Policy paper

Petroleum Revenue Tax: cutting administration costs for the oil industry

Published 23 November 2016

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

The measure will simplify the process for opting fields out of the Petroleum Revenue Tax (PRT) regime. The responsible person for a taxable oil field will be able to remove the oil field from the PRT regime simply by making an election to do so, and then notifying HM Revenue and Customs (HMRC).

Additionally, the measure will simplify certain reporting requirements for those participators who remain in the PRT regime by removing some elements which are no longer relevant. Removing these requirements don’t require legislative changes.

The government is making these changes following the permanent zero-rating of PRT from 1 January 2016.

Policy objective

At Budget 2016, PRT was permanently zero-rated. This was done in order to simplify the tax regime, to level the playing field between older fields and new developments, and to increase the attractiveness of UK investment opportunities.

This measure aims to reduce administrative burdens for participators in the PRT regime by making it easier for them to opt fields out of the PRT regime, and by simplifying the reporting requirements for those that remain.

Removing the conditions for opting fields out of PRT will significantly reduce the administrative burden associated with opting out and will allow more fields to opt out of the regime.

For participators with fields that remain in the PRT regime, removing certain reporting requirements will reduce the administrative burden in complying with the filing of returns.

This measure furthers the UK government’s support for the oil and gas industry and its objective of maximising economic recovery. It builds on the government’s long-term plan to reform the oil and gas fiscal regime (‘Driving Investment’) by making it more competitive, simpler, and more stable. It also supports HMRC’s commitment of reducing administrative costs for business by £400 million by the end of 2019 to 2020.

Background to the measure

PRT is a tax on profits from oil and gas production from fields given development consent before 16 March 1993.

At Budget 2016, the government permanently zero-rated PRT. It didn’t abolish the tax because some companies still require access to their tax history for carrying back trading losses and decommissioning costs.

Following the zero-rating, HMRC carried out a review of the PRT administrative regime over the summer, including workgroups with representatives from industry, to identify aspects of the regime that could be changed to reduce the administrative burden.

One of the main recommendations, and a key priority for industry, was a reform of the opt-out rules.

The current rules require the provision of a substantial quantity of data to provide assurance to HMRC that there is no tax risk to the Exchequer before a field can be opted out of the PRT regime. As PRT has been permanently zero-rated, there is no longer a requirement to have that assurance. This measure simplifies the rules for opting out so that the responsible person no longer has to provide the additional data, and can simply notify HMRC of an election to opt out.

The review also recommended removing some reporting requirements that are redundant following the zero rating. As a first stage, HMRC has identified removing the oil allowance and the tax liability instalment payment reporting requirements, as neither of these are required following the zero-rating.

Detailed proposal

Operative date

The new legislation for opting fields out of the PRT regime will have effect from 23 November 2016. This means that the responsible person will be able to elect to opt fields out of the PRT regime for chargeable periods beginning on or after 1 January 2017.

The legislation will apply retrospectively. HMRC will use its collection and management powers to allow the responsible person to notify HMRC of an election from 23 November 2016. If the simplified election is not approved by Parliament, then companies will need to submit the outstanding returns, but won’t be subject to late penalty charges.

The removal of the reporting requirements for oil allowance and instalment payments will apply to the chargeable period ending 31 December 2016 and all future chargeable periods. However, the relevant forms won’t be updated until a later date, as part of ongoing transformation work. The change will be communicated directly to industry, and in updated HMRC guidance. Further details are in the technical note published on 23 November 2016.

Current law

Schedule 20B of the 1993 Finance Act currently governs elections for fields to become non-taxable. The schedule was inserted by section 107 of Finance Act 2008, and renumbered by section 91 of Finance Act 2009.

Proposed revisions

Legislation will be introduced in Finance Bill 2017 to remove paragraphs 2 to 12 of Schedule 20B of the 1993 Finance Act.

New paragraphs 2 to 4 will set out that an election should be made in writing and notified to the Commissioners. The election will be deemed to have been made when a notification of election is sent to the Commissioners.

New paragraph 5 will set out that the election has effect from the start of the first chargeable period beginning after the election is made.

New paragraph 6 retains the provision that no unrelievable field loss can accrue from the field after the election has effect.

Summary of impacts

Exchequer impact (£m)

2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022
nil	nil	nil	nil	nil	nil

This measure is not expected to have an Exchequer impact.

Economic impact

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

Impact on individuals, households and families

The measure is not expected to impact on individuals and households, or on family formation, stability or breakdown.

Equalities impacts

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

Impact on business including civil society organisations

This measure is expected to have a significant impact on oil and gas businesses that operate in the UK or on the UKCS. This measure was recommended by a review of PRT administration costs that included input from oil and gas businesses.

Between 25 and 30 oil and gas fields (out of 100) are likely to opt out of the PRT regime. As they will no longer be required to comply with the requirements of the regime, they are estimated to save ongoing costs of £540,000 per annum. Further on-going savings include a removal of the requirement to submit returns, streamlining other forms and removing unnecessary calculations, these are estimated at £80,000 per annum for fields remaining in the scheme. Therefore, the average administrative burden saving to companies in the oil and gas sector is estimated at £620,000 per annum. One-off costs or savings are not expected to be incurred due to this measure.

Estimated ongoing impact on administrative burden (£m)

Ongoing average annual impact	(£m)
Costs	-
Savings	0.6
Net impact on annual administrative burden	-0.6

Operational impact (£m) (HMRC or other)

There will be no additional HMRC IT costs to implement this change - any changes to forms following the removal of reporting requirements will form part of ongoing transformation work.

Other impacts

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.

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.

Declaration

Jane Ellison MP, Financial 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.