Currently, profits for oil and gas companies are subject to corporation tax (at 30%) and a supplemental charge (currently 32%). Certain older fields are also subject to Petroleum Revenue Tax (PRT) at 50% (PRT was replaced with the supplemental charge for fields that were given development consent on or after 16 March 1993). Any company currently subject to PRT is allowed to deduct any PRT paid from its profits when calculating its income for corporation tax purposes.
The effect of the allowance is to reduce the amount of profits subject to tax for the supplemental charge and PRT (it will not affect the amount of profits subject to corporation tax). In relation to income subject to the supplemental charge, it will reduce the profits subject to tax up to a maximum of £250m (a potential relief of £80m), and for PRT up to a maximum of £500m (a potential relief of £160m). The increased relief for companies subject to PRT recognises the fact that these older fields are subject to a higher tax rate of 50%.
The exact amount of the allowance available will depend upon the field in question, taking into account its size and cost. In summary, the allowance is available to incremental projects which:
- increase expected production from offshore oil or gas fields (as described in a revised consent for development which is authorised by the Department of Energy & Climate Change) on or after 7 September 2012; and
- have verified expected capital costs per tonne of incremental reserves in excess of £60.
Note that the maximum level of allowance will be £50/tonne and will only be available to projects with verified expected capital costs of £80/tonne or above.
This year's Budget announced several measures intended to increase investment in the oil and gas sector in fields that were considered, because of the high tax rates, not commercially viable. This included an increase in the small field allowance and a field allowance for new large deep water fields (aimed at fields west of Shetland). This announcement is the first in relation to these proposed new measures.
The Chancellor had been under pressure from the oil and gas industry to provide incentives after the increase in the supplemental charge to 32% in 2011 (to help fund a drop in fuel duty. The announcement shows that the Chancellor is unlikely to lower the charge below 32%, which the oil and gas industry had been lobbying for, but rather introduce targeted measures to offer relief in relation to certain fields.