Investment Allowance for oil and gas companies
Published 16 December 2015
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Who is likely to be affected
Oil and gas companies that operate in the UK or on the UK Continental Shelf (UKCS).
General description of the measure
This measure broadens the scope of the Investment and Cluster Area allowances to include expenditure on additional activities.
Investment and Cluster Area allowances were introduced from 1 April 2015 and 3 December 2014 respectively and reduce the amount of adjusted ring fence profits subject to the supplementary charge. The amount of the reduction is equal to 62.5% of the investment expenditure.
Policy objective
This measure supports the government’s objective of providing the right conditions for business to invest in the UK and UKCS to maximise the economic recovery of the UK’s oil and gas resources, at a time when the North Sea industry is facing considerable challenges. Building on the introduction of the Investment and Cluster Area allowances, this measure will encourage further investment in the UK and UKCS, leading to increased production of oil and gas, helping to increase the UK’s energy security, and supporting jobs and supply chain opportunities.
Background to the measure
The introduction of the Cluster Area Allowance was announced at Budget 2014 and the Investment Allowance at Budget 2015. Legislation for both allowances, which was included in the Finance Act 2015, made provision for the scope of investment expenditure to be broadened through secondary legislation.
At Summer Budget 2015, the Chancellor announced that the definition of investment expenditure would be extended to include certain discretionary non-capital expenditure and payments under long term leases.
The Statutory Instrument published in draft alongside this note implements these changes.
Detailed proposal
Operative date
The measure will have effect for expenditure incurred on or after 8 October 2015.
Current law
The primary legislation covering the Investment and Cluster Area allowances can be found in Chapters 6A and 9 of the Corporation Tax Act 2010.
Proposed revisions
The Investment and Cluster Area allowances reduce the adjusted ring fence profits which are subject to the supplementary charge by an amount equal to 62.5% of investment expenditure incurred by a company. This is in addition to any deduction allowed in computing ring fence and adjusted ring fence profits.
This measure extends the definition of investment expenditure to include certain types of discretionary operational expenditure and lease payments.
Operational expenditure will be investment expenditure if it is incurred for a specified activity, is not routine repair and maintenance and:
- increases the rate or amount of oil that can be extracted from a field or cluster
- increases the tariff income that can be earned
- extends the economic life of a field or facility used for oil extraction
Lease payments will be investment expenditure if:
- the lease is for a term of 5 years or more
- the asset that is leased is a mobile asset used for production or storage of oil
- the asset is to be used in relation to a field or a project for which approval was granted in a field development plan or field development plan (addendum) on or after 8 July 2015
- a draft Statutory Instrument is being published alongside this note
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
| Negligible | -5 | -5 | -5 | -5 | -10 |
These figures are set out in Table 2.1 of Summer Budget 2015 as ‘Oil and gas: expand investment allowance’, and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Summer Budget 2015.
Economic impact
The Investment and Cluster Area allowances reduce the effective rate of tax for companies incurring investment expenditure, making investment into oil and gas projects in the UK and UKCS more attractive and supporting jobs and supply chain opportunities.
Impact on individuals, households and families
There is no impact on individuals and households as these changes affect oil and gas companies only. The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
The allowance is considered to have no impact on any equality groups.
Impact on business including civil society organisations
There are around 200 companies operating in the UK or on the UKCS. The extension of the investment allowance will have a positive impact on company post-tax profits within the UK and will further support businesses involved in the exploration for and production of oil and gas. The administrative cost to businesses as a result of tracking investment expenditure is expected to be negligible.
This measure will have no impact on civil society organisations.
The measure is expected to have no impact on small and micro businesses. The change applies only to oil and gas companies operating in the UK or on the UKCS.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be no significant additional costs or savings for HMRC in implementing this change.
Other impacts
Sustainable development, wider environment and health: the oil and gas industry is heavily regulated to ensure its activities do not lead to pollution or disturbance to habitat of wildlife, and to ensure the health and wellbeing of its workers. Investment in oil and gas production is needed even as the economy decarbonises; the government estimates that oil and gas will continue to meet 70% of the UK’s energy needs out to 2030.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be kept under review through regular communication with affected taxpayer groups and the monitoring of tax receipts from and activity in the North Sea oil and gas sector.
Further advice
If you have any questions about this change, please contact Nicola Garrod on Telephone: 03000 589251 or email: nicola.garrod@hmrc.gsi.gov.uk, Clare Dunne on Telephone: 03000 585961 or email: clare.e.dunne@hmrc.gsi.gov.uk.
Declaration
Damian Hinds MP, Exchequer Secretary to the Treasury has read this Tax Information and Impact Note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.