North Sea fiscal regime
The measure
The Government has today announced changes to the North Sea fiscal regime in
respect of the Field Allowance and chargeable gains legislation. The Chancellor
has announced that there are eight known fields which will benefit from the
proposed extension to the Field Allowance legislation. Discussions between
Government and industry are ongoing in respect of other areas of importance to
industry such as support for the development of infrastructure in the West of
Shetland area and the taxation of decommissioning trusts.
Tax rate
Corporation tax (CT) rates remain unchanged in respect of North Sea oil and gas activities. The mainstream CT rate for large companies is 30%, the supplementary charge (SCT) is 20% and the small companies' rate for ring fence profits remains at 19%.
Field Allowance
The Field Allowance applies to certain types of field and reduces a company's profits on which SCT is paid. 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:
- From 1 April 2010, an HPHT field qualifies for the allowance if it has pressure in excess of 862 bar and temperature in excess of 166 degrees Celsius. For all pressures above 862 bar, the allowance will increase on a straight line basis from £500m at 166 degrees Celsius to £800m at 176.67 degrees Celsius.
- Effective from 22 April 2009, the Field Allowance will extend to fields
which have previously been decommissioned. How this will work in practice
has yet to be announced.
Chargeable gains
Effective from Budget Day 2010, further changes will be made to the chargeable gains legislation in respect of licence swaps and reinvestment relief:
- 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.
- FA 2009 introduced a measure whereby gains on the disposal of North Sea
interests are exempt from tax to the extent that disposal proceeds are
reinvested in certain classes of assets. From Budget Day 2010, expenditure
on exploration and development, including drilling costs,
will fall within the classes of assets on which reinvestment relief is
available.
An extension to the Field Allowance and chargeable gains rules will be welcomed by industry. However, there will be disappointment that no announcements have been made in respect of West of Shetland where there is a lack of infrastructure, though it is positive that discussions will continue in this respect. The extension of the chargeable gains legislation to include drilling costs should help to encourage asset trades and stimulate further activity in the North Sea. In order to maximise the recovery of oil and gas from the UK Continental Shelf, it will be important for Government to continue to incentivise companies bearing in mind that this is a mature province with rising costs and global competition.
