Oil & Gas UK Economic Report 2015

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ECONOMIC REPORT 2015 78
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 201528.
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