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ECONOMIC REPORT
2016
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With further reductions also applied to the Supplementary Charge this year, the headline rate of tax paid on
UK oil and gas production has reduced from 50-75 per cent to a flat rate of 40 per cent across all fields, with the
fiscal regime now made up of two taxes:
•
Ring Fence Corporation Tax (RFCT)
– a tax on company profits computed in a similar way to normal Corporation
Tax (CT) but levied at a higher rate of 30 per cent. It has not benefitted from the rate reductions made outside
the ring fence in recent years and is currently 50 per cent higher than the 20 per cent CT rate applicable to the
rest of the UK in 2016-17. There are, however, enhanced loss flexibilities
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and 100 per cent first-year capital
allowances to reflect the high levels of investment and project life cycles typical of the UKCS.
•
Supplementary Charge (SC)
– this additional layer of corporate taxation is computed like RFCT but finance costs
are not deductible. The rate is chargeable at 10 per cent from 1 January 2016, having halved from 20 per cent in
2015 and 32 per cent before then.
Furthermore, while PRT has now been effectively abolished for income and profits, the tax remains relevant
for the purposes of generating tax relief on future losses, especially arising from decommissioning. PRT paid
by a field in the past is refundable on a last in first out (LIFO) basis
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at the rate of tax levied on profits in the
respective period.
The 2015 Budget also transformed and simplified the tax allowance regime by moving away from bespoke Field
Allowances, which have been replaced with the Investment Allowance. The two main features of the allowance
regime are:
•
The Investment Allowance (IA)
– this is a basin-wide capital investment-based allowance against a company’s
SC liability. It is available for all capital investment incurred on or after 1 April 2015 at a rate of 62.5 per cent.
If a company has access to the allowance, only RFCT will be levied on its profits, reducing the effective tax rate
to 30 per cent. The government has also committed to extending the IA’s scope to certain types of operating
expenditure that are intended to add to the asset’s productive capacity.
•
100 per cent first year Capital Allowances
– for almost all investment expenditure incurred on the UKCS an
immediate deduction against RFCT and SC is available within the year, making the regime a true cash-flow tax.
Any expenditure (whether capital or operating) that cannot be relieved in the year it was incurred can be carried
forward for an unlimited number of periods until the company returns to having taxable profits. In addition,
a company can claim up to ten instances of Ring Fence Expenditure Supplement (RFES)
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that enhances the cash
value of the loss by 10 per cent per period claimed.
The ultimate effect of all these changes to the UKCS’ fiscal regime is a major improvement in post-tax materiality,
especially for former PRT-paying fields where the tax burden has more than halved in two years. Whether these
radical changes are enough to bring about the desired investment response and offset the collapse in cash-flow
and profitability, driven by enduring low oil prices, remains to be seen. The short-term view seems to suggest that
this has not (yet) occurred as both greenfield and incremental brownfield investment remain extremely low, as
outlined earlier in section 5.3.
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Enhanced ability to carry back or carry forward losses, especially in regard to decommissioning losses,
to generate a repayment of tax.
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The loss is carried back in chronological order to generate the repayment at the same rate that profits
in that period were taxed.
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RFES assists companies that do not yet have sufficient taxable income to fully offset exploration, appraisal and
development costs. The RFES currently increases the value of losses carried forward from one accounting period
to the next by a compound 10 per cent per year for a maximum of 10 years, not necessarily consecutively.