Economic Report 2016 - Oil & Gas UK

ECONOMIC REPORT 2016

There remains some issues with the current tax regime that present barriers to investment and the UK Government’s stated objective of MER UK. These are outlined below:

Decommissioning One of the most significant barriers is the asymmetric availability of decommissioning tax relief between the seller and buyer of a mature asset, known as a ‘value gap’. The seller of an old asset will often have substantially more tax history for RFCT and SC to achieve full relief for the total decommissioning liability if they continue to operate the field until it ceases production. The potential buyer, on the other hand, is likely to have accumulated less tax history at the point of purchase and there is a risk that the asset’s profitability is insufficiently high to offset the final decommissioning tax liability. This makes the post-tax value of the asset lower for the potential buyer, even if more pre-tax value can be generated from the remaining hydrocarbons in the field. Industry is providing evidence to the UK Government about the number of mature assets for which this tax mismatch impedes transfer to new ownership. It is hoped that corporate tax history can transfer to the new owner along with the asset and the associated decommissioning liability. Fixing this issue would represent a significant improvement to the fiscal terms available on the UKCS and would make it much easier for new investors to enter the market, facilitating MER UK. Access to Finance Companies are also experiencing difficulties in accessing finance to invest on the UKCS. With operating cash-flow continuing to be squeezed, very few companies can take advantage of good value oilfield services and invest counter-cyclically to boost the productive capacity of the UKCS when the market recovers. The necessary cost cutting is hurting the domestic supply chain and risks the loss of skills and export potential over the medium term. One option might be for HM Treasury to allow companies who have previously invested in the UKCS at a loss, to trade in their tax losses at a discount for a cashable tax credit. This could unlock finance for projects including, but not limited to, exploration and drilling. This discount would almost certainly mean HM Treasury gives less tax relief to companies than it otherwise would have in the longer term, and it would, of course, also benefit from production taxes in the future if the capital generated new taxable profits, for example, through a field being discovered. The UK Government and the OGA could specify that the tax credit is invested in particular projects within a set timeframe. Oil & Gas UK is currently discussing this proposal with HM Treasury, and calls on government and the OGA to keep working with industry to find a solution to the low levels of investment and activity in the UK North Sea. Encouraging investment and kick-starting activity now will not only prolong the life of the industry for many more decades but will also ensure vital skills and expertise are not lost in the short term.

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