Investment Allowance to be fast-tracked
Treasury makes first move to cut North Sea oil taxes
Chief Secretary to the Treasury Danny Alexander and the Exchequer Secretary to the Treasury Priti Patel announced a consultation into the investment allowance which is likely to lead to a cut in the tax rate.
The announcement was described by one industry analyst as “the most significantly positive oil and gas fiscal change since 1993”.
The consultation has been fast-tracked at the request of industrial leaders who met the two ministers along with Prime Minister David Cameron.
The allowance, which was first announced in Autumn Statement, is designed to reward investment at all stages in the industry lifecycle. It will hugely simplify the existing regime of field allowances and provide certainty for companies to help ensure they maximise the remaining opportunities in the North Sea.
The government said the launch of the consultation demonstrates the its commitment to the industry and sends a clear signal that the UK is open for business. The new allowance is likely to reduce the effective take rate to 45-50% for companies investing in the future of the North Sea.
The consultation will seek views from industry on how the allowance can best support investment in North Sea oil and gas projects.
Danny Alexander, Chief Secretary to the Treasury, said: “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.
“And it’s why I am meeting industry representatives here today, to see how we can support them further, and announcing today that we are fast-tracking consultation on an investment allowance, which industry has told us will incentivise investment opportunities in new and existing fields across the North Sea. We will take action on oil and gas to help the industry at Budget.
The consultation is expected to take about a month and the government will publish a summary of responses to this consultation later in the year. Legislation will be brought forward in an appropriate Finance Bill.
Oil & Gas UK described the move as a positive signal to investors but urged its delivery to be ‘fast-tracked’ and to take effect from Budget 2015 if the UK Continental Shelf (UKCS) is to regain any attraction for investment in the current climate.
Speaking in Edinburgh today, Oil & Gas UK chief executive Malcolm Webb said: “We are encouraged to note that work on the Investment Allowance announced in the Autumn Statement is progressing. However a reduction in the headline rate of tax is also essential to really improve the international competitiveness of the UKCS.”
“Given the maturity of this basin, I’m afraid there will be no second chances. We now need 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. We see today’s announcement as a first step.”
Derek Leith, UK head of oil and gas taxation at EY, said: “If the oil and gas industry had produced a wish list of measures it would like to see introduced in the wake of the Autumn Statement then a new investment allowance would have been near the top.
“This could lead to the most significantly positive oil and gas fiscal change since 1993, and the Chancellor in expediting the consultation process demonstrates the new macro-economic perspective from which the Government is viewing the UK Continental Shelf.
“There were clear signs, even when oil was sitting at $115 a barrel, that the North Sea fiscal regime was no longer fit for purpose. A new investment allowance is significant step towards simplification and is likely to encourage investment in the basin. It’s another indication that the Government is now focused on creating an environment that enables the UK industry to confidently compete globally for capital.
“In saying that, the immediate response from industry may be lukewarm. There are increasing concerns that the oil price could remain at $50 or less for some time and pressure has been growing on the Government to introduce a further reduction in the tax rate.
“There have been numerous calls for the complete reversal of the ill-conceived increase of 2011 as the bare minimum, and the Chancellor still has the opportunity to make that change in the Budget on 18 March.”
Mairi Massey, energy tax director based in PwC’s Aberdeen office, said: “While these proposals are likely to be welcomed by many across the North Sea industry, we believe it would have been helpful for the consultation to include the proportion of expenditure that attracts the allowance.
“In addition, there may be a problem for companies who had been anticipating a field allowance, but not yet received it. They might find the Investment Allowance is less generous and as a result, it’s important their voices are heard during this consultation process. Nonetheless, we believe the allowance will be broadly welcomed.”