North Sea fiscal regime
In March 2010, the Conservative Party published its energy policy paper, Rebuilding Security. In the paper, the party announced its intention, if elected, to reform the taxation and licensing of UK oil exploration and development in order to profitably produce oil, rather than relying on imports. There have been suggestions that the Treasury would seek a windfall amount of cash from oil and gas companies with operations in the UK Continental Shelf by asking them to 'buy out' their future Petroleum Revenue Tax ('PRT') liabilities. This proposal would help the Government as oil and gas companies would provide cash now rather than over the next few years. It would also reinvigorate the North Sea as oil and gas fields developed before 1993 would not be subject to the 50% tax on field profits going forward.
All of this means that there has been some speculation on whether radical changes would be made to the current North Sea taxation regime.
Today, the coalition Government has not announced any new or radical North Sea taxation regime changes. This is perhaps to be expected, bearing in mind the short period that Government has had to introduce new measures. We welcome the Government's recently announced proposals to widen access to the UK's offshore production infrastructure and the news that secondary legislation will be introduced as soon as possible to extend the scope of the Ultra High Pressure High Temperature field allowance. It is to be hoped that future taxation measures will also be adopted to prolong the life of the North Sea and to maximise the recovery of reserves. The past few years have seen the Government tinkering around the edges of the North Sea fiscal regime. If the intention is to prolong the life of the North Sea and to maximise recovery of reserves, we suggest that more radical reform will be necessary.
Corporation tax main rates
Chargeable gains
Field allowance
Relief for overpayments of Petroleum Revenue Tax ('PRT')
Interest harmonisation for corporation tax and petroleum revenue tax ('PRT')
The measure
From 1 April 2011 the main rate of corporation tax for companies with profits above £1.5m will be 27%. However, the main rate of corporation tax for companies operating within the North Sea fiscal regime will remain at 30% (with a 20% Supplementary Charge).
From 1 April 2011, the corporation tax rate for companies with profits below £300,000 will be 20%. However, the corporation tax rate for companies operating within the North Sea fiscal regime with profits below £300,000 will remain at 19%.
Who will be affected?
All businesses operating in the UK, with the exception of those operating within the North Sea fiscal regime, will be affected by the corporation tax rate changes.
When?
The new 27% rate of corporation tax will apply from 1 April 2011. The corporation tax rate will be further reduced to 24% by 1 April 2014. The main rate of corporation tax for companies within the North Sea fiscal regime will remain at 30%.
The change to the corporation tax rate for small companies will apply from 1 April 2011. No further reductions to this rate are proposed.
It is not surprising that the Government is keeping the main rate of corporation tax for North Sea companies at 30%. Industry will hope that as the basin continues to mature and it becomes more difficult to extract oil and gas from the North Sea that there will be a general decrease in the rate of Supplementary Charge, rather than the targeted field allowance which currently exists in limited circumstances.
The measure
Legislation was introduced in Finance Act (FA) 2009 to exempt certain chargeable gains to the extent that disposal proceeds are reinvested in certain classes of assets. Today's announcement is that legislation to be introduced in the Finance Bill 2011 will widen the scope of this reinvestment relief such that the relief can apply when proceeds are reinvested in exploration and development expenditure, including drilling costs.
The intention of the original legislation was to ensure that the reinvestment relief would apply in a group context (ie that the company making the reinvestment did not need to be the company making the disposal). The wording of the legislation did not achieve this. The Government will introduce legislation after the summer recess to ensure that reinvestment relief can apply to disposals and reinvestments on a group-wide basis.
For licence swaps, where provision for various payments is made between the parties (typically treated as adjustments to the consideration), these payments will be removed from the scope of chargeable gains taxation.
Who will be affected?
The measures affect oil and gas companies operating in the UK or on the UK continental shelf.
When?
The change to widen the scope of the reinvestment relief to apply to proceeds reinvested in exploration and development expenditure, including drilling costs, will be introduced in Finance Bill 2011, but will apply retrospectively to disposals made on or after 24 March 2010 (as originally announced in the Pre-Budget Report 2009).
The change in respect of applying reinvestment relief in a group context will be legislated in a Finance Bill to be introduced as soon as possible after the summer recess, but will apply retrospectively to disposals made on or after 22 April 2009.
The change to exempt payments made between parties on licence swaps was also announced in the Pre-Budget Report 2009 to be effective from 24 March 2010. However, the Government has today announced that this change will apply from Budget Day 2011.
These changes have been welcomed by industry, but were first announced some time ago now and legislation has still not been introduced. It is to be welcomed that the extension to the reinvestment relief rules (to include drilling costs) will apply from 24 March 2010 and that the change to ensure that reinvestment relief applies in a group context is effective from 22 April 2009. No indication is given as to why the exemption in respect of payments on swaps should not also apply retrospectively from 24 March 2010 and those who are affected may wish to question this.
The measure
The field allowance applies to certain types of field and reduces a company's profits on which supplementary charge tax ('SCT') is paid. As previously announced, the field allowance conditions will be relaxed in respect of High Pressure High Temperature ('HPHT') fields and extended to fields which have previously been decommissioned.
Who will be affected?
A limited number of oil and gas companies that operate in the UK or the UK continental shelf will benefit from this extension to the field allowance.
When?
In the Pre-Budget Report 2009, Government announced that the reduction of the qualifying criteria for HPHT fields would apply from 1 April 2010. The Government has now announced that this new rule will apply from the day after the measure is introduced (which is expected for be at some point before 29 July 2010).
As originally announced, the field allowance will extend to fields which have previously been decommissioned from 22 April 2009.
Again, these announcements are nothing new. It is disappointing that Government change the goal posts in terms of when measures will apply.
Relief for overpayments of Petroleum Revenue Tax ('PRT')
The measure
As with all of the other measures announced today, this measure has previously been announced. The measure amends error or mistake relief rules such that it will be possible to reclaim an overpayment of PRT where there is no other statutory route available to the company. The measure removes the requirement that the overpayment must be the result of a mistake in the return and that it must be made under an assessment. Time limits for repayment claims will be changed from six to four years.
Who will be affected?
This will apply to participators in oil fields who are liable to PRT.
When?
The measure will apply from 1 April 2011, to allow for claims to be made under the old rules (in line with European law requirements).
It is not surprising that the rules have been harmonised across taxes, following similar changes to income, capital gains and corporation tax rules last year.
Interest harmonisation for corporation tax and petroleum revenue tax ('PRT')
The measure
Corporation tax and PRT will be included in the harmonised late payment interest regime introduced in FA 2009. The aim is to ensure that the current different interest regimes are replaced by a single regime for interest charged on late payments or interest income on repayments of tax. Interest will be charged on companies from the date the tax was due to be paid to HMRC until the date it is paid. HMRC will pay interest on tax repayments from the date the tax was due to be paid or actually received (if later) until the date that the repayment is made.
Who will be affected?
Payers of corporation tax and PRT who make late payments to HMRC, or receive tax repayments from HMRC.
When?
The new legislation will be introduced over a number of years, taking into account changes to HMRC systems required to handle these changes.
Simplifying the tax system in this way is to be welcomed.
