The Government has offered oil and gas explorers a welcome increase in the Ring Fence Expenditure Supplement (RFES).

Oil and gas explorers will often incur losses or expenditure at a point in time when they do not have any or sufficient profits against which to offset those losses / expenditure. The losses / expenditure are often therefore carried forward, potentially for a number of years. The RFES compensates oil and gas companies for the fact that the value of unutilised losses / expenditure declines in real terms over time when not used by 'inflating' the value of the expenditure / losses by 6% a year (for up to 6 years). The Government has announced that the RFES will now be increased from 6%to 10%.

The impact of the announcement was immediate; several companies, which had previously announced a halt to gas and oil exploration projects in the UK following the increase in the supplementary charge unveiled in the 2011 Budget, have now announced that they have resumed or plan to resume those projects.

The Government has indicated that this change may mark the first of a number of changes (including in relation to field allowances) to support "marginal" projects.

The full value of the concession to industry, and therefore the cost to the Exchequer, is not wholly clear - the relevant Treasury press release refers to a cost of "around £50 million a year by the end of the forecast period (2015-16)".

A link to the press release can be found here.

Current law


Broadly, the RFES allows qualifying companies involved in oil or gas exploration, or which are in the development phase in the UK or on the UK Continental Shelf that do not yet have any taxable income for ring fence corporation tax purposes against which to set their exploration, appraisal and development costs to effectively add a 6% per annum supplement to the value of unused expenditure carried forward from one period to another. The aim is to maintain the time value of exploration, appraisal and development costs. The RFES is available for unused expenditure (relating to any post 1 January 2006 oil and gas extraction activities) for a maximum of 6 accounting periods.

Field allowances

The field allowance is intended to provide incentive for the development of new but commercially marginal oil and gas fields. Finance Bill 2011 extends field allowances to investment in fields that have previously been decommissioned.

Broadly, the allowance reduces the amount of ring fenced profits for the accounting period in respect of which the supplementary charge (which following Budget 2011 is now levied at the rate of 32%) is made.

It is worth noting that the field allowance is only available for particular types of "marginal" oil and gas fields:

  • Ultra heavy oil fields;
  • Ultra HP/HT (high pressure / high temperature) fields;
  • Small oil or gas fields; and
  • Deep water gas fields.

The maximum field allowance claim is dependent on the type of field concerned.  For example, the total field allowance available for a new ultra heavy oil field is £800 million whereas the total field allowance for a Ultra HP / HT field will be between £500 million and £800 million depending on certain field related technical parameters.


The value of the RFES will be increased to 10%.

The Government has acknowledged that the ability of a company to benefit fully from the field allowance is dependent on whether a company has sufficient current taxable ring fenced income against which to off-set expenditure. The Government expects that the increase in the RFES will assist existing field allowances work more effectively and equitably to support investment in marginal fields. The Government will engage with oil and gas companies on the case for new categories of field qualifying for field allowance.

What's next?

It appears that the increase in the RFES announced yesterday may be the first of a number of measures. The Government confirmed that it would further engage with oil and gas companies - with a particular focus on the case for further support for marginal projects. Justine Greening, Economic Secretary to the Treasury, noted that the Government was committed to ensuring that "current allowances work effectively and equitably" and that the change "lays the groundwork for further constructive discussions on field allowances."

It is to be hoped that the review of the scope of fields qualifying for the field allowance will result in more good news for the sector.