Policy paper

Oil and gas taxation: transferable tax history and retention of decommissioning expenditure

Updated 7 November 2018

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 provides a transferable tax history (TTH) mechanism for oil and gas companies operating on the UKCS and amends the Petroleum Revenue Tax (PRT) rules on retained decommissioning costs.

TTH will allow a seller of an interest in a UKCS oil licence to transfer some of its tax history to the buyer of the field. The buyer will then be able to set the decommissioning cost of the field against the TTH.

TTH will be available for licence transfers that receive Oil and Gas Authority (OGA) approval on or after 1 November 2018.

The measure will also give PRT relief when a seller retains a decommissioning liability. Relief will be available to the buyer where the seller subsequently incurs decommissioning expenditure or where the seller provides the funds for the buyer to decommission.

The fact that no relief is currently available in certain circumstances has led to unnecessary complexity in sale and purchase agreements. This will also apply to licence transfers that receive OGA approval on or after 1 November 2018.

Policy objective

The UK oil and gas industry continues to make important contributions to the UK economy. The sector supports over 300,000 jobs, contributes to the UK’s energy security by providing around half of our primary energy needs, and has paid around £330 billion in production taxes to date.

While the UKCS is a mature basin compared to other prospects, there is still an estimated 20 billion barrels of recoverable oil remaining.

In recent years, the government has taken significant steps to create the right environment for oil and gas producers to maximise economic recovery of the remaining hydrocarbons in the basin.

Extending the productive lives of late-life oil and gas fields is an important aspect of this objective, as it leads to new investment, delaying decommissioning and supporting activity in the UKCS for longer.

The ability of oil and gas operators to access tax relief on their decommissioning costs depends on the extent of their tax payment history. TTH will level the playing field between existing operators and new entrants to the UKCS, providing certainty on the tax relief available for decommissioning costs.

The changes to the PRT legislation will ensure that relief is available without the necessity of structuring complex sale and purchase agreements which will simplify the transfer of late-life assets.

This measure should encourage new investment in the North Sea, and help meet the objective of maximising economic recovery from the UKCS.

This measure is in line with the government’s commitment to develop fiscal policy in line with the principles set out in ‘Driving Investment: a plan to reform the oil and gas fiscal regime’.

Background to the measure

In March 2017, the government published a discussion paper: ‘Tax issues for late-life oil and gas assets’. This invited views on whether changes to the tax system could encourage new investment in older (‘late-life’) oil and gas fields and infrastructure.

One issue identified in the discussion paper was the fact that new companies might not have a history of paying tax, to enable them to get tax relief when they came to decommission. This put new entrants at a disadvantage compared to existing operators, and was a potential barrier to new investment in the UKCS.

The paper outlined the concept of a transferable tax history to address this issue, to ensure a level playing field between buyers and sellers of assets.

The paper also considered whether changes to PRT could help overcome obstacles to transactions. At the same time, the government established an expert panel to consider the issues in detail.

At Autumn Budget 2017, the government responded by committing to introduce a new TTH mechanism for oil and gas producers. A commitment was also given to consulting on changes to the PRT rules around retained decommissioning obligations.

In order to bring forward the benefit to the UKCS, the legislation allows for the TTH mechanism to be available for deals where the transfer of the licence has been approved by the OGA on or after 1 November 2018.

Draft legislation was published for consultation on 6 July 2018.

Detailed proposal

Operative date

The measure allows for the TTH mechanism to be available for deals where the transfer of the licence has been approved by the OGA on or after 1 November 2018.

The measure also allows for PRT relief for retained decommissioning expenditure to be available for licence transfers approved by the OGA on after 1 November 2018.

Current law

There is no existing legislation to allow for the transfer of tax history from one company to another. Current law for the PRT legislation is contained in paragraph 8 of schedule 3 to the Oil Taxation Act 1975.

Proposed revisions

Legislation will be introduced in Finance Bill 2018 to 2019 to provide for the mechanism to transfer tax history. On the sale of an interest in a UK oil licence, a seller and buyer will be able to make a joint election to transfer some of the seller’s historic ring fence profits, together with the tax charged on those profits (the ‘tax history’), to the buyer.

Following the election, the buyer will be able to carry back decommissioning losses against this transferred tax history to generate tax repayments under certain circumstances. The transferred tax history will immediately cease to be available to the seller.

To prevent the commodification of tax history, and to ensure TTH will place buyers in an equivalent position to sellers, the TTH will only become part of the buyer’s history, and be capable of providing tax relief for the buyer’s decommissioning losses, once it is ‘activated’.

Activation is dependent on:

• the acquired field having permanently ceased production
• total decommissioning costs for the buyer’s acquired interest in the field being greater than the profits accrued on the buyer’s interest in the field since acquisition

The difference between the post-acquisition profits and the total decommissioning cost of the relevant field interest gives the amount of TTH that is activated.

This will mean that buyers must track the profit or loss of their acquired field interest. This ‘tracked profit’ will not affect the company’s tax liability while the field is producing - it is merely a shadow calculation for the purposes of activating TTH.

Once activated, the TTH becomes part of the buyer’s tax history and so if the buyer makes a claim to carry back a decommissioning loss, the loss can be set against the TTH subject to the normal loss carry back rules. This enables the buyer to get tax relief for the decommissioning.

The changes to the PRT legislation will also be introduced in Finance Bill 2018 to 2019. The anti-subsidy rules will be amended so that where the previous participator provides the current participator with funds for decommissioning, the current participator will be entitled to relief.

In addition where the previous participator carries out decommissioning directly their costs will be deemed to have been incurred by the current participator and will also be eligible for relief.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024
10	25	-5	15	10	10

These figures are set out in Table 2.2 of Budget 2018 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2017.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

However, within the sector, the measure should encourage new investment into late assets in the UK and UKCS which should lead to additional production of oil and gas, helping to increase the UK’s energy security, and supporting jobs and supply chain opportunities.

Impact on individuals, households and families

This measure has no impact on individuals or households as it only affects companies. There is no impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be any adverse impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will only impact on current owners of UKCS oil licences, and prospective buyers of such licences.

There are around 200 businesses currently extracting oil and gas in the UK and on the UKCS. TTH will be optional, so only those businesses which choose to transfer tax history will be affected by this measure.

For those businesses which do choose to transfer tax history, the measure is expected to have a negligible impact on businesses admin burdens. One-off costs include familiarisation with the new legislation, and the buyer and seller making a joint election in order to transfer tax history.

Once the tax history is transferred, the buyer will have certain ongoing obligations to track the profits and decommissioning costs of the field.

There is no impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be IT costs for HMRC to implement this change, these are estimated to be up to £1.9 million, dependant on the final design.

Other impacts

There will be a wider environment impact on air quality and climate change, as the oil and gas industry is heavily regulated to ensure its production methods do not lead to pollution. Investment in oil and gas production is needed even as the economy decarbonises.

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 activity in the North Sea oil and gas sector.

Further advice

If you have any questions about this change, email: tax.oilgas@hmrc.gsi.gov.uk.