EXPLANATORY NOTE

1. This measure provides that the petroleum revenue tax (PRT) exemption for gas sold to British Gas under a pre-July 1975 contract can continue when a company acquires an interest in a relevant gas field. The clause remedies a defect in the existing legislation and will ensure that companies acquiring their interests in some of the older North Sea gas fields do not face an unexpected tax charge. The measure will ensure that past practice can continue and will therefore apply to past as well as future transactions.

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2. Subsection (1) provides for the clause to apply where a pre-July 1975 gas contract between a person (A) and the British Gas Corporation, or its successor companies, is replaced by a new contract between another person (B) and the British Gas Corporation or the relevant successor company and any of A’s rights or liabilities under the contract become B’s rights and liabilities. The clause also applies to subsequent replacements of the gas contract if the contract being replaced is treated, by this clause, as if it had been made before the end of June 1975.

3. Subsection (2) provides that the replacement of the old contract by the new contract will not of itself terminate the PRT gas exemption under section 10(1)(a) of the Oil Taxation Act 1975. The exemption will terminate only if the terms of the new contract are so different from those of the old contract that, if the same changes had been made to A’s contract, they would have amounted to the creation of a new contract rather than the amendment of an existing contract.

4. Subsection (3) identifies the successors of the British Gas Corporation for the purposes of subsection (1).

5. Subsection (4) applies the clause to past as well as future transactions.

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6. The PRT exemption for certain gas supplied to the British Gas Corporation recognised that, before the introduction of PRT in 1975, gas from a number of fields had been contracted to be sold to the British Gas Corporation under long-term agreements at prices which were seen as generally too low to justify a PRT charge on the producer. Gas sold to the British Gas Corporation under contracts made before July 1975 was therefore excluded from the charge to PRT.

7. As part of the privatisation of the British Gas Corporation, contracts to sell gas to the British Gas Corporation were changed to contracts to sell gas to British Gas PLC. Section 60(1) of the Gas Act 1986 ensured that the PRT exemption for gas sold to the British Gas Corporation under pre-July 1975 contracts could continue. As a result of the liberalisation of the gas market, these contracts were subsequently transferred, in 1996, to British Gas Trading Limited. Paragraph 11 Schedule 5 of the Gas Act 1995 ensured that the PRT exemption could continue following that transfer.

8. Since 1975, the Inland Revenue has taken the view that the PRT exemption will continues to apply when a company acquires an interest in a PRT-exempt gas field and takes over the supply of gas to British Gas, provided that there are no significant changes to the gas contract. However, recent legal advice indicates that, strictly speaking, the PRT exemption should terminate whenever a field interest is transferred, even if the terms of the gas contract remain unchanged. The fact that a different company has taken over the supply of gas to British Gas in itself means that a new contract has been created, and gas is thus no longer being supplied under a pre-July 1975 contract..

9. Applying the law as it stands would have an unfair effect on companies engaged in normal commercial transactions. This measure makes it clear that, when an interest in a PRT-exempt gas field is transferred and there is no significant change in the terms of the gas contract, the exemption will continue. The measure makes the law consistent with the way in which it has previously been applied, and it will therefore apply to all past and future transfers. As at present, oil companies will be able to seek advice from the Inland Revenue on whether particular changes to a contract might terminate the exemption.