Yesterday the Government took another step towards meeting its commitment in Budget 2012 that it would respond to industry’s concerns regarding the lack of certainty over future tax relief on the costs of decommissioning assets in the UKCS. (See our LawNows HM Treasury Consults on Decommissioning Relief Deeds and An exceptional outcome for the UKCS for an explanation of how this uncertainty makes it harder for assets to change hands, ties up funds in decommissioning security, limits the funds available for new ventures and deters incremental investment).
The Government’s proposed approach to providing the certainty industry craves, building on proposals put forward by industry, is to implement Decommissioning Relief Deeds (“Deeds”). Under these Deeds, if the tax relief currently available were to be reduced in future, the Government would make a compensating payment.
The complexity of addressing this issue is demonstrated by the fact that, having published one consultation paper in July, the Government has now published draft enabling legislation authorising it to make payments under Deeds, a number of proposed technical changes to tax legislation and a further consultation document setting out its proposal for the Deed itself. The enabling legislation and technical changes can be found here and the consultation paper (which contains the draft Deed at Annex B) here.
The industry’s initial reaction has been positive – the latest consultation paper builds on the results of the very effective process of consultation which the Treasury undertook in the summer and addresses a number of concerns which the industry expressed with the earlier consultation. In particular:
- Eligibility - the Government has accepted that companies which are associated with owners or former owners of oil fields for the purposes of the Petroleum Act are potentially liable for decommissioning costs and should be eligible to have or make a claim under a Deed.
- PRT History - The Government has proposed a certification process by which PRT History will be established and transferred in the event of default.
- Anti-Avoidance Measures - The Government is concerned to ensure that the Deed cannot be used inappropriately to reduce a company’s tax liability but its first consultation paper included proposals for a very broad exclusion which had the potential to exclude quite legitimate commercial structures. The draft legislation and the draft Deed contain some more focussed anti-avoidance provisions but their detail will need to be assessed.
- Taxation of Decommissioning Security Agreement Trusts – the Government has issued draft legislation removing DSA Trusts from the scope of Inheritance Tax (IHT) which will be widely welcomed as exposure to this tax risked increasing requirements for security materially. The Government appears to have concluded, however, that it would not be appropriate to give any exemption from Income Tax for income generated in a DSA trust.
- Other technical changes - The Government has proposed a number of technical changes to the tax code which are necessary to ensure the effectiveness of the proposed measures – these cover changes to the subsidy rules, changes to avoid any “double dipping” and changes to the definition of decommissioning expenditure to ensure it covers onshore facilities which are used in connection with offshore production.
The main area which remains to be addressed between now and the introduction of the legislation in Finance Act 2013 relates to the process for and timing of making claims under a Deed.