At Budget 2013 the Government announced that a new tax allowance would be introduced to support the development of the UK's shale gas industry. Today HM Treasury published for consultation its proposals for that new shale gas allowance. The consultation document can be found here. If the Government's proposals are introduced as set out in the document, the effective tax rate on the proportion of production income benefiting from the allowance would be 30% (instead of 62%) based on current tax rates.

These proposals form part of the Government's overall plan, first announced late last year (see the Herbert Smith Freehills October 2012 client bulletin, which can be found here) to assist the shale gas industry through the early and expensive stages of its development and thereby maximise the economic production of the UK's shale gas reserves.

The key proposals

Introduction of a 'Pad allowance' (the allowance)

  • The proposal is that the allowance would operate in a similar way to existing field allowances, exempting a proportion of income from the supplementary charge (currently levied at 32%), leaving such income subject only to ring fence corporation tax at the rate of 30%.
  • The amount of production income exempted by the new allowance would be a proportion of the capital expenditure (being expenditure qualifying for 100% first year capital allowances) incurred in relation to a shale gas 'pad' ('pad' being the term used to describe the drilling and extraction site). That proportion is itself still open for consultation, with no figure yet proposed.
  • The allowance will be available to be used against all of a company’s adjusted ring fence profits i.e. it would not be restricted to set off against profits from shale gas production.
  • The amount of allowance capable of being activated (i.e. available to be set against profits) in any given accounting period will be capped at the amount of production income from the site (pad), with any activated and unused allowance carried forward.
  • Shale gas will remain within the UK ring fence regime so companies will remain eligible for relief for capital expenditure qualifying for 100% first year capital allowances and also the ring fence expenditure supplement.
  • Costs incurred prior to the date that the allowance is introduced will not be available to offset against production profits.
  • It is proposed that the allowance be extended to all onshore unconventional hydrocarbons, defined as 'an extensive and continuous occurrence of petroleum which has not migrated from its source rock and is not significantly affected by hydrodynamic influence'.
  • The pad allowance will replace all other field allowances otherwise available to onshore hydrocarbon developments.

Ring fence expenditure supplement

  • By way of recap, the ring fenced expenditure supplement (RFES) effectively compensates companies for the fact that the value of unutilised losses/expenditure declines in real terms over time when not used, by ‘inflating’ the value of the expenditure/losses by 10%, for up to 6 accounting periods. Its real value is derived therefore by companies that do not have sufficient taxable income, typically at the start of a project, against which to set their costs and capital allowances.
  • The proposal, as announced at Budget 2013, is for RFES to be extended to 10 accounting periods for shale gas projects. The consultation proposes a similar extension for other onshore unconventional hydrocarbon projects.


Responses to the consultation document are due by 13 September 2013. Legislation is like to feature in Finance Bill 2014.

Other measures

Related non tax measures announced since October 2012 include new planning law guidelines and measures to ensure that communities which host the projects benefit directly. Details of these can be found here, here and here.


The proposals form part of a package of recently announced measures aimed to stimulate the exploration of shale gas reserves in the UK. Government clearly hopes though these measures will together ensure that the UK's shale gas reserves are fully explored, resulting in a positive knock on effect for both jobs and tax revenues.

The proposal to allow the new pad allowance to be set against other ring fenced (non shale) profits of the business appears aimed at ensuring that shale gas exploration is attractive to existing UKCS participants (who bring with them their existing skills and expertise) as well as new entrants to the market. Similarly the extension of the regime to all onshore unconventional hydrocarbons is presumably aimed at ensuring that the exploration of all unconventional reserves of oil and gas (not just shale gas) is maximised.

The level of allowance remains a key open question, and one on which Government will no doubt receive many representations.