North Sea Fiscal Regime
The measures announced today are very welcome and go some way to restoring trust which had been shaken by last year's tax increases.
Certainty on tax relief for decommissioning costs
Government has announced that it will introduce legislation in 2013 giving it the power to enter into contracts with companies operating in the UK North Sea to provide greater certainty over the level of tax relief that will be available for companies' decommissioning expenditure.
The exact form and detail of these contracts will be determined through a consultation process in the coming months, with legislation to be introduced in Finance Bill 2013.
Government estimates that these measures will result in additional benefit to the Exchequer of over £1.1 billion in the period to 2017, due to increased tax receipts arising from additional investment and activity in the UK North Sea.
These measures will remove a major fiscal risk for investors in the UK North Sea and may release significant funds for investment if they allow companies to move to post tax decommissioning guarantees. The contractual solution is the industry's preferred mechanism, and follows detailed dialogue between government and industry over the last two years.
Budget 2012 broadens the field allowance legislation to incentivise field development by providing an additional deduction in computing a company's Supplementary Charge ("SCT").
A new class of field allowance targeting deepwater fields to the West of the Shetland will be introduced, the existing small field allowance will be increased and the existing field allowance legislation will be amended to include new "brown field" developments.
The new class of field allowance will be available for new fields which meet the following criteria:
- Water depths in excess of 1,000 metres;
- Minimum reserves of 25 million tonnes; and
- Maximum reserves of 40 million tonnes (with a taper on a straight line basis such that no allowance will be available where reserves exceed 55 million tonnes).
At £3 billion this new field allowance will become the largest single field allowance in operation and is targeted at the West of Shetland area where new deepwater fields are expected.
The small field allowance will be doubled in both amount (to £150 million from £75 million) and size (to maximum allowance of around 45 million boe and tapering to no allowance at around 50 million boe).
It is also proposed to amend legislation to give HMRC powers to extend allowances to fields that have already received development approval but which are to undergo additional development. The expectation is that this will be used to encourage incremental" brown field" developments and hence preserve existing infrastructure.
The changes to the small field allowance and the incentive targeted at fields to the West of Shetland will come into force following enactment of secondary legislation later in 2012 and apply to fields obtaining development authorisation on or after 21 March 2012.
Per Treasury analysis, these measures combine to reduce Government's tax take by £155 million over the next two years with the majority of this (£95 million) being recouped by increased tax take in 2014-2017.
In relation to high-pressure/high-temperature fields (HPHT), the industry was hopeful that additional field allowance would also be forthcoming. However, at this stage Government has not done this, and wishes to continue dialogue in respect of HPHT fields. Any future changes to the HPHT field allowances could be made through amendment to existing legislation.
The field allowance proposals will be very welcome by industry. It should be noted however that they are making the system more complex and we appear to be moving towards a bespoke tax regime for individual projects.
Fair Fuel Stabiliser
In conjunction with the increase of the SCT rate to 32% announced in Budget 2011, the Government stated that if the oil price fell below a specific trigger price on a sustained basis, SCT would be reduced back towards 20% on a staged and affordable basis while the oil price remained low (the so-called "Fair Fuel Stabiliser").
Government has announced today that following discussions with the oil and gas industry and motoring groups, the Fair Fuel Stabiliser will be implemented with effect from 21 March 2012.
The trigger price will be set at GB£45 per barrel (being the equivalent of the US$75 price stated by Government at Budget 2011). The trigger price will be fixed in sterling and reviewed every three years. Whether the trigger price is met will be assessed annually on the first working day of February, starting in 2013.
The impact on the rate of SCT and fuel duty that result from the trigger price being met will be announced in the Budget of the relevant year.
In this context it is worth noting that Government's own forecasts are based on an oil price of US$118 per barrel for 2012-2013, falling gradually to US$95 per barrel in 2016-2017, so the Government is not expecting the Fair Fuel Stabiliser to result in a tax change in the foreseeable future.
The combined ring fence corporate tax rate of 62% has remained unchanged despite proposals to decrease non-ring fence corporation tax at a faster rate than previously proposed (to 24% from 1 April 2012, and 22% by 2014).
Other measures previously announced
Draft legislation was published in December 2011 to make other changes to the North Sea tax regime. The legislative changes will be included within Finance Bill 2012, with the exception of the increase in RFES to10% from 6% which was enacted in December 2011.
Chargeable gains - application of the supplementary charge
Government has confirmed its intention to introduce legislation in Finance Bill 2012 to ensure that ring fence chargeable gains are subject to SCT (and therefore subject to a combined tax rate of 62%), and also to confirm that SCT has the same scope as ring fence corporation tax. These measures were initially announced on 6 December 2011, and were to have effect from that date. Ring fence chargeable gains which have previously been "held-over" in prior periods will also now be subject to the SCT at 32% if these gains crystallise on or after 6 December 2011.
Restriction on the rate of tax relief for decommissioning costs
As announced in Budget 2011, Government has confirmed its intention to introduce legislation in Finance Bill 2012 to restrict the rate of tax relief for decommissioning to 20% for SCT purposes. This change was stated to be in order to prevent the increase in the SCT rate to 32% providing an incentive to decommission fields earlier than would otherwise have been the case.
Draft legislation was previously published setting out the proposed mechanism in December 2011 and has since been subject to dialogue between industry and HMRC. This legislation will also now include extended loss carry back rules to include losses created through mineral extraction allowances in respect of decommissioning expenditure. This will ensure consistency with the definition of decommissioning expenditure used in the restriction of relief.
Ring fence expenditure supplement (RFES)
Government announced in July 2011 that the rate of RFES would be increased from 6 to 10% from 1 January 2012. This was enacted in December 2011. RFES is an incentive provided to companies involved in an exploration or development phase on the UK Continental Shelf that do not yet have any taxable income against which to set their costs and capital allowances to maintain the time value of exploration, appraisal and development costs.
Despite industry asking for an extension to the duration of RFES from 6 years to 10 years, no changes were announced in this area today.
The measures announced today were anticipated, importantly contained no nasty surprises and will be welcome by industry. In particular, the willingness of government to implement a contractual solution to remove fiscal risk associated with decommissioning costs will be particularly welcome and should release funds needed to maximise recovery of hydrocarbons from the UKCS.