With discussion and debate around Scotland’s fiscal and constitutional future heating up, EY recently launched the latest report in its Grasping the Thistle series.
Entitled “Adding energy to the debate”, the paper examines the views of oil and gas companies with operations in Scotland on the implications and anticipated impacts of next year’s referendum.
In association with Aberdeen & Grampian Chamber of Commerce (AGCC) we surveyed almost 140 industry leaders and decision makers on their opinions of these matters, plus others we felt were pertinent.
The Scottish Government and the Scotland Office welcomed the publication of the report, with a spokesperson looking forward to “further engagement with the industry on how independence can benefit the oil and gas sector”.
On the subject of tax they stated that “Scottish Ministers are clear that post-independence there are no plans to increase the overall tax burden on the industry and that no changes will be made to the fiscal regime without consultation”.
However, Scotland Office minister David Mundell argued that the oil and gas industry was justifiably concerned by taxation. Referring to a report published the same week by the Institute for Fiscal Studies (IFS) he said it shows that “an independent Scotland would require a significant cut in spending or increase in taxes in order to put their long-term finances on to a sustainable footing”.
Whether you believe that the potential of the industry will be realised under independence, or that Scotland is better off dealing with oil and gas as part of the larger UK economy, it is fair to say that the North Sea is currently enjoying a period of relative stability, reflected in the recently announced $4billion investment in the Kraken field.
When polled on tax, 79% of respondents expected the tax burden on the UKCS to increase in the event of a yes vote. Conversely 80% expected no change to the tax burden should the referendum result in a no vote.
Interestingly, this expectation had not fed into the individual businesses’ day-to-day operations. Across a range of questions the business leaders said the referendum question was not affecting their decision making.
Clearly this poses the question as to whether their expectation is of a no vote and therefore it is business as usual or confidence in the possible fiscal regime after independence is such that they can continue to invest.
Oil and gas businesses are used to working in volatile environments and the referendum may simply be another risk that they are dealing with.
An alternative view of the tax question is that the tax take will rise as a consequence of the major investments being made, such as Kraken and Mariner developments. Clearly where there is significant investment the hoped-for outcome of additional profits are subject to tax.
Therefore the tax take associated with the UKCS can increase without any change in rates but merely as a consequence of additional production raising profits – this is the holy grail of fiscal policy.
The targeted field allowances introduced recently as part of the dialogue between the industry and UK Treasury seek to encourage investment in marginal fields and allowing additional investment in existing fields that would not otherwise occur where the tax burden made them uneconomic.
This is also the intention of the Scottish Government; part of its reassurance to the oil and gas sector is that it understands this point entirely and has every intention of maintaining a stable fiscal environment to achieve the goal of increased tax take while not increasing the tax burden.
It could be argued that there is a greater onus on the Scottish Government to persuade oil and gas leaders of its policies given the apparent harmonious nature of the relationship between the sector and HM Treasury. Both sides will need to continue their dialogue with the industry to ensure that the goal of optimum recovery is achieved.
Colin Pearson is a tax partner at EY Aberdeen.
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