As a result of lower prices and rising cost the oil and gas industry has been lobbying hard for improvements to the oil and gas fiscal regime and will have been watching the Autumn Statement closely for positive reforms.
Whilst some announcements were made, further consultation will take place before the package is agreed. It is not clear whether this will happen ahead of next year’s general election.
Further details were announced by the Rt Hon Danny Alexander MP in Aberdeen on Thursday.
HM Treasury has also published the outcome of its consultation on the review of the oil and gas fiscal regime. The Treasury document, entitled “Driving investment: a plan to reform the oil and gas fiscal regime” sets out the conclusions of the review of the oil and gas fiscal regime announced by the Chancellor at Budget 2014, in response to Sir Ian Wood’s report.
It summarises the background to the review, work completed, assesses the opportunities in the UKCS, assesses the case for change and, importantly, provides details on the Government’s plans for reform.
Importantly, it is clear that Government has been listening to Industry and has committed to work together to simplify the fiscal regime over the operating life cycle and reduce the tax burden as the basin matures.
In this respect and in order to provide a measure of certainty for business, Government has set out the guiding principles that will drive oil and gas fiscal policy from now on. In order to achieve the objectives of maximising the economic recovery of hydrocarbons and ensuring a “fair return” for the UK, the following principles will guide oil and gas fiscal policy:
- The overall tax burden will fall as the basin matures in order to maximise the economic recovery
- The wider economic benefits, including revenues will be considered by Government when making decisions about fiscal policy
- The competitiveness of commercial opportunities in the UK and UKCS, prices and costs will be taken into account when Government considers the nation’s return.
The key measures announced to date are:
- A 2% cut in the rate of Supplementary Charge from 32% to 30%, with effect from 1 January 2015.
- Introduction of High Pressure, High Temperature Cluster Allowance.
- Extension of Ring Fence Expenditure Supplement to align rules for offshore and onshore developments.
- Consultation on introduction of a basin-wide Investment Allowance.
- Financial support for seismic surveys to be detailed in the Budget 2015.
- Industry consultation on reform of fiscal treatment of infrastructure, to be launched in 2015.
- Industry consultation on improved access to decommissioning tax relief, to be launched in 2015.
- PRT rate to remain unchanged for now, though to be kept under review.
Promoting exploration is vital and the proposed financial support for seismic surveys, in addition to the other measures mentioned above, will be a step in the right direction; however it is likely to be a targeted tax credit mechanism for exploration that will deliver real interest in exploration.
Government will consult with industry and the new Oil and Gas Authority (OGA) in 2015 to consider this further.
It is an encouraging change in direction that future oil and gas fiscal policy will be determined in the light of the market conditions and through regular consultation with the OGA, although the Chancellor has linked any future rate reduction to the Government’s deficit reduction plans.
A word of caution though, a number of the proposals will be consulted on in 2015 and with an election in May 2015 could take some time to make the statute book, if at all.
Mark Watson is a tax director at Johnston Carmichael
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