UK government to 'fast-track' new tax relief on oil and gas industry investment

It is now consulting with the industry about how best to support investment in North Sea oil and gas projects through the tax regime, as announced as part of last month's Autumn Statement. The consultation will close on 23 February 2015 and the government expects to present its conclusions as part of the Budget in March.

Industry body Oil and Gas UK welcomed the announcement, which it described as a "first step" towards "a much lower, simpler and more stable tax regime that will allow the investor to shift their focus away from fiscal risk towards investment opportunities". The government has pledged to take further action to assist the oil and gas industry as part of the Budget, against a backdrop of oil prices that have more than halved over the past six months.

Oil and gas firms are currently subject to ring fence corporation tax (RFCT) 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 an additional supplementary charge (SC) 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 existing field allowance regime gives firms relief on the 30% SC for a certain amount of their profits from projects that are economically viable, but commercial marginal given current tax rates. They still pay RFCT 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.

As part of the 2014 Autumn Statement, the government announced the creation of a new 'cluster area allowance' to support investment in high pressure, high temperature projects. The new investment allowance would build on the structure of this allowance to create a direct link between investment and the availability of tax relief, according to the consultation. It would be a basin-wide, capital expenditure-linked measure that would cover exploration, appraisal, infrastructure and development spending.

According to the consultation, setting the level of the allowance as a proportion of capital expenditure rather than basing it on the physical characteristics of eligible 'fields' would reduce the effective headline tax rate for most projects to between 45% and 50%. It would also be a simpler method of providing tax relief for investment than the field allowance regime, and give businesses more certainty about its applicability to individual projects.

Oil and Gas UK chief executive Malcolm Webb said that the industry was "encouraged to note that work on the investment allowance ... is progressing". However, he said that a reduction in the headline rate of tax was "also essential to really improve the international competitiveness" of the UK Continental Shelf.

"These are difficult times for Scotland's oil and gas industry, which is why I announced an ambitious package to support this hugely valuable sector at last month's Autumn Statement," said Danny Alexander, chief secretary to the Treasury.

"Oil prices are inherently volatile, that is why it is important that we take a long term view on the issue: supporting the industry through encouraging investment and protecting the UK's public finances through a sustainable tax regime, while ensuring that the 375,000 livelihoods that depend on the UK's oil industry are protected for many years to come," he said.

Earlier this month, the government asked Andy Samuel, the incoming chief executive of new industry regulator the Oil and Gas Authority, to identify "practical" measures that could be taken to offset the impact of falling oil prices. Samuel is due to present his early findings to the government by the end of February.