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Budget 2016: oil and gas tax reforms a missed opportunity to help industry, expert says

Out-Law News | 16 Mar 2016 | 5:14 pm | 2 min. read

Backdated reductions to the headline tax rates paid by oil and gas companies on their profits will make little difference to struggling North Sea firms, an expert has said.

Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that "very few operators" were currently paying the taxes cut by the government in today's Budget announcements. The supplementary charge on oil and gas profits has been cut from 20% to 10% and petroleum revenue tax (PRT), charged on the profits of older fields, has been "effectively abolished", in both cases backdated to 1 January 2016.

Ruddiman, who had previously called on the government to cut corporation tax for oil and gas firms to reflect the taxes paid by firms in other industries, said that both of these taxes were "designed for the good times". PRT in particular was targeted at 'super profits' from the exploitation of fields approved before 16 March 1993, he said.

"Anyone familiar with North Sea oil and gas will know there hasn't been much by way of super profits recently," Ruddiman said.

"The really disappointing part is that there were options available which would have been relatively inexpensive to the Exchequer. Industry would also have welcomed a deferral of the apprenticeship levy, which would have cost nothing; however that has been overlooked. All in all, it will add to a sense of frustration within the industry that its plight -–and its potential to drive future economic growth through export of technology and knowhow – is not properly understood in Whitehall," he said.

The apprenticeship levy is due to come into force in April 2017, and will be charged at 0.5% on the wage bills of the largest employers. Every business is to receive a £15,000 allowance to offset against the levy, with the effect that only those businesses with wage bills of £3 million a year or more will be subject to it. The proceeds of the levy will be used to fund the government's target of three million new apprenticeships over the next five years.

Before the changes were announced, oilfield profits faced a marginal tax rate of 67.5% for fields subject to PRT and 50% for other fields compared to a general corporation tax of 20%, despite a package of measures announced during last year's Budget. These changes included cutting PRT from 50% to 35% as of 1 January, reducing the supplementary charge to 20% and the launch of a £20 million seismic survey fund.

The government will now "permanently zero-rate" PRT; so that companies will no longer have to pay it, but those which decommission fields that have paid PRT in the past will still be able to benefit from decommissioning relief. It will also further reduce the supplementary charge, provide a further £20m in funding for seismic surveys and extend the Investment and Cluster Area Allowances, as well as undertake further work with the new Oil and Gas Authority (OGA) to reduce decommissioning costs and potentially modify decommissioning relief in order to "better encourage transfer of late-life assets".

Oil and gas industry expert Bob Ruddiman welcomed the government's "encouraging mood music" on engagement around decommissioning liabilities, but noted that detail was "thin on the ground".

"The 'certainty' on decommissioning promised in the Budget papers cannot come soon enough," he said.

"The industry cannot afford to become introspective, however. It must keep engaging with the OGA, with Holyrood and with Westminster to ensure that the message gets through," he said.