The Spring Budget included the announcement of the formation of an expert panel to consider the impact of the North Sea tax regime on late life asset transactions, and promised the publication of a discussion paper to inform the panel’s remit. The discussion paper provides some insight into HM Treasury’s current thinking in this area and presents the industry with an opportunity to respond and get involved with the discussion.
It is well understood that the current regime for providing decommissioning tax relief may present a barrier to late life transactions. It is a fundamental tenet of the existing regime that a company can only obtain a tax refund for decommissioning costs to the extent it has previously paid tax on its North Sea profits. Therefore if a new entrant takes on a late life asset but cannot generate sufficient profits to shelter the decommissioning liability, it cannot get effective tax relief. In many situations the seller would be able to get effective relief by virtue of its tax history, and therefore the difference in the tax profile of seller and buyer can prevent the transaction from occurring.
Understandably, the majority of the discussion paper is given over to this issue and possible remedies. It is reassuring that HM Treasury is minded to take action. However, it is equally clear that HM Treasury is not yet convinced a change can be delivered in a way that meets its objectives. Changes will only be made where they demonstrably benefit the UK taxpayer. It is therefore up to industry to show that new rules would enable late life transactions that bring further investment in those fields, allow the newcomer to produce incremental barrels compared to the incumbent, or create the opportunity for the newcomer to decommission the assets more efficiently.
HM Treasury also wants to ensure any changes do not result in the commodification of tax history, and that any administrative burden created is not disproportionate. These are all perfectly reasonable objectives, but there will be a significant degree of challenge in designing a workable solution that meets them all.
The discussion paper highlights two other issues that are potentially relevant to North Sea transactions. Firstly, at last year’s Budget, HMRC confirmed it agreed with industry’s interpretation of the ring fence corporation tax (RFCT) rules that apply where a seller retains the obligation to decommission assets. The seller’s entitlement to RFCT relief for its decommissioning expenditure is not dependent on the seller remaining a licensee in the field disposed. However, the position for petroleum revenue tax (PRT) is different; where a seller retains decommissioning obligations, it will not be entitled to any PRT relief unless it remains a licensee. This creates practical and logistical difficulties, and HM Treasury is prepared to consider this further.
Secondly, HMRC will consider the impact of loss-buying anti-avoidance rules, which apply where a company with trading losses is sold and there is a major change in the nature or conduct of the trade.
While the expert panel will discuss and provide recommendations on the issues raised in the paper, comments from all interested parties are nonetheless welcomed by HM Treasury.
The deadline for responding is 30 June 2017, and I would encourage everyone with an interest to ensure they participate fully in the debate.
Derek Leith is a senior partner at EY in Aberdeen and Head of Oil and Gas Tax
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