In the Autumn Statement, the UK Government announced a number of measures aimed at increasing the competitiveness of the UK Continental Shelf. This included a 2% reduction in the Supplementary Charge to Corporation Tax, new tax allowances to encourage development of complex fields as well as enhanced tax measures for the exploration phase.
But this was the curtain raiser to the main event in Aberdeen, where the Chief Secretary to the Treasury, Danny Alexander MP, presented a more detailed roadmap for the future fiscal approach to the UK oil and gas tax regime.
Many firms based in the North Sea will welcome news that the Government has once again restated its commitment to the UK oil & gas industry, acknowledging the significant contribution it continues to make to the UK economy over the years.
Importantly, Government has listened to feedback from the Fiscal Review consultation, noting that the North Sea is now a mature basin and the approach to taxation needs to change.
Danny Alexander MP set out three broad areas to support further investment, namely reduction in overall tax burden, simplification of the oil tax regime and tax support for exploration.
So what are the Government’s proposals and what impact are they likely to have?
The 2% reduction in tax burden to 60% (together with further reductions when affordable) is a good statement of intent, reflecting the industry’s needs at this stage of its life. But this should not be seen as a tax break for oil companies.
It’s important to remember that they still face a tax rate up to four times higher than other UK companies.
Instead, it recognises the changing profile of the UK basin and helps ensure the best return for the UK taxpayer. The recognition that there are issues on the taxation of infrastructure and more mature fields is also good, but there will be a lot of work to do make good intentions reality.
The announcement of the Investment Allowance will be welcomed in the industry, as it both encourages investment and potentially simplifies the tax regime, which was previously complex and uncertain.
The devil will be in the detail, to see if the replacement of the current regime has an overall benefit. There will also be concerns to ensure larger, difficult projects that were supported by the old rules remain protected.
Exploration is a particular concern in the UK Continental Shelf, with it falling to a historically low level. The Government are hoping to encourage the revitalisation of this.
In particular, Government support for new seismic surveys is an innovative and potentially exciting proposal.
Tax credits for exploration may well be a useful stimulus for smaller exploration companies, as has been the case in Norway. However, the Government will have to tread a careful line between making such credits meaningful, while keeping them affordable and not encouraging wasteful exploration.
Some will be disappointed that there is no immediate drop in the rate for the Petroleum Revenue Tax on older fields or the taxation of pipelines and other infrastructure, but there are proposals to review this, allowing companies to make their case.
Willo Renehan is a Corporate Tax Partner based in Aberdeen. He has been with PwC for 18 years and advises oil & gas companies on tax and business matters.
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