Decommissioning rebates exempt from windfall tax as government throws industry a bone

Tax repayments related to losses incurred by removing North Sea assets will not be touched by the energy profits levy.

A senior figure at HM Treasury has confirmed decommissioning rebates will be exempt from the new 25% windfall tax, a key ask of industry.

Former Chancellor Rishi Sunak, who announced his shock resignation last night, met with oil and gas chiefs in Aberdeen recently to listen to concerns about the unintended consequences of the policy.

Announced by government earlier this year in response to a surge in the cost-of-living, the levy added 25% to the base industry tax rate of 40%.

An investment relief mechanism was also included as a sweetener.

Some clarification at last

Announcing the measure in May, the then Chancellor said companies would not be able to offset previous losses or decommissioning costs against profits subject to the levy.

In a boon to industry, Lucy Frazer, financial secretary to the treasury, told the House of Commons that tax repayments won’t be hit by the energy profits levy.

She said: “Two weeks ago, the former Chancellor met with industry stakeholders in Aberdeen to discuss the levy. Not just to communicate the aims of the levy, on how it will go to fund vital support for families, but to ensure the levy works as the government intended.

© Supplied by PariamentTV

“That’s why I can confirm the government is making a change to the legislation. I can confirm that tax repayments that oil and gas companies received for petroleum revenue tax – related to losses generated by decommissioning expenditure – will not be taxed under the levy.

“Since wider decommissioning expenditure is also left out of account for the levy, this change is consistent and fair. We are very grateful for the engagement we’ve had with industry on this matter.”

Chief executive of trade body Offshore Energies UK (OEUK) and harsh critic of the windfall tax, Deirdre Michie said: “While we remain deeply concerned about the impact the levy will have on the UK industry’s ability to meet the country’s energy needs and play a critical role in the economy, we recognise that the government has listened to the concerns put forward by industry and addressed some of those within the bill.

“This gives some reassurance that government understands the offshore oil and gas sector must remain attractive for business so it can continue producing the energy and solutions we will need for the low-carbon UK of the future.

“We now ask that they continue to actively engage with the sector as the Levy unfolds, and take into account our further recommendations.”

Decommissioning rebates

UK firms can only claim a rebate once their fields stop production, meaning they can carry back big decommissioning losses against premium taxes paid during production.

Given the Petroleum Revenue Tax was introduced in 1975, refunds can date back decades, leading to large sums being paid to companies in some cases.

© Supplied by University of Aberde

Professor Alex Kemp, a leading petroeconomist at Aberdeen University, said: “My understanding is that tax repayments of Petroleum Revenue Tax, relating to decommissioning losses, will not be taxed under the energy profits levy. This clarification is certainly logical and will be welcomed by the industry.”

Platform electrification added to investment relief

In an effort to incentivise companies to invest in new oil and gas developments, the windfall tax also included a near doubling of the investment allowance.

It means firms will get 91 pence back for every £1 they spend, for a total relief rate of 91.25%.

There were calls for this to extend to investment on decarbonising oil and gas production, such as platform electrification, a point government has now conceded.

Ms Frazer said: “Such spending can be used to decarbonise their oil and gas production, for example through electrification. Therefore, any capital expenditure on electrification, as long as it relates to specific oil activities within the ring-fence, will qualify for the allowance.

“Examples of the activity that may be carried out for the specific oil activities include expenditure on plant and machinery, such as generators, which includes wind turbines, transformers and wiring.”

Orcadian Energy, a North Sea firm with grand plans for platform electrification, has praised the decision to broaden the investment relief.