Budget Notes

BN09 NORTH SEA FISCAL REGIME

Who is likely to be affected?

1. Oil and gas companies that operate in the UK or on the UK Continental Shelf.

General description of the measure

2. Legislation will be included in Finance Bill 2008 to give companies greater access to corporation tax (CT) and Petroleum Revenue Tax (PRT) relief for the costs of decommissioning North Sea infrastructure. This will be achieved by extending the period in which CT losses can be carried back, extending the post-cessation period in which costs can be claimed for CT purposes and extending the scope for PRT relief where companies are called upon to meet such costs as a result of a default by another company.

3. Fields that are never going to be liable for PRT will be able to elect to come out of the PRT regime. There will also be a simplification of the PRT returns regime to reduce the level of information companies have to provide.

4. Capital allowances rules will change to provide 100 per cent first-year allowances for new expenditure on long-life assets and mid-life decommissioning. Existing long-life assets will get the same 10 per cent writing down allowance as is proposed for non-oil and gas production assets (see BN08).

Operative date

5. As there are a number of proposed changes, there are range of operative dates:

•    the decommissioning changes have effect respectively for CT losses incurred in accounting periods beginning on or after 12 March 2008; for ring fence CT trades that cease on or after 12 March 2008; and for PRT default expenditure incurred on or after 30 June 2008;

•    elections to come out of the PRT regime may be submitted on or after the date Finance Bill receives Royal Assent;

•    the changes to the reporting requirements for simplified PRT returns will have effect for chargeable periods ending on or after 30 June 2008; and

•    the capital allowances changes will have effect for expenditure incurred on or after 12 March 2008.

Current law and proposed revisions

6. Under the current law as it relates to decommissioning:

•    companies can carry decommissioning losses back three years;

•    after their ring fence trade has ceased, companies can only get tax relief for decommissioning costs incurred within three years of the trade ceasing; and

•    where a company is liable to meet decommissioning costs in respect of a field and defaults on its obligation, companies that have previously operated in that field can be held liable for the costs. In such a situation, no relief is available for PRT purposes for those companies meeting the cost because of the default of others.

7. Under the current law as it relates to the operation of PRT:

•    even if a field will never be liable to PRT, because of the allowances available to it, the field remains within the PRT regime and has certain reporting obligations; and

•    companies are required to return to HM Revenue & Customs (HMRC) details of all sales of oil to enable HMRC to have sufficient information to calculate a market value for non-arm's length sales.

8. Under the current law as it relates to the capital allowances regime for assets used for the purposes of oil and gas production in the North Sea:

•    expenditure on long-life assets (those with a useful economic life of 25 years or more) and expenditure on decommissioning which is not part of a programme of abandonment of the field (so-called 'mid-life decommissioning), do not qualify for the 100 per cent first-year allowances which applies to other capital spending in oil and gas production in the UK Continental Shelf; and

•    long-life assets receive 24 per cent allowances in the first year and 6 per cent thereafter. Mid-life decommissioning receives 25 per cent allowances on a reducing balance basis.

9. The new rules for decommissioning will:

•    allow companies to carry back decommissioning costs to 17 April 2002, the date of the introduction of the supplementary charge for profits from oil and gas production in the UKCS;

•    provide for companies to claim the post-cessation costs of decommissioning fields for tax purposes until such time as the decommissioning has been properly completed; and

•    provide PRT relief where an ex-participator in a field is obliged to meet decommissioning costs in a field because of default by a current participator.

10. The new rules for the operation of PRT will:

•    allow companies to elect to come out of the PRT regime on the basis that such fields will not become liable to PRT, because of the level of allowances available, for the rest of the life of the field. Companies will have to provide information in support of the election with the final decision resting with HMRC; and

•    only require companies to make returns to HMRC of details of sales of certain types of oil, what is referred to in the legislation as Category 2 oil.

11. The new rules for capital allowances for assets used for the purposes of oil and gas production in the UKCS will:

•    extend the 100 per cent allowances regime to new expenditure on long life assets and mid-life decommissioning; and

•    increase the rate of writing down allowances for existing long life assets from 6 per cent to 10 per cent, in line with the wider capital allowances changes announced today (see BN08).

Further advice

12. If you have any questions about this change, please contact Mike Crabtree on 020 7438 6576 (email: mike.crabtree@hmrc.gsi.gov.uk) or Paul Philip on 020 7438 6993 (email: paul.philip@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk