Proposed changes to UK oil and gas taxation
The Chancellor announced three changes to oil and gas taxation in the Autumn Statement on 3 December 2014 covering Supplementary Charge, ring fenced expenditure supplement and a new cluster area. Draft clauses to outline these measures in the 2015 Finance Bill were published on 10 December 2014. Ronan Lowney, Managing Associate at Bond Dickinson LLP considers the proposals.
Why is the government making changes to upstream oil and gas taxation?
The changes come in the wake of the review of the industry by Sir Ian Wood. The UK government realises that the North Sea basin is at a stage of maturity which requires greater investment in infrastructure and in the technical challenges required to maximise UK energy security. The fiscal regime within which the industry operates needs review and change in order to maintain competitiveness for such in investment in what is a very international sector. The fall in oil prices is also a motivational factor.
Was the industry surprised by any of these changes?
The changes in themselves are not a surprise- they are largely positive however they are regarded as merely piecemeal. HM Treasury launched a consultation in July focusing on the fiscal regime in the UK relating to the oil and gas sector. Large scale change at this point would not have been expected, but there is more expected to come. Of particular future interest in 2015 will be proposals for the Investment Allowance, which will be designed to enhance production in existing fields and will therefore be of significant interest to current participants.
Of the changes currently proposed, which are the most important for the oil and gas industry?
The cluster area allowance will be the most interesting development. Other changes, such as the extension of the ring fence expenditure supplement and the supplementary charge reduction are welcome, but the cluster allowance is the development which is more closely tied to the aim of expanding exploration.
What kind of projects will the new cluster area allowance encourage?
The intention is to encourage investment in the more challenging areas of the central North Sea. Access to the further reserves there is financially and technically more difficult. Therefore, the proposal of Cluster Area plans is designed to consolidate investment in these areas. The way that the allowance will work should also give a direct cash incentive, in that it effectively reduces the tax rate (through reduction of the supplementary charge) and applies to all UKCS activity and not just profits from the cluster area.
The Chancellor suggested that there could be further changes to upstream oil and gas taxation in the near future. What changes would you like to see?
There is currently a lot of complexity concerning allowances. These allowances have been developed over a number of years in response to particular objectives. A consolidation of these to fit within a rational framework of economic and energy security objectives could be interesting, and may be the way in which investment is encouraged rather than headline rate reductions. HMT has stated that the underlying tax structure of ring fence corporation tax, supplementary charge and PRT shall remain (albeit subject to review) therefore we should see objectives and competitiveness being achieved through allowances.
Is the UK tax regime changing fast enough to account for the changing dynamics of oil and gas operations on the UK Continental Shelf?
In the short period between the start of the fiscal regime consultation and now we have seen how global economics can impact quite heavily and suddenly on this sector, with a reduction of 30% in crude prices. This in itself demonstrates the vulnerability of mature basins when it comes to the economic viability of exploration. Any future fiscal regime may need to have an element of flexibility within it (such as allowance enhancement or rate reductions tied to prices). For example, the Chancellor had stated in 2011 that if crude fell below £45 per barrel, supplementary charge rates should be examined. That floor has been reached.
Republished with the kind permission of Ronan Lowney of Bond Dickinson LLP