Ring Fence Corporation Tax: tariff receipts
Published 22 November 2017
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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 clarifies that activities by petroleum licence holders in the UK and on the UK Continental Shelf which give rise to tariff income, in relation to UK oil and gas assets, are oil extraction activities. This means profits from these activities are subject to Ring Fence Corporation Tax (RFCT) at 30% and Supplementary Charge (SC) at 10%.
This measure amends the definition of tariff receipts in the legislation to make it clear that there is no distinction for RFCT and SC purposes between the treatment of third party income arising from old (PRT) and new (non-PRT) oil fields.
Policy objective
The UK oil and gas industry has made important contributions and continues to make them to the UK economy. The sector supports over 300,000 jobs, contributes to the UK’s energy security providing around half of our primary energy needs and has paid around £330 billion in production taxes to date.
Therefore, to continue to support the industry, this measure intends to provide certainty by putting beyond doubt that all tariff income received by licence holders is within the scope of the ring fence regime. Being within the ring fence regime provides companies with generous allowances for capital expenditure, including decommissioning.
This clarification will provide certainty to the oil and gas industry, whilst building on the Budget 2016 announcement of the expansion of the Investment and Cluster Area Allowances to include tariff receipts. This is to encourage investment in UKCS infrastructure, improving the incentive for owners to maintain investment and reducing early decommissioning of key infrastructure. This is in line with the government’s commitment to maximising economic recovery, and the principles set out in ‘Driving Investment: a plan to reform the oil and gas fiscal regime’.
Background to the measure
In 2015, the Investment and Cluster Area Allowances for SC were introduced. These enabled oil and gas companies investing in the UKCS to generate an allowance which could subsequently be used to reduce the profits subject to the SC.
Budget 2016 announced the expansion of these allowances to include tariff receipts. However, following an informal consultation with industry and analysis of the legislation, a degree of ambiguity was found in the current legislation making it difficult to deliver the expansion as intended. This distinction in legislation is likely to have arisen due to the various changes to the legislation and previous consolidation of Taxes Acts.
After engaging with industry on current practice and looking at the original policy intention, the government is now amending the legislation to confirm the treatment that all tariff income arising to licence holders should be within the ring fence and subject to RFCT and SC.
Further background and information on this measure is provided in the published technical note.
Detailed proposal
Operative date
The measure will have effect for accounting periods beginning on or after 1 January 2018.
Current law
Section 291 of Corporation Tax Act 2010 (CTA 2010) brings the activity of earning ‘tariff receipts’ into the scope of the oil and gas ring fence trade as an oil extraction activity. This means profits from this activity are subject to RFCT and SC.
Tariff receipts are specifically defined at section 291(9) of CTA 2010 by reference to the definitions in Oil Taxation Act 1983 (OTA 1983) sections 6 and 6A.
Proposed revisions
Legislation will be introduced in Finance Bill 2017-18, amending the definition of tariff receipts in Section 291 of CTA 2010 to ensure that there is no distinction between the treatment of tariff income arising from PRT and non-PRT assets for RFCT and SC purposes
Summary of impacts
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 |
|---|---|---|---|---|---|
| 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
This measure has no impact on individuals or households as it only affects businesses.
The measure is not expected to 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
Of the approximately 200 oil and gas companies that operate in the UK or on the UK Continental Shelf, only those earning tariff income will be affected.
This measure will have a positive impact on the oil and gas industry by clarifying that all tariff income is in the scope of the ring fence. This will allow the new Statutory Instrument to be laid meaning companies will subsequently be eligible to activate Investment and Cluster Area Allowances, giving the industry reassurance. This measure is expected to have a negligible impact on businesses admin burdens. One-off costs could include familiarisation of this clarification of existing rules. It is not expected that there will be any on-going costs. This measure will have no impact on civil society organisations.
Operational impact (£m) HM Revenue and Customs (HMRC) or other
There will be no operational impact on HMRC.
Other impacts
Wider environment impact: on air quality and climate change, 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 . Justice impact test: this measure will introduce new legislation which may have an impact on the number of appeals, although the impact is expected to be minimal.
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.