Appendix

A. UKCS Fiscal Regime

The offshore oil and gas industry is the highest taxed industry in the country. Fields developed since March 1993 are taxed at 50%, being liable for both Corporation Tax (CT) at 30% and a Supplementary Charge (SCT) at 20%. The marginal tax rate rises to 75% on fields developed before 1993, these also being liable for Petroleum Revenue Tax (PRT) at 50%.

Figure 58: Marginal Government take from fields ranges from 50% to 75%

Oil and gas exploration and production companies are subject to CT which is applied to company profits at a rate of 30%. It should be noted that the offshore oil and gas industry has been excluded from the general reduction in the rate of CT from 30% to 28%, applicable from April 2008, announced in 2007’s Budget in March.

SCT was raised to 20% from 1 January 2006. It was originally introduced at a rate of 10% in 2002’s Budget which also saw the introduction of 100% First Year Allowances for UKCS capital expenditure in recognition of the higher tax rate. Since the introduction of 100% First Year Allowances, all capital costs are effectively tax deductible as incurred, with the exception of long life assets which secure a 24% First Year Allowance and 6% of the remainder on a reducing balance basis.

Taxable profits derived from the extraction of oil and gas from the UKCS are also “ring fenced” so that losses from other activities cannot be offset against these ring fenced profits. Stringent rules are also applied to ensure that only interest relating to UKCS projects is deductible within the ring fence. However, the taxable profit for SCT differs from CT in that finance costs are not deductible.

PRT is applied on all fields which received development consent before 16 March 1993 and to tariff arrangements existing prior to 9 April 2003 relating to pipeline systems and other facilities which in some part service a PRT paying field. Tariff contracts arranged on or after this date are exempt from PRT, as addressed in the Finance Act 2004. PRT is applied to profits, field by field, in six-month chargeable periods. If losses arise, the ability to surrender losses to other fields is extremely limited.

PRT is deductible for CT and SCT. Capital and operating costs are also deductible. No deduction is allowed for interest, but most capital incurred pre-payback (see below) qualifies for an additional deduction of 35% (uplift). As most fields subject to PRT are past payback, the significance of this relief is now very limited.

Payback is the period in which total cumulative income exceeds total cumulative expenditure. This period not only determines the cut-off for uplift, but also dictates the number of six-month periods for which safeguard applies.

Safeguard was introduced as a safety net for the benefit of the less profitable fields, essentially to ensure that, in the early years of a field’s life, the PRT cannot exceed an amount that would reduce the participants’ after-tax profit below a minimum return on investment in the field. It limits PRT in each six-month chargeable period to 80% of the excess profits over 15% of cumulative capital which has qualified for uplift. It applies to the period from the start of production to the period of payback plus half as long again. It will not apply if it calculates PRT in excess of the “normal” calculation.

An “Oil Allowance” can be applied to fields with development consent on or before 31 March 1982 which makes the first 250,000 tonnes per six-month period, up to a cumulative total of 5 million tonnes, PRT free. For southern fields the amounts are 125,000 and 2.5 million tonnes and for all other taxable fields 500,000 and 10 million tonnes respectively.

A “Tariff Receipts Allowance” is available for some income streams. This makes the first 250,000 tonnes of throughput for each user field per six-month period PRT free.

Gas sold under contracts entered into before 30 June 1975 is exempt from PRT.

As mentioned above, new tariff business for transportation, processing, and other services provided through the use of UKCS infrastructure which is transacted under contracts entered into on or after 9 April 2003 will be exempt from PRT, provided the infrastructure is used in relation to:

1. A field receiving development consent on or after 9 April 2003; or
2. An existing field using a new evacuation route, but only if that field has not to date made use of non-field assets, which have qualified for PRT relief.

While the exemption covers new tariff business contracted on or after 9 April 2003, it only applies to income and expenditure received and incurred under such contracts since 1 January 2004.