Budget 2015: UK chancellor announces 'bold and immediate' oil and gas tax reform

Out-Law News | 19 Mar 2015 | 9:45 am | 2 min. read

A package of measures designed to ease the tax burden on oil and gas companies operating on the UK Continental Shelf (UKCS) will save the industry £1.3 billion over the next five years while boosting production by 15%, the chancellor of the exchequer has announced.

The changes include the introduction of a single 'investment allowance' from next month, as well as a reduction in the petroleum revenue tax (PRT) rate from 50% to 35% from next year. The government will also cut the supplementary charge on company profits from 30% to 20% "with immediate effect", backdated to January; and invest £20 million in new seismic surveys of under-explored areas of the UKCS, George Osborne said in his 2015 Budget speech.

Oil and gas industry expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that the new tax reliefs would be welcomed by firms recently hit by falling oil prices. However, he said that the incoming Oil and Gas Authority (OGA) would have plenty to do to "keep global investors interested in a mature basin".

"Any tax relief on expenditure will be welcome and has potential, in conjunction with government support for seismic, to boost much-needed exploration," he said. "The chancellor will win praise from many operators for having recognised we're in a position where some fields which need investment could be closed irreversibly without action - although whether they see this action as enough is another issue. There is significant work to be done by industry and the OGA to boost efficiency and manage costs appropriately."

"Changes to the investment allowance and a reduction in the supplementary tax charge will also be welcome. It's only fair that a strategically important industry which paid its fair share in the good times is properly supported now. This government has shown itself to be supportive of systemically important industries facing tough times in the past, and there's no reason the same logic shouldn't apply to oil and gas," he said.

Oil and gas firms are currently subject to ring fence corporation tax (RFCT) at 30% of profits, less allowances for capital expenditure. They are also subject to an additional supplementary charge, first introduced in 2001, on adjusted ring fence profits, as well as PRT on profits from certain individual oil fields. Various field allowances give firms relief on the supplementary charge for a certain amount of their profits from projects that are economically viable, but commercially marginal given current tax rates. Without these field allowances, firms pay an effective 60% headline tax rate on non-PRT fields, or 80% on PRT fields.

The new investment allowance is expected to replace the various field allowances with a single, simple means of incentivising investment. It is expected to be a basin-wide, capital expenditure-linked measure that will cover exploration, appraisal, infrastructure and development spending. The immediate reduction in supplementary charge rate will effectively reduce the headline rate of tax payable by firms to 50% on non-PRT fields.

In the Budget document, the government said that its changes would "send a strong signal that the UK is open for business and ensure the [UKCS] remains competitive as the basin matures" and "extend the life of key infrastructure".