Finance Bill

Written evidence submitted by Oil & Gas UK (FB 22)

Introduction

Oil & Gas UK is the leading representative body for the UK offshore oil and gas industry with over 450 member companies right across the UK spanning exploration and production (E&P) companies and large, medium and small companies in the UK’s supply chain.

This briefing outlines our views on the Finance Bill 2016, explaining why it is so important to our industry, which is currently under significant pressure in the face of the global downturn, and asks the Public Bill Committee to ensure the Bill’s swift passage through parliament so that it receives Royal Assent as soon as possible.

We also ask the committee to note our concerns around how Diverted Profits Tax legislation may unfairly disadvantage our industry.

The Finance Bill 2016 and its importance to the UK’s oil and gas industry

Earlier this year, Oil & Gas UK welcomed the 2016 Budget announcements by the Chancellor which marked further progress in modernising the tax regime to reflect the increasing maturity of the UK continental shelf (UKCS). These measures support the industry’s resilience and achievements in an extremely challenging business environment and are consistent with the Government’s ‘Driving Investment’ roadmap, published in December 2014. Many of the clauses (54-59) in this year’s Finance Bill implement these positive Budget measures, and are welcomed by the wider oil and gas industry. These five clauses are outlined below.

· Clause 54 is the most significant for our industry, and reduces the rate of Supplementary Charge (SC) payable by Exploration & Production (E&P) companies on profits from 20% to 10%, with effect from 1 January 2016. Alongside the Ring Fence Corporation Tax (30%), the prevailing corporate tax rate is now 40%, and Petroleum Revenue Tax (PRT) has been effectively abolished by the Government, setting the rate to 0% on a permanent basis from 1 January 2016. Oil & Gas UK welcomes these measures, as they will continue to build on the industry’s achievements in improving efficiency in the face of low oil prices, boosting the sector’s competitiveness and helping to restore investor confidence.

Currently, many of our members are not making taxable profits due to the current depressed oil price, historically high investment levels and the increasing maturity of the UKCS. However, the benefits of these tax rate reductions will be felt in future years, contingent upon a recovery in operating margins.

· Clauses 56 and 59 enable the Government to expand the scope of Investment and Cluster Area Allowances respectively. These will enable both allowances to apply in a more effective manner to infrastructure assets located on the UKCS which are used to transport third party hydrocarbons. The Investment and Cluster Area Allowances (Finance Act 2015 s49, s50) provide a company partial relief against SC where they have made qualifying capital investment. However, these allowances require additional legislation to work well for infrastructure such as onshore terminals, offshore gathering systems, risers and pipelines upon which a great number of fields now depend. Oil & Gas UK welcomes these measures to improve the taxation status of infrastructure assets and urge the swift implementation of secondary legislation to bring these improvements into effect.

· Clauses 55, 57 and 58 are technical changes which clarify how the Investment, Onshore and Cluster Area Allowances respectively apply for companies using leased assets in their investment plans, and how the allowances work for investment on projects prior to a field being determined. Oil & Gas UK supports these changes alongside industry.

Diverted Profits Tax

Diverted Profits Tax (DPT), which was legislated in Finance Act 2015, applies to the ring-fence oil and gas regime at the prevailing rate of 55%. Oil & Gas UK is concerned that some of our member companies undertake commercial arrangements to manage risk across multinational groups (called ‘captive insurance’) which may unintentionally fall foul of the current DPT rules. We also feel that the current 15 percentage point disparity between DPT and headline ring-fenced rates of taxation unfairly penalises our industry and is unequitable, given that the DPT rate stands at only 5 percentage points for other companies. We have written to HM Treasury to express these concerns and their response has been to assure us that our industry is not unfairly disadvantaged by this regime. Despite their response, we remain concerned and will monitor the impact of this regime closely.

Conclusion

Our member companies are working extremely hard to reduce cost and make our operations more efficient in order to manage their way through the global downturn and the measures in the Budget 2016 and the consequent Finance Bill 2016 are very welcome and necessary, to help ensure the UKCS has a sustainable future as it matures. Until the Finance Bill passes, companies will not be able to benefit from the positive changes outlined above, for example in relation to their decommissioning security provisions for which money has to be set aside based on tax calculations. Given the benefits of the package cannot be factored into company plans until the Bill is legislated we hope that it will progress through Parliament and receive Royal Assent as swiftly as possible.

July 2016

 

Prepared 8th July 2016