After a period of stagnation following the fall in the oil price in 2014 there is now evidence of an increasingly attractive environment for deal-making in the UK Continental Shelf (UKCS).
There is no doubt that the market for UKCS assets is very active at the moment, with announcements by established majors looking to sell increasingly prevalent and commercially innovative deal structures bridging gaps between sellers and buyers.
Looking to the future, we’ll also have Transferable Tax History (TTH) taking effect from November 1, 2018. This should mean the relative tax profiles of sellers and buyers should no longer create a barrier to transactions, and given the short time until its introduction this could become an important feature of deals under consideration now.
TTH is a response to the issue where a buyer expects it may have insufficient tax capacity to obtain effective relief for future decommissioning costs relating to a target asset.
Where there is a shortfall between the seller’s post tax valuation of the asset and the buyer’s valuation, a deal may be prevented from happening.
On July 6, HM Treasury released the much-awaited draft legislation that will enact TTH. The draft legislation sets out proposals including the cap on the amount of ‘history’ that can be transferred, the conditions the buyer needs to comply with in order to use that transferred history, the method by which the election is made and agreed to by HMRC, and the interaction of TTH with other existing legislation, among others. From a first review of the draft legislation, some work remains to be done to ensure that TTH is workable and is capable of meeting its objective.
A technical consultation on the draft legislation is taking place this summer, with final responses due by August 31. In the meantime, HM Treasury intends to have a number of sessions with industry experts to obtain feedback on certain aspects of its proposals, offering an opportunity for the industry to have real input in shaping how the practicalities of the regime can be most effectively managed.
I will be participating in those sessions, and would encourage all interested companies to consider responding. It is in the interests of both the industry and HM Treasury to have a system that works practically and is used. From HM Treasury’s perspective, it will want to see the measure unlocking deals and new investment that may not otherwise have happened and, given that the industry has pushed for TTH to be introduced and a substantial amount of time and resources have been committed to it, the industry’s credibility with HM Treasury could be damaged if it went unused after its introduction.
It is important to recognise that TTH is not capable of making all deals possible. Depending on the particular package of assets under consideration, and the tax profiles of both seller and buyer, the fiscal barrier that TTH seeks to fix may not be present. This is why we have continued to see deal activity come to fruition in recent times despite looming decommissioning bills.
However, if correctly designed, TTH will be an important tool that can increase deal flow and help move assets into the hands of those that want to invest in them. The work to be done in the coming months will be critical to the success of TTH, and you can expect to hear more as we move towards the anticipated commencement date of November 1, 2018.
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