Reducing tax rates on oil companies would be a smart strategy on Budget Day, says PwC

So what can the Chancellor do on 16 March?

Against this challenging backdrop, global accountants PwC believes a smart strategy for sustaining the flow of oil investments in this mature basin and protecting long-term total tax revenues could be to reduce the tax rates on oil companies.

Cutting the headline rate (currently ranging from 50 per cent to 67.5 per cent), for example, would have a minimal cost implication for UK Government in the near future whilst companies are loss making and absorbing capital expenditure.

However, some cost would be expected in the medium term when companies start paying tax again as they return to profitability and the capital expenditure they have incurred (a record £14.8 billion in 2014) starts to pay some dividends.

Nevertheless, the wider benefits to the economy that would result from preserving jobs and investment (and the associated employment tax revenues which areoften overlooked but very significant) need to be weighed against that cost.

Alan McCrae, head of UK energy tax at PwC, said: “Production from oil and gas has been a golden goose for the UK Exchequer to the tune of over £330bn in corporate taxes alone, not taking into account additional revenues from employment taxes, jobs and the supply chain. However, with the current low oil price, the goose is now looking a bit thin and threadbare.

“The Chancellor has the potential to provide a much needed cushion – and, crucially, provide a stimulus for investment and its tax paying employees - in the March Budget. If this is recognised and an effective response is forthcoming, then there may well be plenty of life in the old bird yet.”

Other measures the Chancellor could embrace include reducing stealth taxes (e.g. licence fees) and the tax burden on infrastructure.

Support could also be delivered to the supply chain, a vital component for the health of the basin and provides much needed highly skilled jobs and associated tax revenues - and one that helps drive healthy export revenues of over £16bn. For example, putting tax on the supply of rigs in UK waters by the drilling industry on the same footing as everyone else under new international tax rules would not only help the struggling supply chain, but should reduce one of the main costs for the producers, particularly for exploration, where 2016 activity is set to plunge to an all-time low.

Mr McCrae added: “With other factors such as over-supply in the market, and the impending transition to a low carbon world, alongside cost management and working capital issues also impacting the UK oil and gas industry, it’s even more vital than ever that corporates, regulators, the supply chain and the UK government work together to secure the North Sea basin’s future value and cement its position as a specialist skills and innovation hub in areas such as decommissioning.”