Oil & Gas UK Economic Report 2015

The Investment Allowance Budget 2015 announced the introduction of a new simplified investment incentive based on capital expenditure incurred within a determined field area. This new allowance replaces all the previous offshore field allowances and works to reduce the marginal rate of tax on a much broader range of investments across the UKCS. The allowance shelters a certain amount of income (62.5 pence for every £1 invested) from the (now reduced) SC – meaning that for a proportion of production income generated by that field only RFCT is due. Transitional rules are in place to ensure that the value of the old field allowances is protected as long as FDP approval is gained before the end of 2015 28 . The Investment Allowance applies to all investment expenditure incurred after 1 April 2015. The benefits of this new approach (alongside the cluster allowance for areas thought to contain high pressure high temperature resources) are principally that of simplification of the allowance regime and removal of the distortionary effects of the old allowances that incentivised some projects over others. Alongside reductions in headline rates for SC and PRT, also announced at Budget, the Investment Allowance aims to more successfully attract capital to the UKCS, as is necessary for a mature and high cost region.

The Balance of Taxes and Allowances The oil and gas fiscal regime taxes profits at a minimum rate of 30 per cent, which is considerably higher than for companies in all other parts of the economy. The Oil Allowance within the PRT regime and the Field Investment Allowance for SC purposes only ever reduce the tax burden from very high rates to ones that are closer to, but still higher, than that for other companies. Therefore, these allowances cannot be said to represent a subsidy for the industry, as is sometimes claimed; all they do is partially alleviate the higher than normal tax burden. Furthermore, companies that have integrated businesses are subject to both the ring fence regime in respect of their upstream oil and gas production and the normal CT regime for their downstream refining and marketing businesses. Companies cannot offset their profits or losses between the two regimes to reduce their overall tax liability, because upstream profits are always taxed separately under the ring fence regime.

28 For the list of Field Allowances, see the Economic Report 2014 at www.oilandgasuk.co.uk/publicationssearch.cfm

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ECONOMIC REPORT 2015