Economic Report 2013

6. Fiscal Policy

Introduction

The Fiscal Regime for Oil and Gas

The production of oil and gas from the UKCS is the most highly taxed business activity in the country, with three separate corporate taxes which generate substantial revenues for the Exchequer. Over the past decade or so, the UKCS has been subject to considerable fiscal instability, with the most recent tax change, in March 2011, increasing overall tax rates to between 62 per cent and 81 per cent. To ensure that the remaining development opportunities on the UKCS are internationally competitive, the government has had to build on existing field allowances (FAs), first introduced in 2009, providing targeted relief from the scope of the Supplementary Charge (SC). These allowances have contributed to a greater diversity of marginal tax rates which reflect the varying commercial opportunities available on the UKCS. Since the introduction of the Brown Field Allowance (BFA) in September 2012 and with the security to be provided by Decommissioning Relief Deeds (DRDs), the government now has the ability to influence all phases of the development cycle through the fiscal regime. This should help ensure that the full economic potential of the UKCS is realised over the coming years.

The production of oil and gas from the UKCS is subject to a ‘ring fence’ tax regime 6 comprising: • Ring Fence Corporation Tax (RFCT) – this is computed in a similar way to normal Corporation Tax (CT), but with different rules for the treatment of losses, 100 per cent first year capital allowances and a higher rate of 30 per cent on all profits. The oil and gas industry has not benefitted from reductions in the rate of CT seen elsewhere in the economy in recent years. • Supplementary Charge (SC) – this is an additional corporation tax, levied on all profits at the rate of 32 per cent (was 20 per cent before March 2011). Profits are computed in the same way as for RFCT, but finance costs are not deductible for SC purposes. • Petroleum Revenue Tax (PRT) – this is a field-based tax on profits in the regime and only applies to fields given development consent by DECC before March 1993. PRT is levied at a rate of 50 per cent and is deductible for the purposes of computing profits charged to RFCT and SC. Immediate relief is given for all capital and revenue expenses.

6 The ‘ring fence’ ensures that the profits from oil and gas production are taxed separately from any other activities within a company and any losses made by those other activities cannot be used by the company to offset the profits from the production of oil and gas.

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ECONOMIC REPORT 2013