In the Budget 2015 delivered on Wednesday 18 March 2015, the Chancellor of the Exchequer George Osborne set out several significant tax breaks for the  UK oil  and gas sector. Set against the background of a maturing UK basin, albeit one with  significant resources as yet unexplored,1 the Government states that these measures are “expected  to lead to over £4 billion of additional investment and at least 120 million barrels of oil  equivalent of additional produc- tion in the next 5 years. 2

Background

By way of background, the UK’s current oil and gas taxation regime consists of three charges:

  1. ring fence corporation tax at 30% (“RFCT”), applied to a company’s “ring fence profits”, i.e. profits derived from oil extraction and the exploitation of oil rights;
  2. the supplementary charge at 30% (“SC”)3, charged on “adjusted ring fence profits” – ring fence  profits before deductions for financing costs are made4; and
  3. petroleum revenue tax at 50% (“PRT”) on profits from oil produced under UK licence.5

All three taxes apply to fields that received develop- ment consent before 1993, but PRT does not  apply to fields that have obtained consent more recently.6 Where PRT is charged, it is deductible  against profits for the purposes of calculating RFCT and the SC.7

Reduction in tax rates

The Government has now announced a reduction in the rate of the SC to 20%, with effect on and after  1 January 2015, and of the rate for PRT to 35% for chargeable periods ending after 31 December  2015.8 In other words, once both changes take effect newer (non-PRT) fields should be taxed at top rates of 50%, and older (PRT) fields at 67.5%, as opposed  to respec- tive rates of 60% and 80%.

Investment allowance and other reliefs

Following a 2014 review by HM Treasury of the oil  and gas fiscal regime,9 the Government consulted  on a proposed investment allowance for the sector.10 As  part of the Budget, it has now been  announced that 62.5% of investment expenditure incurred on or after 1 April 2015 on a field is to  be removed from the adjusted ring fence profits subject to the SC.11 Further details of the  allowance have been released today.12

The Finance Bill 2015, which will implement the recently announced developments, is to also provide  for an extension to the “ring fence expenditure supplement”13, a rule announced in Autumn Statement  2014 which compounds brought-forward losses, over ten, rather than six, years for offshore activities.

NON-TAX   ANNOUNCEMENTS

In addition to the significant tax breaks announced above, the Government will provide £20m of  funding for a programme of seismic surveys designed to encourage off-shore exploration.14 It also  plans to give additional powers to the Oil & Gas Authority, a newly-established regulator of the sector,15 including the power to scrutinise plans for  decommissioning programmes.