In a move designed to breathe life into the United Kingdom’s North Sea oil and gas industry, the United Kingdom’s Chancellor of the Exchequer has announced a suite of tax cuts as part of the 2015 Budget. The cuts are a response to falling oil prices and industry lobbying to reverse previous increases, with the sector suffering its worst performance since the 1970s.
What are the 2015 Budget oil and gas tax cuts?
Reduction to Supplementary Charge
- The headline change is a reduction in the supplementary charge from 30 percent to 20 percent. The supplementary charge is applied on a company’s ring-fenced oil and gas profits and is in addition to corporation tax (applied at 30 percent).
- This reduction follows a recent 2 percent reduction down to 30 percent (from 32 percent) announced in the Autumn Statement 2014 and represents a dramatic turnaround, given that the charge was raised to 32 percent (from 20 percent) only in 2011.
- The reduction in supplementary charge will be backdated, with effect from 1 January 2015.
Reduction to Petroleum Revenue Tax
- The Petroleum Revenue Tax (PRT) rate will be reduced from 50 percent to 35 percent, with effect from 1 January 2016.
- PRT is an individual field-based tax on profits from oil and gas production that applies to only mature fields that were given development consent before 16 March 1993.
UK Continental Shelf Investment Allowance
- A new investment allowance has been introduced, reducing the profits subject to the supplementary charge tax and simplifying the existing ad hoc allowance regime.
- The investment allowance is designed to encourage new spending and will remove an amount equal to 62.5 percent of investment expenditure from a company’s ring-fenced profits.
- The allowance will apply to investment expenditure incurred on or after 1 April 2015.
What are the reactions to the changes?
The U.K. Treasury proclaims the proposed tax cuts as worth £1.3 billion to the industry and expects the changes to result in an additional £4 billion of additional investment, with extra production of 120 million barrels.
While the market seems to view these changes positively and agree that the tax cuts do increase the possibility of greater investment, notes of caution have been sounded by many commentators, who warn that these tax changes are not alone enough to revive the North Sea region. Many commentators argue that there needs to be a greater focus on exploration incentives and the current decommissioning regime, which poses a significant barrier to investment, given the mature nature of many fields in the region.