The UK Government recently published its proposals and draft legislation for tax provisions relating to onshore shale gas  following extensive discussion with the industry. Along with the provisions of the draft  legislation in the Finance Bill 2014, the results of the consultation process was published on 10  December 2013.

The aim of the new regime is to provide certainty for those involved in exploration, appraisal and  production and at the same time facilitate commercialisation of a sector which has high initial  capital requirements. These aims are to be recognised through a number of measures, which include  extending the time period for supplementary expense and the effective reduction/ elimination of the  supplementary charge for shale gas production (thereby bringing the tax rate down from 62% to 30%).

Supplementary  expense

Companies involved in a ring fence trade enjoy the benefit of an uplift on losses so as to maintain the benefit of those losses over the time it would take to set them against income from extraction. The uplift  is 10% and was originally carried forward for 6 accounting periods. Due to the longer timescale  envisaged for returns on shale production, the time limit of carry forward was extended  to 10  accounting periods from the Budget in 2013. It is now proposed that this extension shall apply to  all onshore oil and gas activities. This would have the effect of lessening  the burden on  operators who have interests in onshore conventional hydrocarbons as well as unconventional  hydrocarbons such as shale gas.

Pad/onshore allowance

This allowance is being introduced  for new sites for which approval is given from 5 December 2013  in  order to encourage investment in shale gas exploration for sites which are otherwise not  commercially viable due to the higher tax rates when the supplementary charge is taken into  account. The effect is to give relief against the supplementary charge, potentially reducing the  effective tax rate to 30%. This is achieved through making a proportion of profit (generally equal  to 75% of the capital spend) deductible. Allowances which are not activated can be carried forward  to future periods, or allowances can be used against profits from other pads. In conjunction with  the introduction of this relief, existing field allowances  will be abolished for new sites.

Community benefit

Following announcements made by the Chancellor earlier in 2013, it has been agreed with the  industry that for the exploration phase of any new shale gas well, a direct payment of £100,000 per well would be paid by the operator for local community benefit. In addition, once the  well becomes productive, 1% of revenue would be provided for such community benefit. Consultation and outcome The consultation process which resulted in the provisions proposed involved many of the major  operators or potential operators in the area of shale gas exploration and  production. There is in  these provisions recognition of the need to address the commerciality and timeframes required for  the exploitation of this resource. The  draft legislation will not yet pass for a number of months.  However, the clear intention is to have the regime, particularly for Pad Allowances, on a new  footing immediately in order to support new investment in the sector.