The proposed transferable tax history mechanism will allow companies selling North Sea oil and gas fields to transfer some of their tax payment history to their buyers. This means that buyers will be able to offset the costs of decommissioning against the transferable tax history.
HM Treasury’s announcement is intended to encourage fresh investment in order to release the estimated 20 billion barrels of oil remaining on the UK Continental Shelf (UKCS) and maximise economic recovery.
Under the current rules, tax relief for decommissioning expenditure is based on the tax history of the company incurring the expenditure. The government believes that the introduction of transferable tax history will provide potential buyers with more certainty that they will be able to access tax relief on their decommissioning costs.
Previously, potential buyers had to assess whether they would be able to generate sufficient tax history over the remaining life of the acquired asset to cover decommissioning costs, which can be a difficult assessment on a late life asset.
How will transferable tax history work?
Transferable tax history will allow the seller of a UK or UKCS oil or gas field to transfer some of its tax history on a sale to the buyer. Transfer of tax history will be optional, and the amount transferred will be a matter of negotiation between the parties subject to safeguards that:
- the amount transferred must be agreed at sale and cannot subsequently be adjusted
- the amount which can be transferred cannot be 'excessive' and will be capped at an estimate of the buyer’s share of the decommissioning costs, verified by an independent third party.
The transferable tax history will not immediately become part of the buyer’s tax history on transfer. It will be ‘activated’ once two conditions are fulfilled:
- the transferred field permanently ceases production
- the total loss incurred on decommissioning of the field must be greater than the buyer’s post-acquisition profits.
This prevents the transferable tax history being utilised by losses from another field.
What are the next steps?
It is expected that draft legislation will be published this spring. HM Treasury has proposed that, once the legislation is enacted, it will have retrospective effect for deals completing on or after 1 November 2018.
The government is also due to launch a technical consultation on allowing a petroleum revenue tax deduction for decommissioning costs incurred by a previous licence holder. This will support transfers of assets where the seller retains the decommissioning liability.
While the legislation will need to be carefully considered to protect the taxpayer from the potential for ‘gaming’, the initiative is anticipated to be an important step towards helping to facilitate the OGA’s aim that ‘the rights assets are in the right hands’ with a view to maximising economic recovery from the North Sea.