It’s fair to say Philip Hammond’s first (and last) Spring Budget as Chancellor followed the same approach as his first (and last) Autumn Statement – no vote-grabbing gimmicks, no rabbits out of the hat, steady as she goes.
The Office for Budget Responsibility gave the Chancellor a boost by revising near-term growth figures upwards, but he resisted the temptation to spend the bounty.
A variety of new spending plans have been announced that are to be funded by tax increases. The vast majority will come from measures aimed at reducing differences in the taxation of employees compared to the self-employed (by increasing Class 4 National Insurance Contributions paid by the self-employed), and the taxation of the employed/self-employed compared to those working through limited companies (by reducing the amount of dividends that can be taken tax-free from such a company).
The oil and gas industry featured briefly in the Chancellor’s speech. HM Treasury are to publish a discussion paper on tax issues associated with the transfer of late-life oil and gas assets, and will establish an advisory panel of industry experts to consider options for change.
Tax relief for decommissioning expenditure is given at the end of field life and is likely to result in refunds of tax previously paid during the productive life of the field. However, where fields are transferred late in their lives to new investors, those new investors may not generate sufficient profits, and as a result tax payments, during the remaining years of the field to enable effective relief for decommissioning expenditure. All else being equal, this issue alone could prevent the potential investor from being able to take on the asset, because the field is worth more (on a post-tax basis) to the existing owner than the potential new investor.
A properly functioning market for oil and gas assets is critical to the industry’s ability to maximise economic recovery from the North Sea, by getting the right assets into the right hands. If the potential acquirer is willing to invest in the field in the final few years because it can produce the remaining barrels more efficiently than the incumbent and/or decommission the assets in a more cost-effective way, then the seller, the buyer, HM Treasury and the taxpayer all win. A solution whereby HM Treasury pays out the same in decommissioning tax relief to the buyer of the asset as it would have paid to the seller would remove this barrier to entry for the new investor.
The announcement will therefore be welcomed by the industry, although hard work lies ahead to prove the case for change and identify a satisfactory solution that does not increase the Exchequer’s exposure to decommissioning.
No further changes were announced to the North Sea regime but, in my view, nothing additional could be expected at this stage. In particular I remain unconvinced that tax incentives for exploration are the right way to solve the undoubted lack of activity, and HM Treasury appear to hold the same view.
On the whole this was an uneventful Budget, but with a second Budget to come later in the year that was perhaps to be expected.
Derek Leith is this week’s Guest Editor and EY’s head of oil and gas.
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