A North Sea tax expert has warned that any move by the UK Government to extract more revenue from the oil and gas industry is likely to have devastating consequences.
Derek Leith, EY’s global oil and gas Tax Leader and Senior Partner in Aberdeen, cautioned against the chancellor raising taxes from the sector, saying it could undermine the UK industry.
It risked both accelerating a sell-off of assets by major North Sea players and forcing “nervy” new or potential investors to have second thoughts about the wisdom of ploughing cash into the area, he said.
EY clients have expressed concerns in the wake of media reports of a possible tax hit in Chancellor Philip Hammond’s Budget on November 22, Mr Leith said.
Recovery in the sector following its recent severe downturn is still fragile, with firms more “sensitive” than ever to the tax environment and its role in their investment decisions, he added.
He said: “The successes of recent years in radically reducing costs and increasing production efficiencies were driven by the necessity to return the UK continental shelf (UKCS) to positive cash flows and providing a basis for further investment.
“Notwithstanding that success, the highly competitive war for capital is resulting in a number of traditional UKCS players either reducing their positions to core areas, or selling up completely. That isn’t necessarily a bad thing if there are new sources of capital funding buyers who will utilise new operating models to breathe new life into old assets and develop fallow resources.
“However, those choosing to retain some portfolio in the UKCS and those taking a position here for the first time will be ill at ease at the prospect of any tax increase.”
He added:“Investors have been encouraged by the promise of fiscal stability and the single biggest effect of a tax increase would be to destroy any belief in such statements from government in the future.”
Mr Leith also warned that cutting taxes during a downturn and increasing them in an upturn had become a bad habit, adding: “The UK needs to be a demonstrably competitive place for investment in oil and gas.
“The government must not undermine the confidence created in recent years by spooking investors.”
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