UK gov’t to allow transferable tax history to North Sea oil and gas operators

As a response to pressure from the oil and gas industry, the UK government will allow the long-awaited transferable tax history (TTH) policy in order to encourage investment in the North Sea. 

In his presentation of the Autumn Budget 2017 to the Parliament on Wednesday, the Chancellor Philip Hammond said the government would introduce ‘Transferable Tax History’ for transfers of oil and gas fields in the North Sea.

This mechanism will apply to deals that complete on or after November 1, 2018.

The oil and gas industry has repeatedly called for this mechanism to be introduced. In a final plea for this tax policy the Oil & Gas UK, a trade association for the UK offshore oil and gas industry, on Sunday said this could save the UK taxpayer millions of pounds by deferring the decommissioning of mature oil and gas fields.

During his speech, Hammond called this initiative “an innovative tax policy that will encourage new entrants to bring fresh investment to a basin that still holds up to 20 billion barrels of oil.”

According to the government, this will allow companies selling North Sea oil and gas fields to transfer some of their tax payment history to the buyers of those fields. The buyers will then be able to set the costs of decommissioning the fields at the end of their lives against the transferable tax history.

This will level the playing field between buyers and sellers of oil and gas fields, providing new investors in the UK Continental Shelf with certainty on the tax relief available for the decommissioning costs.

In recent years, the UK government has taken a number of steps to create the right environment for oil and gas producers to maximize economic recovery of the remaining hydrocarbons in the basin.

TTH would permit a seller to transfer an appropriate amount of their tax history along with an asset. This would provide the buyer with certainty that they will be able to access tax relief on their decommissioning costs, putting them on a similar footing to the seller. This would help encourage transactions, helping to protect jobs and maximize economic recovery from the UKCS.

Oil & Gas UK’s analysis of 23 UK asset transfers since 2011 supports the introduction of the policy. Namely, the analysis reveals that deals have extended field life by almost five years on average. Some fields have gone on producing for up to an extra 14 years, generating additional value to the Exchequer and providing continued highly skilled employment across the UK, according to Oil & Gas UK.

How TTH will work

The TTH mechanism will be set out in draft legislation in a technical consultation paper in spring 2018. Following technical consultation, the government intends to legislate for TTH in Finance Bill 2018 to 2019, with TTH applying to deals where the transfer of the license has been approved by the Oil & Gas Authority on or after November 1, 2018.

Transfer of tax history will be optional and the precise amount of tax history to be transferred from the seller to the buyer will be a matter of negotiation between the parties involved.

If multiple fields are being acquired in a deal, the tax history transferred to the buyer will be allocated to each field at the time of acquisition. Once the transfer has taken place, the tax history transferred to the buyer will no longer be available to the seller.

Speaking of recent North Sea deals, Shell completed the sale of a package of its UK North Sea assets to Chrysaor at the beginning of this month. In addition, BP this week sold its interest in the Bruce, Keith, and Rhum fields in the UK North Sea to Serica Energy.

Commenting on the government’s commitment to deliver the policy, Alex Tostevin, Tax partner at law firm Dentons, said: “The oil & gas industry will be pleased to hear that the government is going to legislate to enable operators to transfer their tax history to other market participants, however, quite how useful this will be will be down to the detail of the legislation. To the extent that any person taking over a field from another person who has no positive tax-paying history (which is the case for many North Sea operators), the effect of this may be marginal.”

Offshore Energy Today Staff