Faced with the challenges of a low oil price, high tax and a mature basin, there was a palpable sense of anticipation in the oil and gas sector ahead of this year’s Budget. While there was some good news, in the form of the ‘effective abolition’ of Petroleum Revenue Tax and cut in Supplementary Charge to 10%, there was disappointment that George Osborne had not gone further in abolishing Supplementary Charge and doing more to encourage the development of the UKCS by simplifying and bringing greater clarity to the future tax regime.
George Osborne’s announcement means an effective rate of tax of 40% for all fields (reduced from 67.5% for PRT fields and 50% for non-PRT fields). This remains at odds with the United Kingdom’s standard Corporation Tax payers, who will benefit from a reduction in Corporation Tax from 20% to 19% next year and 17% in 2020.
If Supplementary Charge had been abolished then Investment Allowance would have been abolished too as it only applies against Supplementary Charge. This would have led to a simpler and more streamlined regime, with companies continuing to pay the higher ‘oil and gas’ Ring Fence Corporation Tax rate of 30%.
Though, why the oil and gas industry continues to pay a super-profits tax when the days of large fields and bumper production peaked in the mid-1990s is a moot point.
The Chancellor acknowledged, but did not commit to tackle, the biggest barrier to late-life asset sales – decommissioning tax relief and tax history. The industry lobbied for the ability to transfer a company’s tax history for an asset when the asset is sold during its late-life stage. The Chancellor stated that this will only be explored if significant progress can be made by the industry and the Oil & Gas Authority to reduce the overall cost of decommissioning. This continues to block efforts by new players to enter the market other than through corporate acquisition.
In order to make a real impact on investment and to encourage asset transfers and the entrance to the sector of new players, the Government needs to simplify the regime further and create a certain investment environment. We are in a low oil price economy in a mature basin and investors need certainty that the tax regime will only improve and not worsen when, as the industry anticipates, the oil price rebounds.
Although the Chancellor cannot bind successive Governments he could pledge to lock in these new arrangements for the tenure of the current Government and our foreseeable future.
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