Oil and gas companies have made significant in-roads into reducing the cost of production, but this is in the context of some of the highest operating costs in the world.
With the oil price falling from the highs of above $100 a barrel in the summer of 2014, those cuts alone cannot go far enough and real fiscal stimulus is needed to drive renewed investment.
In the 2016 Budget the Chancellor has certainly delivered meaningful changes, with the headline rate of the supplementary charge (SC) being halved and petroleum revenue tax (PRT) effectively abolished.
Let’s consider the changes in more detail and put them in context SC has itself had a volatile past; originally proposed in 1997 but shelved in 1998, the industry was caught by surprise when it was introduced at a rate of 10 per cent in 2002. Since then, the rate was doubled to 20 per cent and increased again to 32 per cent. The 2014 Autumn Statement announced a reduction in the rate of SC to 30 per cent from 1 January 2015, but this was superseded by a further reduction, announced in the 2015 Budget, to 20% with effect from the same date. Still with me?
The announcement in the 2016 Budget is that the SC rate will be halved to 10 per cent with effect from 1 January 2016.
PRT is the additional level of tax on a company’s profits from certain older fields (broadly, those receiving development consent prior to 16th March 1993). There had been much speculation before the 2016 Budget that PRT could be abolished and this has effectively been delivered. Strictly speaking, the rate of PRT has been permanently reduced to zero per cent with retrospective effect from 1 January 2016.
Both SC and PRT are taxes on profits and with companies struggling to make money, one might question the immediate benefit of these changes to the effected companies. The benefit will hopefully come through stimulating investment in what had been marginal or sub-marginal projects.
Beyond the headline changes (to the headline rates), further amendments have been made to the detail of the oil and gas tax rules. HMRC will gain new power to extend the definition of “relevant income” for the cluster area and investment allowances. This will enable tariff income (payments by a third party for access) to be included to activate the allowances, rather than being limited to production income. Again, it is hoped this will encourage further investment in infrastructure, particularly where this is maintained for third parties.
Some more detailed amendments were also announced to the onshore, cluster area and investment allowances. These allowances provide relief from SC where companies incur certain qualifying expenditure. The amendments are broadly designed to prevent relief where expenditure is incurred on an asset on which allowances were previously generated.
Finally, further announcements focused on how decommissioning tax relief might better encourage transfers of late-life assets, new entrants for late-life assets and the development of late-life business models.
The cuts to SC and the effective abolishment of PRT will catch the headlines this week but we will all be keen to see if these changes actually stimulate renewed investment. Criticism has been directed at the complex and field specific allowances and reliefs introduced in previous Budgets. Whilst those changes reduced the final tax rate on profits from particular fields, the complexity of the rules made it hard for investors to assess the overall position. It is to be hoped that yesterday’s announcements will be more effective in helping to attract investment, particularly for those comparing opportunities in the UK and UKCS against investment opportunities elsewhere in the world.
In an industry which supports around 250,000 jobs in the supply chain, nearly half of which are in Scotland, it is critical to tackle the collapse in investment and for this to filter down the supply chain.
David Ward is a tax director at Johnston Carmichael
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