UK Government backs down on oil tax

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THE UK Government has signalled a change in North Sea oil taxes, in a political bid to offset some of the damage done to the industry in the March Budget.

The UK will increase tax incentives to help firms operating in smaller, less profitable oil fields, the Treasury said on Tuesday.

In March, the Coalition Government caused dismay in the oil industry, when it increased the main tax on North Sea oil and gas producers to 32 percent from 20 percent.

This was done to raise money to cut fuel duty just before the Scottish Parliament election, in a transparent attempt to blunt criticism from the SNP over higher petrol prices in Scotland.

But the tax rise made new investment in the North Sea unprofitable. In response, Norway’s Statoil suspended $10bn worth of projects in UK waters. Gas giant Centrica also halted some operations.

CONCESSION

Now the Treasury says it will raise the annual rate of so-called Ring Fence Expenditure Supplement (RFES) to 10 per cent from 6 per cent.

RFES allows companies to increase the value of losses they carry over from one period to the next, for a maximum of 6 years. It is aimed at helping firms that do not yet generate enough income to be able to offset their exploration, appraisal and development costs against corporation tax.

The Treasury says the new RFES allowance will cost £50m a year by the fiscal year 2015/16. In making these changes, the Government appears to acknowledge that the increase in supplementary corporation tax announced in this year’s Budget has made the UK less competitive.

Malcolm Webb, head of Oil & Gas UK, the main industry trade body, said:

“This is a first step in the right direction. We made it clear after the Budget that Government actions and not just words would be required to begin to rebuild trust and restore the confidence of investors.

“This will help some new players but much more action is needed including on other reliefs and on the important decommissioning problem in the light of the Budget. However this has to be seen as an encouraging first sign of some real progress.”

Mike Tholen, Oil & Gas UK’s Economics Director, said: “Whilst the change to the allowance will not redress the damage caused by the recent tax increase, it will help new investors to the UKCS who are otherwise disadvantaged compared to more established players.

The North Sea oil industry anticipates further concessions from the UK Government, including extension of investment allowances for existing fields.

NEWSNET COMMENTS:

This concession by the Treasury is worth only £50m per year – chickenfeed given the fact that the March Budget aimed to take an extra £10bn from the North Sea. However, it does show the Treasury is under pressure to retreat on its disastrous Budget measures.