North sea fiscal regime
Whilst there were no significant announcements in respect of the North Sea fiscal regime, the Government has today confirmed some expected changes to North Sea chargeable gains legislation and various minor points on interest and tax payments. These are detailed below.
Announcements were made earlier this year that the Field Allowance would be extended to the area west of Shetland to further support the development of gas fields in this region.
Discussions between Government and industry are ongoing in respect of other areas of importance to industry such as the taxation of decommissioning trusts. Tax changes for certain trusts compensating asbestos victims that were announced today will be of interest to the Industry. Although this measure is unrelated to the North Sea fiscal regime, it is worth noting that trusts attached to Decommissioning Security Agreements (DSAs) may be subject to income tax, inheritance tax and capital gains tax in certain circumstances. Today's change highlights the fact that Government can and will make exception to the usual taxation of trust rules and industry would welcome a similar exemption applying to DSA Trusts.
Reinvestment relief
Relief for overpayments of PRT
Interest harmonisation for Corporation Tax (CT) and PRT on under/overpaid tax
Capital allowances: plant and machinery: cushion gas
The measure
Legislation was introduced in Finance Act (FA) 2009 to exempt certain chargeable gains arising on disposals of certain North Sea assets to the extent that disposal proceeds are reinvested in certain classes of assets. The intention of the legislation was to ensure that the reinvestment relief would apply in a group context (i.e. that the company making the reinvestment did not need to be the company making the disposal). The drafting of the legislation did not achieve this. Today's announcement is that reinvestment relief can apply to disposals and reinvestments on a group-wide basis.
Who will be affected?
This measure affects oil and gas companies operating in the UK or on the UK Continental Shelf.
When?
The change will have effect in relation to disposals made on or after 24 March 2010.
Although it is welcome that Government are correcting this mistake, in our view the change should be retrospective and apply from the time that the reinvestment rules were introduced in 2009 as this was always the intention of the law.
We are awaiting legislation to extend the reinvestment relief rules to include exploration and development drilling announced in the 2009 Pre-Budget Report. It is now clear that this legislation will not be enacted pre-election.
Relief for overpayments of PRT
The measure
This 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. 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 (no doubt to ensure that this is in line with European law requirements).
It is not surprising that the rules have been harmonised across taxes, following similar changes to income tax, capital gains tax and corporation tax rules last year.
Interest harmonisation for Corporation Tax (CT) and PRT on under/overpaid tax
The measure
CT and PRT will be included in the harmonised late payment interest regime on under/overpaid tax 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, although it is disappointing that such changes will take so long to implement.
Capital allowances: plant and machinery: cushion gas
The measure
Two measures have been announced in respect of cushion gas:
- All leases of cushion gas will be treated as funding leases; and,
- All expenditure on cushion gas will qualify for capital allowances at 10% on a reducing balance basis
Who will be affected?
This affects companies that operate gas storage facilities and lessors of cushion gas.
When?
The provision in respect of leases will apply to leases commencing on or after 1 April 2010, except in some circumstances where a contract for the lease is already in place.
The legislation in respect of capital allowances will apply to expenditure incurred on or after 1 April 2010.
The treatment of cushion gas as plant and machinery was announced in early 2009. Those affected may be disappointed that Government has decided to apply the 10% capital allowance rate, rather than the rate of 20% which is applied to general plant and machinery, although since cushion gas does not strictly wear out, capital allowances at the same rate as a long life asset are not surprising.
The treatment of these arrangements as funding leases ensures that only the lessee should obtain the capital allowances where the lease is for a term of five or more years. Depending on the particular circumstances of companies affected, this could be an adverse or helpful measure. We will have to see the detail of the legislation to determine this.
