Cut corporation tax on oil and gas in line with wider industry, says expert

Out-Law News | 15 Mar 2016 | 5:01 pm | 2 min. read

The UK faces "a flight of capital, skills and technology" without urgent action to cut the taxes paid by the oil and gas industry, an expert has said.

Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, called on the government to cut the headline corporation tax paid by oil and gas firms in order to bring it into line with other industries and ease the pressure on businesses facing continuing low oil prices. The marginal tax rate on oilfield profits remains 67.5% for fields subject to petroleum revenue tax (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.

"Leaving aside the fact that many in the industry thought this package was woefully inadequate when crude was $60 a barrel, we are now in $30 a barrel territory," Ruddiman said. "The fact is that few businesses are actually subject to these headline rates and few feel the benefit."

"While few would argue that a decline from $100 oil has economic benefits, the impact of $30 oil is only just starting to be felt. Clearly there must be scope for further tax reduction and flexibility amid unprecedented volatility in global oil prices – a lack of succour for the industry will weigh heavily on UK output, while a well-incentivised industry could be world-beating," he said.

The government should also consider a "deferred exemption" to "soften the blow" of the planned apprenticeship levy on North Sea businesses, and carefully review the impact that the proposed blanket restriction on tax relief for interest payments would have on energy and other capital-intensive businesses. These measures "could have a disproportionate effect on oil companies whose profitability has already been sharply eroded by the fall in oil prices", Ruddiman said.

Last week, industry body Oil and Gas UK called for a permanent reduction of "at least 20 percentage points" in the headline rate of tax payable on UK oil and gas profits, along with the complete removal of PRT payable on older fields. The UK government cut PRT from 50% to 35% as of 1 January 2016 as part of the package of measures announced as part of the 2015 Budget, which also included reducing the supplementary charge to 20% and the launch of a £20 million seismic survey fund.

An apprenticeship levy, which will be charged at 0.5% on the wage bills of the largest employers, is due to come into force in April 2017 and will be used to fund the UK government's target of three million new apprenticeships over the next five years. 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. Once the levy is in force, large employers in England will receive digital vouchers based on the amount that they pay into the system to fund their own apprenticeship places while similar schemes will operate for the devolved administrations.

HM Revenue and Customs (HMRC) is due to publish new rules on interest deductions in its upcoming 'business tax roadmap', which will be based on "best practices" identified by the Organisation for Economic Cooperation and Development as part of its work to combat tax avoidance by multinational businesses. The proposals as drafted would be a "major change" to the UK corporate tax regime, and would present particular challenges for capital-intensive businesses, according to an early consultation paper published by the UK tax authority.