Finance experts welcome positive budget steps for Scotland’s oil & gas sector, but warn further delays could slow industry’s revival

The firm has been joined by experts at PwC and EY in welcoming the announcement of a range of legislative developments designed to drive up investment in the sector, as it gradually rebuilds lost ground.

But, while the plan to introduce the initiative to enable oil and gas companies to transfer tax histories has been confirmed, its introduction has now been pushed back to November 2018, allowing for draft legislation to be issued in spring of next year.

The plan, which is highly innovative and much anticipated, is designed to prevent potential buyers being put off by the significant lack of tax relief available with respect to the substantial decommissioning liabilities associated with late-life oil and gas assets.

Despite the slight delay, the UK Government has confirmed it remains committed to delivering on its promises and will following through on the consultation that closed in August, which originally set out the plans.

Other initiatives outlined in the Budget include the launch of a technical consultation on allowing a petroleum revenue tax deduction for decommissioning costs incurred by a previous licence holder. This will support transfers of assets where the seller retains the decommissioning liability.

The UK Government has also stated that it will legislate in the Finance Bill 2017/18 in order to put beyond doubt that all tariff income earned by petroleum licence holders is within the ring-fenced corporate tax regime. The Treasury has stated that this is to ensure that the Investment and Cluster Area allowances are definitely extended to include income from tariff receipts.

James Strang, associate tax director at Grant Thornton, said: “The UK Government has followed up on its promises to announce changes that show it recognises the important role Scotland’s oil and gas sector continues to play in the UK’s vibrant economy, and that’s something that should be broadly welcomed. The measures outlined in the Budget will provide a shot-in-the-arm for a sector that is continuing to rebuild lost ground, especially in terms of encouraging deals to happen by providing more certainty over the tax relief available. The changes will be crucial if we’re to see a return to sustainable, long-term growth.

“The fact that the change facilitating the transfer of late life oil and gas assets will not come into force immediately is disappointing, as financial assistance is required right now, but political leaders have recognised that inaction is not an option, and a commitment to deliver the plans in November 2018 should provide some reassurance to industry leaders.”

Derek Leith, EY’s head of oil and gas tax, also welcomed the news: “Today’s announcement by the Chancellor represents an unprecedented change to UK oil and gas tax law and is a clear demonstration that the government wishes to maximise the value of the UK’s remaining hydrocarbon reserves.

“The proposed changes, the details of which will be worked through in 2018, have the potential to revitalise the UK oil and gas industry. They will enable the current owners of mature producing fields to pass some of the corporate tax history of the current owner to the buyer, thus enabling the buyer to be in broadly the same tax position as the seller. This should have the effect of enabling new or recent entrants to the UK Continental Shelf (UKCS) to bid for mature assets which no longer attract investment from their current owners who allocate capital to large projects in less mature basins. A key plank of government policy to maximise economic recovery and to reduce the cost of decommissioning is to get the larger mature assets in the UKCS into the hands of those companies that will focus on late life investment, extend the producing life of the assets and ultimately decommission these large fields more cheaply.

“New investment in the UKCS is the lifeblood to preserving an industry which has made a huge contribution to the UK’s economy over many decades, and supporting a supply chain focused on innovation and internationalisation.”

Mairi Massey, director in PwC’s oil and gas tax team, added: “The Office for Budget Responsibility forecasts tax receipts from the oil and gas sector will total £900 million in the 2017/18 financial year - down from £12.4 billion in 2009 - so all help to the sector is welcome.

“At the moment owners can claim tax relief for the cost of shutting down wells and clean up though these tax reliefs at present cannot be passed on to a new owner.

“The much anticipated Budget announcement, that legislation will be enacted to allow transfers from 1 November 2018, will be warmly welcomed by industry. This change should allow purchasers to obtain tax relief for decommissioning costs when the fields dry up and and help unlock more deals in late life assets in the UK North Sea. As ever, examining the small print will be vital and some of this is contained in the paper published by HM Treasury this afternoon, however we eagerly await draft legislation, which is to be published in Spring 2018.

“Industry trade body Oil and Gas UK estimates the change in the tax rules to allow these tax credits to pass from owner-to-owner could stimulate as much as £40 billion in new investment and save the Treasury an average of £10 million per asset in deferred tax relief.

“This will be a much needed boost to a maturing basin and will ensure that the UK continental shelf continues to be an attractive investment proposition as a result of its infrastructure, potential 20bn barrels of oil for extraction and a much more stable tax regime.”