Inland Revenue 15
17 March 1998
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FORMAL CONSULTATION ON THE NORTH SEA FISCAL REGIME
The Chancellor announced today that the Government will
formally consult the oil industry on specific proposals to
change the fiscal regime for companies involved in the
extraction of UK oil and gas. A consultative document will be
published in mid April with the aim of legislation in the
next Finance Bill.
The industry has requested further consultation on any planned
changes and the Government believes that this will be
beneficial to the process of developing an appropriate fiscal
regime for these activities.
Further consultation will take place to ensure that an
appropriate share of profits are being taxed while continuing
to maintain a high level of oil industry interest in the
future development of the UK's oil and gas reserves.
DETAILS
1. The Chancellor announced a review of the North Sea fiscal
regime in his Financial Statement and Budget Report on 2 July
1997. The review has been undertaken jointly by a team from
the Inland Revenue, Treasury and the Department of Trade and
Industry.
2. There has been extensive discussion with interested
parties about the existing fiscal regime. Following an
invitation to submit representations, a wide range of
responses were received. Representatives of the oil and gas
industry have described the review process as open and
constructive.
3. As a result of the review, the Government believes that
certain aspects of the current fiscal regime are
unsatisfactory. In implementing change, the Government is
keen to consult the oil industry and other interested parties.
This should help to ensure that uncertainty is minimised,
particularly against the background of current low oil
prices, and that full account is taken of the potential
impact on investment in both existing and new fields.
4. An outline of the proposals which will be included in the
consultative document is in the Annex to this press release.
Gas Levy
5. The Government announced in the last Budget that Gas Levy
was to be cut to zero with full effect from April 1998. The
Government proposes to implement this by introducing
legislation in the Finance Bill to abolish Gas Levy from
1998-1999 and to reduce the rate of levy for 1997-98 by one
pence per therm to three pence per therm. More details are
given in a press release from the Department of Trade and
Industry.
Petroleum Revenue Tax - gas valuation
6. The Government announced on 4 December 1997 that it
intended to make some technical changes to the legislation
used to value North Sea gas for tax purposes. The aim was to
ensure that valuations would continue to reflect the price
which would be fetched in an equivalent sale between
unconnected parties. This corresponded to the way in which
the legislation had previously been applied by the industry
and the Inland Revenue and the changes were to apply to past
as well as future disposals. A draft clause was attached to
the Press Release and comments were invited.
7. No respondent has disagreed with the policy underlying
the change. Questions raised about the application of the new
rules have been answered. No respondent is currently seeking
any change to the draft clause and it is intended that the
clause used for consultation will be included in the published
Finance Bill
NOTES FOR EDITORS
1. The current UK oil and gas fiscal regime has four
components:
- For all companies : `ring-fence' corporation tax,
which is the ordinary tax on company profits
payable by all companies in the UK, but with
special rules to stop profits from UK oil and gas
extraction being reduced by losses from other
activities.
- For fields given development consent before 16 March
1993: petroleum revenue tax (PRT), charged at 50
per cent of a company's profits from a field, after
various reliefs and allowances.
- For fields given development consent before 1 April
1982: royalty, charged at 12 1/2 per cent of the
value of production less certain expenses.
- Gas Levy is currently payable at the rate of four
pence per therm mainly on gas bought under
contracts entered into before end June 1975.
2. Corporation tax and petroleum revenue tax are
administered by the Inland Revenue. Royalty and Gas Levy are
administered by the Department of Trade and Industry.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6706/6692/7327
(Out of hours: 0860 359544)
Non-media enquiries to: 0171 438 6420/6425
(Office hours only)
Annex
CONSULTATIVE DOCUMENT ON THE NORTH SEA FISCAL REGIME
1. This annex provides an outline of the proposals which
will be included in the consultative document on the North
Sea fiscal regime. The document will be issued in mid-April.
2. It will explain the rationale behind the Government's
view that the existing fiscal regime is inappropriate and
will provide an analysis of the level of taxation of North
Sea profits and the impact of taxation on expected returns
from exploration activity. It will compare the North Sea
fiscal regime with oil taxation regimes in other countries
and consider the impact of royalty on older fields as they
approach the end of their productive lives. It will also
address the overall issue of complexity in the North Sea
fiscal regime.
3. Alternative fiscal reform packages will be presented.
The aim of the consultative document is to seek the views of
the oil industry and interested parties on the relative
merits of the two packages so that the Government can take
account of those views in proposing changes for inclusion in
the next Finance Bill. The document will also invite other
suggestions for reform which could meet the Government's
objectives of ensuring that an appropriate share of North Sea
profits are taxed while continuing to maintain a high level
of interest in the future development of our oil and gas
reserves.
4. The main elements of the reform packages will be as
follows. Each package contains a structural change to the
existing fiscal regime and there are a number of changes
which are common to both packages.
Supplementary Corporation Tax
5. The first option for structural change is the
introduction of a supplementary corporation tax charge on the
profits from UK oil and gas extraction activities. The tax
would be charged on profits within the existing "ring fence"
for these activities. Profits would be determined before the
deduction of any financing costs, including interest. This
would prevent manipulation of debt levels and allow a lower
rate of tax to be set than would otherwise be necessary.
Broader Petroleum Revenue Tax
6. The second option for structural change is to broaden the
scope of Petroleum Revenue Tax (PRT). There would be three
elements to this change:
- PRT would be extended to all fields given
development consent on or after 16 March 1993.
These fields are currently not liable to PRT. All
profits of these fields for periods before this
change is implemented would be ignored. Expenditure
previously incurred would be allowed to the extent
that it is attributable to production which would
be liable to PRT
- oil allowance, which is a PRT-free slice of
production for all fields, would be halved
- a new PRT relief would be introduced to give
companies a fair amount of relief on abortive
exploration expenditure which they incur.
7. The Government is very keen to have the views of industry
and others on these two options.
8. The common parts of the packages which will be covered in
the consultative document are:
- the abolition of oil and gas royalty. This is
intended to encourage companies to exploit more
fully the reserves from older oil and gas fields
and responds to representations made by some
companies
- the removal of Tariff Receipts Allowance (TRA),
which reduces the PRT charge on tariffs
- the relaxation of the timetable for the delivery of
some PRT returns, including scope for indefinite
deferral in certain cases. This is aimed at
reducing the industry's compliance costs and
responds to previous suggestions from the oil
industry. If PRT is broadened, as outlined above,
this change will also help to reduce the resulting
compliance costs for the industry.
9. One technical change will also be proposed to remove a
defect which has been identified in the pipeline election
legislation introduced in 1994. This change would form part
of the package based on the new supplementary corporation tax
charge. It would not be appropriate if PRT is being
broadened as discussed above.
10. The document will give further details about the proposed
changes. It will include illustrative figures on the impact
on tax yields and on profitability measures.
11. The document will also refer briefly to a number of other
options for change which have been proposed in some of the
representations received.
12. In acceding to the industry's wish for further
consultation on specific options, the Government recognises
that there is a risk that some companies might seek to take
advantage of the opportunity to try to avoid the impact of
some of the proposals. This would be regarded as a breach of
faith and the document will indicate that, where necessary,
anti- avoidance legislation would be enacted to protect the
Exchequer against the effects of transactions, disposals or
any other events taking place on or after today that could
reduce the intended effect of any of the measures discussed
in the consultative document.