In his budget yesterday the Chancellor finally committed to the introduction of Decommissioning Relief Deeds (“Deeds”) which will give the oil and gas industry certainty over decommissioning tax relief on the UKCS. The Government expects contracts to be signed later in 2013. Under these Deeds, if the tax relief currently available were to be reduced in future, the Government would make a compensating payment.
Uncertainty over future tax relief makes it harder for assets to change hands, ties up funds in decommissioning security, limits the funds available for new ventures and deters incremental investment - the promise of this certainty has already begun to unlock deals within the sector and is expected to lead to billions of pounds of further investment with consequent gains for the Exchequer.
The Chancellor has now firmly committed to the introduction of Deeds, a mechanism put forward by industry, and developed by the Treasury in close consultation with industry over the last two years. (See our LawNows Decommissioning Tax Relief – Another Step Forward, HM Treasury Consults on Decommissioning Relief Deeds and An exceptional outcome for the UKCS.
The Budget confirms that the Government will also:
- Extend the availability of decommissioning tax relief to onshore terminals of offshore installations.
- Allow HMRC to release taxpayer information where this is necessary to support operation of the Deeds (the Deeds rely on a certification process by which PRT tax history will be established and transferred from the defaulter to the person who picks up the liability in the event of default).
- Amend the subsidy rules for decommissioning security arrangements to allow for post-tax securitisation.
- Remove IHT charges for property held in decommissioning security arrangements.
- Introduce measures to limit relief between connected parties.
- Drafts of the proposed legislation and the Deed itself were attached to the Government’s second consultation paper. Discussions have been ongoing with Government on the detail of these proposals, including a number of technical changes to the tax code, to ensure that they correctly implement the Government’s policy and create sufficient certainty to be relied on by industry. We look forward to seeing amended draft legislation included in Finance Bill 2013 when that is published next week. A further draft of the Deed is also expected to be placed before Parliament next week. At this point industry will need to scrutinise the draft carefully for any further clarification which may be required. However, to a large extent the draft appears to meet industry’s requests.
- Arrangements for the signing of Deeds will need to be made – it is anticipated that this will occur after the summer recess.
- Industry will now need to give serious attention to the amendment of existing decommissioning security arrangements to reflect this new certainty, thus reducing the amount of security which licensees need to provide to others who are concerned about being made to pick up this liability on a default. This will be a significant exercise for the industry, involving the amendment of a large number of existing DSAs. The Oil & Gas UK working group is developing standard wording for Oil & Gas UK’s own standard DSA which may assist in this process.