The "world first" policy, announced as part of the 2017 Budget, will mean that purchasers will be able to offset some of the costs of decommissioning against tax paid by the previous owner. This will in turn encourage the purchase of late life oil and gas assets, bringing new entrants and fresh investment to the UK Continental Shelf (UKCS), the government said.
Draft legislation on transferable tax history (TTH) will be published in the spring, so that the new regime can come into force on 1 November 2018, according to the government.
Oil and gas expert Bob Ruddiman of Pinsent Masons, the law firm behind Out-Law.com, said that the policy would be welcomed by the oil and gas industry, which has been lobbying for the introduction of TTH for some time. However, bringing it into force would require "careful thought" by the government, he said.
"Following a very challenging three years for the UKCS, this is confirmation of an anticipated announcement following extensive lobbying and consultation, and will be welcomed by E&P [exploration and production] companies, oilfield services and providers of debt and equity," he said.
"But this is a highly complex matter that requires careful thought and detailed implementing legislation. If this complex legislative landscape is navigated correctly, the prize is of course extracting natural resource – which contributes to better security of supply in a post-Brexit environment, whilst continuing to develop world-class export capability in people and technology for Scotland and the wider UK," he said.
TTH would permit the seller of late life assets, such as oil platforms and related infrastructure, to transfer a portion of their ring fence corporation tax payment history to the buyer alongside the asset, which would be used later to offset some of the costs of decommissioning. The government has been examining how best to determine the TTH for a particular asset for some time as well as how to deal with some of the unintended consequences, such as the potential for 'gaming' the system or the 'commodification' of tax history.
A policy document, published alongside the Budget, setts out some of the detail of how TTH would work. Transfer would only be possible on the sale of the asset, and the amount of tax history transferred could not be adjusted at a later date. Parties would be able to negotiate on the amount of tax history to transfer provided that it is not "excessive". The maximum transferrable would be capped at an estimate of the buyer's share of the decommissioning costs, subject to an independent estimate commissioned by the parties.
The government also intends to publish a technical consultation on allowing a deduction against petroleum revenue tax for decommissioning costs incurred by a previous licence holder, according to the Budget document. This will support the sale of late life oil and gas assets where the seller, rather than the buyer, retains the decommissioning liability.