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Chancellor confirms tax incentives for investment in shale and other onshore extraction activities

Out-Law News | 06 Dec 2013 | 10:03 am | 1 min. read

The final version of a new tax allowance for onshore oil and gas exploration activities will provide "meaningful support" to the nascent shale gas industry, an expert has said.

Tom Cartwright of Pinsent Masons, the law firm behind Out-Law.com, said that details of the new allowance provided as part of the Chancellor of the Exchequer's Autumn Statement showed that feedback from a recent consultation exercise had been taken into account.

"Many of the industry's concerns have been listened to in framing the new allowance, which will apply to all onshore extractive activities, not just unconventional gas," he said. "In particular, the ability to transfer allowances by reference to capital expenditure incurred on sites which are  unsuccessful will be welcomed. The definition of what constitutes capital expenditure by reference to which the onshore allowance is given is more generous than may have been anticipated."

"The draft legislation confirms that companies already engaged in offshore oil and gas development and production will be able to get tax relief for the expenditure they incur against their other taxable profits. This is a key incentive to encourage offshore licensees to move into exploration and development of unconventional gas. Companies can start generating entitlement to relief on any site which is authorised for development from today," he said.

The Chancellor announced the creation of a generous tax regime to "promote early investment" in shale as part of this year's Budget. The draft proposals, published for consultation in July, set out the details of a new shale 'pad' allowance, based on the existing field allowances for oil and gas production, and sought views on whether the new tax regime should apply to other onshore unconventional hydrocarbons as well as shale.

The Autumn Statement confirmed that a new tax allowance will be created to "incentivise investment in the exploration for, and development of, the country's indigenous oil and gas resources, including shale gas". This allowance will reduce the tax rate on a portion of a company's profits from 62% to 30% to "reflect the challenging nature of these developments", equating to 75% of its capital spend on an eligible project.

"Independent analysis shows that this allowance makes the UK tax regime for shale gas the most competitive in Europe," the paper said. "Evidence collected from operators also indicates that the allowance makes the effective tax rate for shale gas projects lower than in the US - making the UK an attractive, competitive opportunity for global investors."

"The work the government has done is already creating the right environment for companies to invest, as demonstrated by several recent announcements by large oil and gas companies who have made big investment commitments to explore the UK's shale gas resources," it said.

The Autumn Statement also reiterates the Government's commitment to a streamlined, safe and sustainable regulatory framework for shale; and to ensuring that local communities benefit from shale projects in their area.