Main points in the Budget 2009
- The North Sea Fiscal Regime
The North Sea Fiscal Regime is a taxation scheme levied on oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS). The taxation scheme is designed to stop profits from oil extraction activities and oil rights in the UK and UKCS being reduced by losses from other trading activities.
Corporation tax on upstream oil and gas profits is currently levied at 30 per cent.
A “ring fence” is placed around these profits. Normal rules would allow the profits to be reduced by losses from other activities accruing to other companies in the same corporate group. However, they do not apply in this instance as only losses from other oil extraction activities or oil rights are able to be set off against the profits. Therefore the full rate of corporation tax is levied on all upstream oil and gas profits (30 per cent). In addition a supplementary charge at the rate of 20 per cent is chargeable.
The Budget 2009 has introduced changes to the ring fence corporation tax effective from 22 April 2009 as described below.
- North Sea Fiscal Regime: Incentivising production
The Budget 2009 has introduced a new package of measures to encourage investment into gas and oil exploration in the North Sea.
The new “Field Allowance” will reduce the rate of tax paid in respect of certain challenging new developments. Specific types of new fields will receive a field allowance which, when the field is producing, can be offset against the supplementary charge. The supplementary charge is an additional charge of 20 per cent on a company’s ring fenced profits excluding finance costs.
The “Field Allowance” will apply to small fields, ultra heavy oil fields and ultra high temperature/high pressure fields.
The “Field Allowance” will apply to fields given development consent on or after 22 April 2009.
- North Sea: Accelerated decommissioning relief
This measure will affect companies that produce oil and gas in the UK and UKCS that have entered into arrangements to incur decommissioning expenditure in advance of the decommissioning process.
This is an anti-avoidance measure to ensure that tax relief for decommissioning will only be given in respect of those costs that relate to the work actually carried out in the accounting period.
The measure will come into effect on or after 22 April 2009.
Capital gains and ring-fenced assets
A new tax relief will be introduced for gains on ringfenced chargeable assets provided that the sale proceeds are reinvested in new ring-fenced chargeable assets. Ring-fenced chargeable assets are assets owned by the company and used in the oil or gas production.
This relief is also available if no chargeable gains arise on the swap of UK/UKCS licences. Whereas a relief for swaps of undeveloped licences has been available for years, this is to be extended to developed licences.
Licences are given by the UK Government to companies to explore for and exploit oil and gas resources within the UK and on the UKCS. Undeveloped licences are in relation to undeveloped areas and developed licences are in relation to developed areas.
This provision will come into effect on or after 22 April 2009.
Recent decision taken by the UK tax authorities
On 21 April 2009, the UK tax authorities said that they accepted that purchased “cushion gas”, which is kept in a gas storage facility to maintain pressure, can be regarded as part of the capital cost of a development.
This decision came after Centrica stated in February 2009 that it planned to spend approximately £1.2billion converting the Baird gas field in the southern North Sea into the UK’s second largest gas storage facility.
Therefore, if any of you are looking to develop a gas storage facility within the UK, then it may be eligible for this tax relief via plant and machinery capital allowances.
An asset is regarded as “plant and machinery” if it is used for carrying on the business of the company. Capital allowances are a relief scheme whereby a proportion of the costs incurred to buy plant and machinery are deducted from a company’s tax liability.