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Warm response to North Sea decomm tax breaks

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UK Chancellor of the Exchequer Philip Hammond brought some solace to hard-pressed North Sea oil and gas operators in the Autumn Budget with the promise of transferable tax breaks for companies taking over aged North Sea assets and faced with significant decommissioning costs. A freeze on fuel duty also proved welcome. There was also promise of new funding for electric car infrastructure and a £220mn clean air fund that will have significant implications for future diesel powered car sales, which are already plummeting, writes Brian Davis.

Commenting on the upstream tax breaks, Mairi Massey, Director in PwC’s Oil and Gas Tax Team. said: ‘The Office for Budget Responsibility (OBR) forecasts tax receipts from the oil and gas sector will total £900mn in the 2017/2018 financial year – down from £12.4bn in 2009 – so all help to the sector is welcome. At present, owners can claim tax relief for the cost of shutting down wells and clean up, but the tax relief cannot be passed on to a new owner. The much-anticipated Budget announcement, that legislation will be enacted to allow transfers from 1 November 2018, will be warmly welcomed by industry.

‘Industry trade body Oil & Gas UK estimates the change in the tax rules to allow these tax credits to pass from owner-to-owner could stimulate as much as £40bn in new investment and save the Treasury an average of £10mn per asset in deferred tax relief. This will be a much-needed boost to a maturing basin and will ensure that the UK Continental Shelf continues to be an attractive investment proposition as a result of its infrastructure, potential 20bn barrels of oil for extraction and a much more stable tax regime,’ continued Maissey.

Meanwhile, Michael Burn, Oil and Gas Partner of law firm Ashurst, remarked: ‘Decommissioning is one of the most significant challenges in agreeing valuations on M&A deals that bring new investment into the sector. To implement the concept of a transferable tax history will provide a useful additional tool in the armoury to help bridge valuation divides.’

‘Today’s innovative oil and gas tax announcements are likely to boost the market for North Sea oil and gas assets, particularly for mature fields,’ said Roman Webber, UK Oil & Gas Tax Leader at Deloitte. ‘North Sea tax rates are already globally competitive and the implementation of the Autumn Budget’s changes will remove the key tax barriers to mergers and acquisitions allowing the right assets to pass to the right hands. While the OBR estimates that the policies will increase the tax take by £70mn over the next five years, it is over the longer term that the real benefits will be felt, through increased economic activity and deferral of decommissioning of UKCS fields.’

Chris Bates, Senior Tax Consultant at global law firm Norton Rose Fulbright, commented: ‘The Chancellor has made good on his pledge in the Spring Budget 2017 to prolong and maximise productivity in the North Sea by confirming the transfer of tax history from a seller to a buyer of late life assets... This should alleviate the current bottleneck around the transfer of mature fields in the North Sea to late-life specialists.’ However, David Blumenthal, Legal Director at Clyde & Co, warned that while a tax break for transfer of North Sea oil and gas fields ‘should provide a welcome stimulus for investment’ it is ‘not quite the silver bullet.... more government support is needed to reverse the decline in oil and gas production in the North Sea than we have seen in the last few years.’

Diesel singled out
The Chancellor also announced that owners of new diesel cars registered from 1 April 2018 will face a 1% rise in vehicle excise duty (VED), but this will not apply to next generation clean diesel vehicles. Hammond said the higher rate would remain in place until car manufacturers can improve the technology and reduce emissions, while owners of existing diesels will have to move to a band higher and pay more in road tax than new cars. There will also be a 1% rise in the company car tax diesel supplement from 3% to 4% from 6 April 2018. Neither of these tax increases will apply to diesel powered vans or heavy good vehicles.

Edmund King, Head of the AA, remarked: ‘Sales of diesel vehicles are already falling. Down 40% last month. The changes are hardly going to make a difference.’

Meanwhile, Quentin Wilson and Howard Fox of the FairFuelUK campaign were pleased about the Chancellor’s freeze on fuel duty. They said: ‘The Chancellor has understood the debilitating effect of raising fuel duty on consumers, households, businesses and the broad economy.’

However, Brian Madderson, Chairman of the Petroleum Retailers Association (PRA) tweeted: ‘This budget represents a missed opportunity to fuel economic growth and minimise inflationary trends. PRA will continue to press for fuel duty cuts to boost our economy and to move the UK towards a level playing field with fuel duty levels in EU countries. But the freeze on petrol and diesel duty is an improvement on the well-leaked proposal to punish diesel drivers with a differential increase to diesel duty.’

In addition, the Chancellor noted that a new £400mn electric car charging infrastructure fund is to be established, with an extra £100mn plug-in-car grant and £40mn invested in charging R&D.

Photo: Press Association

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