A number of measures and proposals relating to oil and gas were announced in Budget 2016 earlier today. The most obvious changes from a tax point of view are:
- Petroleum Revenue Tax is to be ‘effectively abolished’ by permanently reducing the rate from 35% to 0%, with effect from 1 January 2016.
- The rate of the Supplementary Charge is to be reduced from 20% to 10%, again with effect from 1 January 2016.
Both of these measures are to be included in Finance Bill 2016. These reductions are a response to market conditions and – in relation to PRT – an attempt to simplify the tax regime and ‘level the playing field’ between investment opportunities in PRT and non-PRT fields. The reasoning behind reducing the rate of PRT to zero (rather than abolishing the tax entirely) is to preserve the availability of PRT reliefs on decommissioning for companies that have previously paid PRT, by keeping the tax on the statute books. It should be noted that even if PRT had been abolished, the Government would still have effectively been obliged to pay reliefs to many oil and gas companies under the provisions of their Decommissioning Relief Deeds.
There were also a number of measures announced in relation to decommissioning:
- The Government will provide certainty that companies will be able to access tax relief on their costs when they retain decommissioning liabilities for an asset after a sale. This is intended to encourage new entrants for late-life assets and the development of late-life business models, and had been specifically suggested by Oil & Gas UK prior to the budget. The Government is intending to publish a technical note that clarifies the interpretation of existing legislation.
- Further work will be undertaken with the Oil and Gas Authority and industry to reduce overall decommissioning costs, building on the OGA’s new decommissioning powers. This is intended to reduce costs to industry and the treasury, and seems likely to relate to the proposal in the Autumn Statement to give the OGA additional powers to scrutinise companies’ offshore decommissioning plans and take action to ensure they represent value for money.
- If significant progress can be made in relation to the above, the Government will explore whether decommissioning tax relief could better encourage transfers of late-life assets. This is currently the most vague but potentially the most interesting of the announcements. It may be that it reflects the other suggestion OGUK has made in this area, which was that decommissioning tax relief should be allowed to transfer with the sale of an asset, which would be a significant change.
The other announcements relating to oil and gas were:
- The Investment and Cluster Area Allowances will be extended to include tariff income, in order to encourage investment in key infrastructure maintained for the benefit of third parties. This will be included in Finance Bill 2016.
- A further consultation on the application of the new interest restriction rules in relation to the oil and gas ring-fence will be conducted to ensure that existing commercial arrangements within the ring-fence are not adversely affected.
- A further £20 million of funding for a second round of seismic surveys in 2016-17 (as previously announced on 28 January 2016).
- The Government is willing to consider proposals for using the UK Guarantees Scheme for infrastructure where it could help secure new investment in assets of strategic importance to maximising economic recovery of oil and gas. This is a government scheme designed to encourage crucial infrastructure projects, which has been extended to 2021. Any oil and gas related proposal would have to comply with the existing requirements of the scheme, which operates by providing government support in the form of an unconditional and irrevocable financial guarantee of principal and interest in favour of a lender to a UK infrastructure project.