The modified Corporation Tax rules for companies in the UK oil and gas industry including calculating the charge and payment deadlines.
Ring Fence Corporation Tax
Ring Fence Corporation (RFCT) tax and the supplementary charge only apply to companies involved in the exploration for, and production of, oil and gas in the UK and on the UK Continental Shelf (UKCS)).
RFCT is calculated in the same way as Corporation Tax, but with the addition of a ‘ring fence’ that treats these activities as a separate trade. The ring fence prevents taxable profits from oil and gas extraction being reduced by losses from other activities or by excessive interest payments.
The rates of RFCT differ from those of Corporation Tax. The main rate of tax on RFCT is 30%.
Any Petroleum Revenue Tax (PRT) paid by a company is an allowable deduction in computing ring fence profits.
Cross ring fence transactions
Any cross ring fence transactions within a single company are treated as if they were transactions between associates and are subject to the normal transfer pricing rules.
The normal transfer pricing rules are suspended where the trade involves the disposal or appropriation of oil, instead the Petroleum Revenue Tax (PRT) valuation rules apply for Corporation Tax purposes.
There are special rules concerning oil and gas chargeable gains in the UK and on the UKCS).
Chargeable gains are part of a company’s ring fence profits and subject to RFCT and supplementary charge, but no gains arise where North Sea licences for developed areas are swapped. Also, if all the proceeds from a disposal of ring fence assets are reinvested in other ring fence assets then any gain on the disposal is exempt.
Capital expenditure on oil extraction activities is relieved under the appropriate capital allowances rules, and in most cases 100% first year allowance is due.
The capital cost of oil exploration and appraisal activity may be relieved in full in the year in which it is incurred under the research and development capital allowances code.
Expenditure on the decommissioning of fields and assets normally qualifies for immediate 100% relief. Any loss attributable to such costs can be carried back and set against profits arising but not beyond 17 April 2002, when the supplementary charge was introduced.
Both RFCT and the supplementary charge are payable in 3 equal instalments each year:
- first instalment - 6 months and 13 days from the start of the accounting period
- second instalment - 3 months from the first instalment due date
- third instalment - 14 days from the end of the accounting period
You can find detailed guidance on RFCT in the Oil Taxation Manual.