There has been much uncertainty in recent years around the tax relief available to companies as part of the decommissioning process, as a result of a constantly changing UK tax regime.
Oil and gas companies have commonly been required to provide security for their share of decommissioning costs on a gross basis (i.e. without taking account of the tax relief available on those costs). Clearly, this resulted in significant capital being unavailable for other investment.
In March 2011, the UK Government announced plans to work with the oil and gas industry to achieve longer term certainty on decommissioning activity. A consultation on "Decommissioning Relief Deeds" (DRD) launched in July 2012, looking at the potential to establish legally-binding contracts between the government and oil companies to guarantee a base level of relief.
After much consultation, the final version of the DRD was published in November 2013. What this meant was that any company entering into a DRD would receive a "difference payment" from the government, if the relief obtained in any period through decommissioning costs was less than a "reference amount." The reference amount being the relief that would have been available applying the legislation as in force at 17 July 2013 (the date when Finance Act 2013 came into effect).
The initiative is worth in excess of £20 billion over a 30-year period, and is designed to encourage investment through reducing capital committed as part of decommissioning security agreements (DSAs).
Following on from the introduction of DRDs, the UK Government is consulting with industry to improve access to decommissioning tax relief to new entrants into the UK Continental Shelf (UKCS).
The motivation here is that, with the maturity of the UKCS and with estimates for decommissioning costs sitting at around £40 billion, the UK could (and should) be the site of new innovative decommissioning methods, with the development of new skills and expertise. However to support this, new entrants and specialists need to be attracted into the basin to take on decommissioning work. Currently the tax system does not encourage companies to do this.
One of the existing problems is that where such specialists take ownership of assets, they may not benefit from tax relief as often, they are not making profits subject to ring fence corporation tax and supplementary charge against which to offset their decommissioning costs.
The opportunity here is immense and the benefits to industry go beyond cost reduction. Get this right and the UK could develop highly valuable expertise and technologies, which could be exported around the world.
David Ward, pictured, is tax director at Scottish Chartered Accountancy and business advisory firm Johnston Carmichael.
Subscribe
