The former chief executive of BP said he feared that the recent fall in oil prices, to less than US$50 (£33) a barrel in January, has done "permanent damage" to the oil and gas industry, and that the complex tax structures in place need to be simplified.
"Frankly, why don’t we put the whole thing on a corporation tax basis? It all needs to be simplified. These bespoke tax regimes — it’s not appropriate to have so many detailed regimes. I don’t know of anywhere else in the world that does it like that," Lord Browne said, according to the report.
Oil and gas firms currently pay ring fence corporation tax at 30% of profits, less allowances for capital expenditure. They may not deduct losses from other activities or interest payments as is the case under the mainstream corporation tax regime. They are also subject to the supplementary charge on adjusted ring fence profits, the rate of which was reduced from 32% to 30% last month, as well as petroleum revenue tax (PRT) on profits from certain individual oil fields.
The supplementary charge was introduced in 2002 under the North Sea fiscal regime, and was raised from 20% to 32% in 2001.
A field allowance was introduced in 2009 to reduce the impact of the supplementary charge on new, marginal fields, removing some income from these new fields – including small fields, ultra heavy oil fields, ultra high pressure/high temperature fields and remote deep water gas fields – from the scope of the supplementary charge.
Firms still pay ring fence corporation tax on this portion of profits. Without field allowances, firms pay an effective 60% headline tax rate on non-PRT fields, or 80% on PRT fields.
In January, the government said it would "fast-track" the introduction of tax relief, and is now consulting with the industry on the best way forward. The consultation will close on 23 February and the government expects to present its conclusions as part of the Budget in March.
Energy expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said in January that the oil and gas industry should be amongst UK chancellor George Osborne's priorities in the 2015 Budget.
"Successive governments have failed to understand the requirement for a mature, long-term energy policy, instead taking a short-term view involving regular tinkering with tax rates," he said. "I would hope that has now come to an end and Mr Osborne will take a more progressive approach in 2015 to show support for what is one of the country's most important industries."
"While the oil price is a concern, let's not forget the global demand for oil and gas remains high and we still have significant hydrocarbon resources in the UK, backed up by a world-class supply chain. You don't need a crystal ball to predict the UK will continue to be a significant producer of oil and gas for the foreseeable future, provided all stakeholders work together towards that common goal," he said.