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UK: New Onshore Tax Reliefs

24 December 2013   (0 Comments)
Posted by: Author: B. Palmer, P. Shah, S. Dames & A. Tuck
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Author: B. Palmer, P. Shah, S. Dames & A. Tuck (CMS Cameron McKenna)

On 5 December 2013, UK Chancellor of the Exchequer, George Osborne announced in the 2013 Autumn Statement, a new tax allowance to kick-start development of shale gas resources in the UK. On 10 December 2013, the UK government published draft tax legislation implementing policies from the both the Autumn Statement and the Budget earlier in the year. The new legislation will be included in the 2014 Finance Bill and will contain key measures for a new onshore oil and gas tax relief, which will support investment in the UK’s emerging onshore shale gas industry.

Despite continuing criticism, the government and the Chancellor have been vocal in their support for the shale industry. The Chancellor promised "thousands of jobs, billions of pounds of investment and lower energy bills” in the Autumn Statement and continued to state that UK’s shale gas tax regime will be the most competitive in Europe and lower than the US "making the UK an attractive, competitive opportunity for global operators”.

Onshore allowance

A new onshore allowance will be introduced with effect from 5 December 2013 to remove an amount equal to 75 per cent of capital expenditure incurred by a company in relation to an onshore site from its adjusted ring fence profits which are subject to the supplementary charge.  It is designed to support the early development of onshore oil and gas projects which are economic, but not commercially viable at the 62 per cent tax rate.

Contrary to expectation, the government has decided to extend the scope of the allowance to all onshore hydrocarbons, both conventional and unconventional, and the allowance will replace all existing field allowances for onshore projects.  This decision is based on the significant difficulty of apportioning costs and production income from a single pad between conventional and unconventional sources and the similar cost characteristics and commercial obstacles faced by all onshore oil and gas projects.

The government aims to ensure that the allowance is appropriately targeted so as only to support projects that would not have progressed without it. Very large conventional oil or gas fields are likely to be commercially viable without fiscal support, therefore there will be a production cap of 7 million tonnes of oil equivalent on the onshore allowance – in line with the upper limit of the current small field allowance.  The allowance will be activated by relevant income in relation to a qualifying site, will be able to be transferred on disposal of a licence interest and will allow a company to elect to transfer allowances between different sites for which it holds a licence.

Where companies are considering projects but have not yet received development consent, they will be able to choose between existing allowances (for which their project qualifies) or the new onshore allowance until the end of 2014.  From 2015, new onshore projects will only qualify for the onshore allowance.

Extension of the ring fence expenditure supplement ("RFES”) for onshore activities

Like the onshore allowance, the extension to the RFES supports the early development of onshore oil and gas projects which are economic but not commercially viable at the 62 per cent tax rate.  It recognises the longer payback period for these projects compared with offshore hydrocarbon projects and the fact that, at least in the early stages, the industry will be dominated by companies without other ring fence profits against which to relieve up front expenditure.  It will therefore allow companies without existing ring fence profits to maintain the time value of their losses and pre-trading expenditure over a longer payback period.

Currently, a company can make up to six claims for RFES on qualifying expenditure or losses to maintain their time value until they can be offset against future profits.  RFES adds a supplement of 10 per cent to the value of unused expenditure carried forward from one period to another (the supplement recognises the fact that for companies engaged in a trade where it may take some years to show a profit, the value of the expenditure will be reduced by the time they come to be utilised).  The proposal is to extend the number of claims available to companies involved in oil and gas related activities in relation to onshore hydrocarbons from six to ten accounting periods.

Similar to the onshore allowance, the government believes that limiting the extension to just shale gas, or to unconventional hydrocarbons, would significantly increase the complexity of the onshore oil and gas tax regime. An extension to all onshore losses and pre-trading expenditure will therefore reduce the administrative burden on companies, and acknowledges the similar commercial obstacles faced by all onshore activity.

The new tax regime along with other Government incentives could provide a much needed boost to investment in shale gas in the UK. The Office of Budgetary Responsibility has calculated that the expense to the treasury by the end of the decade will be at £20million which is relatively minor and could vary relative to production. The Government also intends to ensure that local communities benefit from hosting shale gas projects.  Previous announcements have stated that they will receive £100,000 for every fracked well site during the exploration phase and at least 1 per cent of revenue during production.

For the full Autumn Statement please click here, and for the full draft legislation please click here.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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