encourage them to make a similar change for trusts set up for decommissioning costs.
7. Anti avoidance
There were a number of anti avoidance measures contained in the Budget. Further changes will be set out in Technical Notes to be published shortly.
8. Consortium Relief
Two changes are proposed to the consortium relief rules, to take effect when the legislation is published, in a Finance Bill to be introduced as soon as possible after the summer recess.
The first change will change the requirement that a “link company” must be a UK resident company to any company established in the EEA.
The second change introduces a further restriction on the amount that can be claimed from a consortium company to include the shareholder’s proportion of voting rights and the extent of control.
The first of these changes brings the consortium legislation into line with the other group relief provisions and the second is an anti avoidance measure to avoid distortion in the flow of group relief.
9. Loan relationships and derivatives anti avoidance
To counter the effects of schemes reported to HMRC, further changes are to be made to extend the circumstances when the tax rules can override the accounting treatment to avoid the derecognition of loan relationship and derivative debits and credits when certain acquisitions and variations in capital interests in entities takes place.
This is another targeted anti avoidance measure resulting from the improved flow of information received by HMRC on avoidance schemes.
10. Tax policy making: A general anti-avoidance rule
A discussion document has been issued setting out a number of proposals for improving the framework for developing legislation and implementing tax policy. As part of this review the Government is to examine whether a GAAR should be introduced as part of a new approach to the tax policy making process.
11. Worldwide Debt Cap Rules
A whole series of amendments are proposed, with effect from 1st January 2011 to the worldwide debt cap rules, as previously announced in Budget 2010.
For UK upstream oil and gas companies the worldwide debt cap rules are unlikely to be of relevance due to the exclusion of ring fence debt from the measures. International groups or integrated groups will however still have to try and comply with the very complex rules.
12. Corporation Tax Reform
The Government intends to conduct a wide ranging review of corporation tax and will set out a detailed programme for reform in the autumn for consultation. It has stated that it believes “a broad tax base, a low rate, and a more territorial approach will improve competitiveness”. It has stated that it will establish a business forum to consult with multinational businesses on the UK’s tax competitiveness, including the long-term aims of reform of the corporate tax system.
As part of the Government’s “road map” to corporation tax reform they have acknowledged that reform of the CFC rules is a key priority for UK multinationals. The intention is to bring in new CFC rules in the 2012 Finance Act. The delay is to enable proper consideration of how to make the rules more competitive with other jurisdictions while maintaining adequate protection to the UK tax base. The intention is to however also make some improvements to the current regime in Finance Bill 2011.
Similarly there is an intention to move to a more territorial basis for the taxation of branch profits with consultation over this summer on options for retaining branch loss relief. Again the intention is to introduce any changes in the Finance Bill 2011 as part of a comprehensive package of measures dealing with non UK activities.
The CFC rules do not typically create too many problems for the oil industry apart from where non UK assets are held in branches of third country jurisdictions. Any change to the exempt activities exemption that removed this anomaly would be welcomed. In the discussions to date on branch exemption there has been a clear divide between the financial community who have been pushing for a branch exemption against the integrated oil and gas companies which do not want to lose the relief for overseas exploration costs against non ring fence income. The Budget announcement suggests that the Government is moving more towards a hybrid system as used in some European jurisdictions under which relief for branch losses will be retained within an overall branch exemption regime with a claw-back once the particular branch becomes profitable.