Oil and gas taxation: reduction in Petroleum Revenue Tax and supplementary charge
Published 16 March 2016
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Who is likely to be affected
Oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS).
General description of the measure
This package of measures will permanently zero rate Petroleum Revenue Tax (PRT) payable in respect of profits from oil and gas production in the UK and UKCS - a reduction from 35%, and further reduces the rate of supplementary charge payable in respect of adjusted ring fence profits from 20% to 10%.
Additionally, it will give HM Revenue and Customs (HMRC) a power to extend the definition of ‘relevant income’ for the cluster area and investment allowances by secondary legislation, to enable tariff income to be included to activate the allowances.
Policy objective
Building on the £1.3 billion package of fiscal reforms delivered at March Budget 2015, these measures deliver the next stage of reform and ensure the UK is in a strong and competitive position, protecting jobs and investment and safeguarding the future of the North Sea industry. These measures support the government’s objective of providing the right conditions to maximise the economic recovery of the UK’s oil and gas resources at a time when the industry is facing considerable challenges.
The cuts to headline tax rates will simplify the tax regime for investors, and level the playing field between investment opportunities in older fields and infrastructure and new developments. They will increase the attractiveness of projects in the UKCS relative to investment opportunities elsewhere, encouraging investment in the UK and UKCS, and could lead to increased production of oil and gas, helping to increase the UK’s energy security, balance of payments and supporting jobs and supply chain opportunities.
The extension to relevant income will encourage investment in infrastructure maintained for third parties. Enabling allowances to be activated by tariff income (payments by a third party for access) will improve the incentive for owners to maintain investment in infrastructure which is critical to the protection of existing production and development of new projects.
The taking of a power to introduce this extension by secondary legislation will provide the opportunity for government to take representations from industry on how best to address issues of allocation and transparency, whilst not being bound to a Finance Bill timetable.
Background to the measure
At Autumn Statement 2014, the government published the conclusions of the HM Treasury review of the oil and gas fiscal regime in “Driving investment: a plan to reform the oil and gas fiscal regime.” The Review concluded that the government should keep the rate of PRT under review and consider reducing the rate when fiscal conditions allow, to level the playing-field between investment opportunities in fields which are subject to PRT and opportunities in other fields and ensure key assets attract the right level of investment. A reduction in the rate of PRT from 50% to 35% was announced at Budget 2015.
“Driving Investment” also recognised that the government would need to reduce the overall tax burden on the industry over time to maximise economic recovery. The government announced a reduction in the rate of supplementary charge to 30% at Autumn Statement 2014, and set out its aim to reduce the rate further in an affordable way. Delivering on that aim, Budget 2015 announced a further reduction to 20%.
Budget 2015 also announced the introduction of the cluster area and investment allowance. The legislation did not cover tariff income, owing to the complexities of identifying and apportioning capital expenditure between infrastructure owners and users, and insufficient transparency around the commercial arrangements in place. The response to the consultation on the investment allowance, published on 22 January 2015, confirmed that further work would be carried out to permit tariff income to activate generated allowance in addition to production income.
Detailed proposal
Operative date
The reduction in the rate of PRT will have effect for all chargeable periods ending after 31 December 2015.
The reduction in the rate of supplementary charge will have effect for accounting periods commencing on and after 1 January 2016. There are transitional rules for accounting periods beginning before the operative date.
The power to extend the scope of relevant income will have effect from Royal Assent and will allow a retrospective effective date of the extension.
Current law
Section 1 of Oil Taxation Act 1975 imposes a PRT charge on a participator’s assessable profits in respect of a taxable field at the rate of 35%.
Corporation Tax Act (CTA) 2010 Part 8 Chapter 6 section 330 imposes a supplementary charge on a company’s adjusted ring fence profits at the rate of 20%.
CTA 2010 sections 332F(3) and 356JH(3) define “relevant income” for the purposes of the investment and cluster area allowances.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to amend section 1 of the Oil Taxation Act 1975 to reduce the rate of PRT to 0%, to amend section 330 of CTA 2010 to reduce the rate of the supplementary charge to 10%, and to enable HMRC to amend the cluster area and investment allowance by secondary legislation to extend the definition of ‘relevant income’ and to make any amendments in consequence of, or in connection with, this extension.
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|
| -165 | -265 | -225 | -155 | -200 |
These figures are set out in Table 2.1 of Budget 2016 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costing document published alongside Budget 2016.
Economic impact
The reduction in the rates of PRT and supplementary charge will increase the post-tax profits for affected companies, making investment into oil and gas projects in the UK and UKCS more attractive. This should lead to additional production of oil and gas, helping to increase the UK’s energy security, balance of payments, and supporting jobs and supply chain opportunities.
Impact on individuals, households and families
As this measure affects oil and gas companies only there is no impact on individuals, households or family formation, stability or breakdown.
Equalities impacts
The decrease in the tax rates only applies to companies involved in the oil and gas industry in the UK or UKCS and is considered to have no differential impact on any equality groups.
Impact on business including civil society organisations
There are around 200 companies currently extracting oil and gas in the UK and on the UKCS. The industry also supports c30,000 direct jobs and 250,000 in the supply chain (100,000 in exports). The supply chain is based predominantly in Scotland (c45%), but also has a significant presence in Norfolk, the North East and Yorkshire and the Humber. The decreases in PRT and in the supplementary charge will have a positive impact on company post-tax profits within the UK.
Any reduction in the rate of supplementary charge will result in lower instalment payments being made. This will apply, where appropriate, to instalment payments made on or after the date of announcement. If the rate cut is not approved by Parliament then companies will have to pay the additional tax arising.
This measure is expected to have no additional administrative burden on businesses.
There is no impact on civil society organisations.
Small and micro business assessment: The change applies only to oil and gas companies operating in the UK, but helping the large businesses which pay PRT and supplementary charge cope with the challenges of the current low oil price will help to protect jobs in the small businesses sector which are subcontractors to the oil and gas industry.
Operational impact (£m) (HMRC or other)
HMRC will incur some additional costs for implementing this change. For PRT these will be negligible. For the supplementary charge they are estimated to be around £120,000 for IT changes. There may also be some small staffing costs but these are anticipated to be negligible.
Other impacts
Sustainable development, wider environment and health: the oil and gas industry is heavily regulated to ensure its activities do not lead to pollution or disturbance to habitat or wildlife, and to ensure the health and wellbeing of its workers. Investment in oil and gas production is needed even as the economy decarbonises; the government estimates that oil and gas will continue to meet 70% of the UK’s energy needs out to 2030.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through regular communication with affected taxpayer groups and the monitoring of tax receipts from activity in the North Sea oil and gas sector.
Further advice
If you have any questions about this change, please contact Nicola Garrod on Telephone: 03000 589251 or email: [email protected].