Last month saw the UK Government issue a consultation paper outlining proposals designed to provide oil companies with clarity on the issue of the availability of decommissioning tax relief.
The document is a significant milestone in the life of the joint industry/Government working group which was established following the 2011 increase in supplementary charge.
It can be seen as a clear indication that government is willing to adapt and adopt proposals presented by Oil & Gas UK and its members, supported by Ernst & Young, in an effort to remove the uncertainty surrounding tax relief associated with the costs of dismantling and disposing of the UK’s ageing oil and gas infrastructure.
Launching the paper, Chloe Smith, economic secretary to HM Treasury, said: “At the Budget the Government signalled its determination to get the most out of the UK’s oil and gas reserves.
“By providing certainty on decommissioning costs through signing legally-binding deeds with industry we are paving the way for billions of pounds of new investment in the North Sea.
“This is great news for jobs, not just in the North Sea, but across the UK. These changes will also benefit the taxpayer, with increased tax revenues in the long term boosting the public finances.”
The quote refers to Decommissioning Relief Deeds that are to be executed by the Government and individual oil companies that will provide assurances on the minimum amount of relief – the “Reference Amount” – that will be available across a number of different scenarios.
It is proposed that the deeds be standardised documents with an individual side note certifying a company’s Petroleum Revenue Tax (PRT) history by field.
Should a situation arise where the assets decommissioned do not qualify for the Reference Amount under the tax code then the associated company will receive a shortfall payment from government, subject to conditions.
Generally, a deed should guarantee the amount of relief that is available under current legislation. That is, when decommissioning expenditure generates losses which are carried back and set against historical profits the reference amount will be equal to those profits multiplied by the prevailing rate at which those profits were taxed; subject, of course, to the 20% cap in the rate of relief for supplementary charge purposes introduced in Finance Bill 2012.
However, in cases where a company is required to pay for another defaulting party’s share of decommissioning, the deed will ensure that it receives a defined amount of relief in respect of expenditure on the defaulting party’s obligation.
The first stage of the consultation will run until October 1, after which the Government will consider all responses before finalising the policy design and launching a second consultation on the draft Deed and associated legislation in November/December of this year.
Views from a wide range of stakeholders including individuals, companies and professional bodies will all be taken into consideration, while four working groups have also been established to operate with officials during the period, covering commercial aspects, legal design, reference amounts and issues associated with anti-avoidance measures.
This latest paper officially acknowledges the difficulties encountered when oil and gas assets change hands, the limitations existing legislation places on funds for new ventures and the manner in which they deter incremental investment.
It would appear from the paper plus the measures outlined in this year’s Budget that the Government is committed to providing an effective solution to these problems.
Despite that, there are specific areas that require attention during the 12-week consultation period, namely:
o How a Petroleum Revenue Tax (PRT) history certification process can provide certainty on the extent and availability of PRT relief
o The Government’s proposed response to concerns that the Deed could be utilised to inappropriately reduce a company’s tax liability
o How the proposals interact with existing field allowances and potential future targeted investment incentives.
Additionally, it might have been hoped that the consultation would bring forward proposals to address the application of Inheritance Tax and the top rate of Income Tax on decommissioning security trust assets and income respectively, but the fact that matters remain under consideration is some consolation.
The potential application of Capital Gains Tax (CGT) to foreign exchange movements on non-sterling balances held by a trust is not covered, but it is our view that measures introduced in Finance Bill 2012 should remedy the concern of industry in most situations by ensuring that a trustee cannot be liable to CGT on foreign currency it holds on deposit with a bank.
The contractual approach proposed by Government twinned with the associated technical changes puts it on a course to unlock significant investment in the UK Continental Shelf that will increase production and, subsequently, the revenues collected by the Exchequer.
It is a pragmatic approach by the current Government, as it seeks to deliver a measure that achieves its policy aims while operating within wider constraints; it has to be remembered that it must ensure a fair return to the taxpayer, while also protecting the Exchequer.
Previously, taxpayers faced with a situation where the system could be perceived to create disincentives and frustrate commercial activities were limited to ways in which their activities could be reorganised to avoid that issue.
However, the recent developments in oil and gas tax policy have demonstrated that the Government has shown greater preparedness to engage with business over areas where the tax system operates contrary to public policy aims.
Derek Leith is head of oil and gas taxation at Ernst & Young and the firm’s Aberdeen office managing partner
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