UK: Oil & gas tax cuts revealed in Budget 2016

UK’s Chancellor of the Exchequer George Osborne has presented his Budget 2016 to the UK parliament in which it has been revealed that the oil and gas industry will be aided by tax cuts worth £1 billion.

In his budget statement he said that the government believed in making the most of the UK’s oil and gas resources and the industry which supports thousands of jobs.

Osborne said: “The Oil and Gas sector employs hundreds of thousands of people in Scotland and across our country. In my Budget a year ago, I made major reductions to their taxes. But the oil price has continued to fall. So we need to act now for the long term. I am today cutting in half the Supplementary Charge on oil and gas from 20% to 10%. And I’m effectively abolishing Petroleum Revenue Tax too. Backing this key Scottish industry and supporting jobs right across Britain. Both of these major tax cuts will be backdated so they are effective from the 1st of January this year, and my HF the Exchequer Secretary will work with the industry to give them our full support.”

 According to Osborne’s budget, the government will:

• effectively abolish Petroleum Revenue Tax by permanently reducing the rate from 35% to 0%, to simplify the regime for investors and level the playing field between investment opportunities in older fields and infrastructure and new developments. The change will take effect from 1 January 2016
• reduce the Supplementary Charge from 20% to 10%, to send a strong signal that the UK is open for business and in recognition of the exceptionally challenging conditions that are currently facing the sector. The change will take effect from 1 January 2016
• provide a further £20 million of funding for a second round of seismic surveys in 2016-17, as announced by the Prime Minister in January, to build on the success of the seismic programme in 2015 and encourage exploration in under-explored areas of the UKCS
• extend the Investment and Cluster Area Allowances to include tariff income, in order to encourage investment in key infrastructure maintained for the benefit of third parties
• provide certainty that companies will be able to access tax relief on their costs when they retain decommissioning liabilities for an asset after a sale, to encourage new entrants for late-life assets and the development of late-life business models
• build on the new decommissioning powers of the Oil and Gas Authority (OGA) by undertaking further work with the OGA and industry to reduce overall decommissioning costs, to deliver significant savings for industry and the Exchequer. If significant progress can be made, the government will explore whether decommissioning tax relief could better encourage transfers of late-life assets

According to the statement in the Budget 2016, the government expects that “this radical package” will ensure the UK has one of the most competitive tax regimes for oil and gas in the world, supporting jobs and investment and “safeguarding the future of this vital national asset.”

While the government feels the package is a radical one, not everybody agrees.

Derek Leith, EY Head of Oil & Gas Tax feels the measures announced fall short for the oil and gas industry.

He said: “Today’s announcement of a 10% cut in corporate taxes, and the effective abolition of Petroleum Revenue Tax for the UK oil and gas sector will fall short of industry expectations. Since 2011 there has been a compelling case to lower the tax burden to recognise the maturity of the basin, the high cost base, and the falling production efficiency of older assets which support vital offshore infrastructure.

“The case for a significant change to the oil and gas regime has been exacerbated by the collapse in the oil price. Decisive action by the government was required to send a strong signal to investors.

“Today’s changes, while welcome, are a missed opportunity to be more radical and abolish supplementary charge completely which would have simplified the regime by sweeping away the complexity of investment allowance and its interaction with decommissioning losses.”

Leith added: “The industry will be very relieved that the proposed restriction on trading losses will not apply to oil and gas companies, and appreciative of the announcement clarifying tax relief on retained decommissioning activities.”