A new report into tax measures announced by Chancellor George Osborne to unlock North Sea investment has said they could have gone further – and brought in more cash for the Treasury.
Tax incentives revealed by the chancellor in the 2012 Budget were said to have the potential to unlock £50billion of investment in the UK North Sea.
The measures, including a small field allowance and a deepwater field allowance, went some way to unlock a surprise tax grab on the sector in the 2011 Budget, stifling investment. However, a new report by Aberdeen University said that, while the moves would unlock investment, further measures were needed. One suggestion made by the paper is for a new type of field-specific tax allowance on the cost of production per barrel of oil, in addition to corporation tax.
The report, written by Alex Kemp, professor of petroleum economics, and Linda Stephen, says this type of allowance would see slightly more investment and levels of production in the North Sea.
In addition, the Treasury would net £10billion more in taxes over 30 years than it would under the current tax regime. This was based on oil costing £58 a barrel.
“A key finding of the study is that the scheme in which the supplementary charge allowance is related to the development costs of the project produces both higher activity and larger tax revenues in the long term.”
“Measures introduced in Budget 2012 will encourage the development of substantial numbers of new fields over the longer term,” said Prof Kemp.
“But further incentives are needed, including for incremental projects in mature fields, to ensure that maximum economic recovery is obtained.”
Prof Kemp said while the measures announced in the 2012 Budget would help many marginal fields because they were for fields with specific physical features – such as size or depth – they could also help profitable ones as well.
“The result is that the effective tax rates are not well-related to field profitability,” he said.
The latest study looked at nine tax possibilities and how these would impact production levels, investment and tax revenues to the Treasury over a 30-year period. They included the current tax regime: Corporation tax plus a 32% supplementary charge; a system where firms paid corporation tax and a 20% supplementary charge; and a third alternative where firms paid corporation tax but the supplementary charge is based on the cost per barrel of producing from an individual field – a field-specific tax.
They were all compared to a tax system where oil firms had to pay onlycorporation tax.
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