Government kicks off discussions with industry over future of North Sea tax
This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government
A call for evidence will explore how the tax regime can continue to encourage investment in the North Sea.
The government has today (Monday 14 July) called on industry to submit their thoughts on the future of the UK oil and gas tax regime.
The call for evidence will explore how the tax regime can continue to encourage investment in the North Sea and help maximise the value of the country’s oil and gas resources for the UK, whilst ensuring the nation continues to receive a fair share of profits.
The call for evidence marks the beginning of 12 weeks of discussion with the oil and gas industry and other stakeholders about the long-term shape of the tax regime.
The review, which the Chancellor announced at Budget 2014, comes at an important time for the UK Continental Shelf. There is still a considerable amount of oil and gas left to recover – up to around 21 billion barrels of oil (boe) equivalent.
The basin is currently attracting record levels of private investment – £14.4 billion in 2013, and there are around 125 groups of companies now involved as licensees in offshore exploration and production.
However, exploration and production is becoming harder and more expensive, and the UK is facing competition for capital from other countries.
As the independent Office for Budget Responsibility highlighted last week, tax revenue generated from the oil and gas industry will continue to decline over the long-term.
The value of the industry to the country will increasingly come through wider economic benefits – through jobs, skills and exports.
The UK offers the strongest basis to maximise these benefits because of the size and diversity of its economy. It provides the stability and predictability needed for companies to invest and is able to adopt a long-term approach to the sector because of its broad shoulders.
Danny Alexander, Chief Secretary to the Treasury, said:
This review offers the opportunity to put the fiscal regime on the best footing to ensure that the economic potential of the North Sea can be maximised for the UK and Scotland.
The broad and diverse UK tax base means we are able to support the industry through, for example, certainty over decommissioning tax relief.
A separate Scotland is unlikely to be able to provide the same level of support and risks missing out on the economic potential the North Sea has to offer.
Nicky Morgan, Financial Secretary to the Treasury, said:
The government is committed to supporting investment in the oil and gas industry, a vital sector that provides jobs and growth across the United Kingdom.
Changes we have made have already unlocked billions of pounds of new investment. This review demonstrates the government’s commitment to working with the sector on the long term future for the industry.
There are some 300 offshore oil and gas fields in production. The sector:
- still provides nearly 40% of the UK’s primary energy needs
- directly and indirectly supports around 450,000 jobs across the UK
- paid £4.7 billion in upstream taxation in 2013 to 2014
Oil and gas companies operating in the North Sea are taxed at higher rates than other companies, to ensure the nation a share of the profits of production. Marginal tax rates are 62% or 81%, in comparison to the standard corporation tax rate which is currently 21%.
In recent years the government has introduced a number of tax reliefs to encourage investment, particularly in North Sea fields that are smaller or harder to access. These ‘field allowances’ unlocked £7 billion of new investment last year, according to the industry.
The government has also signed decommissioning relief deeds to provide certainty over the tax relief available for decommissioning North Sea infrastructure when production ends. These deeds are worth over £20 billion to the industry.
An independent Scotland would have to invest around £3,800 per head – over ten times more than when costs are spread across the UK – just to match the amount the UK Government has committed on decommissioning.
The government estimates that there are between 11 and 21 billion boe remaining in the UKCS that could be economic to recover.