UK: Shale gas: the new tax regime
03 March 2014
Posted by: Author: Ronan Lowney
Author: Ronan Lowney (Bond Dickinson LLP)
The UK Government recently published its proposals and draft legislation for tax provisions relating to onshore shale gas following extensive discussion with the industry. Along with the provisions of the draft legislation in the Finance Bill 2014, the results of the consultation process was published on 10 December 2013.
The aim of the new regime is to provide certainty for those involved in exploration, appraisal and production and at the same time facilitate commercialisation of a sector which has high initial capital requirements. These aims are to be recognised through a number of measures, which include extending the time period for supplementary expense and the effective reduction/ elimination of the supplementary charge for shale gas production (thereby bringing the tax rate down from 62% to 30%).
Companies involved in a ring fence trade enjoy the benefit of an uplift on losses so as to maintain the benefit of those losses over the time it would take to set them against income from extraction. The uplift is 10% and was originally carried forward for 6 accounting periods. Due to the longer timescale envisaged for returns on shale production, the time limit of carry forward was extended to 10 accounting periods from the Budget in 2013. It is now proposed that this extension shall apply to all onshore oil and gas activities. This would have the effect of lessening the burden on operators who have interests in onshore conventional hydrocarbons as well as unconventional hydrocarbons such as shale gas.
This allowance is being introduced for new sites for which approval is given from 5 December 2013 in order to encourage investment in shale gas exploration for sites which are otherwise not commercially viable due to the higher tax rates when the supplementary charge is taken into account. The effect is to give relief against the supplementary charge, potentially reducing the effective tax rate to 30%. This is achieved through making a proportion of profit (generally equal to 75% of the capital spend) deductible. Allowances which are not activated can be carried forward to future periods, or allowances can be used against profits from other pads. In conjunction with the introduction of this relief, existing field allowances will be abolished for new sites.
Following announcements made by the Chancellor earlier in 2013, it has been agreed with the industry that for the exploration phase of any new shale gas well, a direct payment of £100,000 per well would be paid by the operator for local community benefit. In addition, once the well becomes productive, 1% of revenue would be provided for such community benefit. Consultation and outcome The consultation process which resulted in the provisions proposed involved many of the major operators or potential operators in the area of shale gas exploration and production. There is in these provisions recognition of the need to address the commerciality and timeframes required for the exploitation of this resource. The draft legislation will not yet pass for a number of months. However, the clear intention is to have the regime, particularly for Pad Allowances, on a new footing immediately in order to support new investment in the sector.
This article first appeared on lexology.com.