Oil & Gas UK Economic Report 2014

8. Appendices

1

2

a) The Fiscal Regime for Oil and Gas

to fields given development consent before March 1993 by the then DTI 18 . PRT is levied at a rate of 50 per cent and is deductible for the purposes of computing profits charged to RFCT and SC. Immediate relief is given for all capital and revenue expenses. Marginal tax rates therefore vary across the UKCS as follows (see Figure 43 overleaf): • Fields subject to PRT, SC and RFCT pay 81 per cent of their profits in tax, comprising PRT at 50 per cent, plus 30 per cent RFCT and 32 per cent SC of the remaining 50 per cent • Fields not paying PRT (either because they are not liable to this tax, or by virtue of a relief called Oil Allowance 19 ) are subject to tax at a marginal rate of 62 per cent (30 per cent RFCT plus 32 per cent SC) • Fields which benefit from a field allowance (FA) – a relief against SC – pay tax at a rate between 30 per cent (that is only paying RFCT) and 62 per cent (on all net income above the value of the FA).

The production of oil and gas from the UKCS is subject to a tax system which is different from that applying to the rest of industry and commerce in the UK. It is a so-called ‘ring fence’ regime 17 comprising: • Ring Fence Corporation Tax (RFCT) – this is computed in a similar way to normal Corporation Tax (CT, a profits tax), but with different rules for the treatment of losses, 100 per cent first-year capital allowances, and a higher rate of 30 per cent on all profits. The oil and gas industry has not benefitted from reductions in the rate of CT seen elsewhere in the economy in recent years. • Supplementary Charge (SC) – this is an additional corporation tax, levied on all profits at the rate of 32 per cent (20 per cent before March 2011). Profits are computed in the same way as for RFCT, but finance costs are not deductible for SC purposes. • Petroleum Revenue Tax (PRT) – this is a field-based tax on profits and only applies

3

4

5

6

7

8

17 The ‘ring fence’ ensures that the profits from oil and gas production are taxed separately from any other activities within a company and any losses made by those other activities cannot be used by the company to offset the profits from the production of oil and gas. 18 Department of Trade & Industry, DECC’s predecessor for energy matters. The DTI’s other main functions are now the responsibility of BIS. 19 Oil Allowance is a relief to ensure that PRT is only levied on the largest, most productive fields. The allowance gives each field liable to PRT amounts of oil and gas which can be produced free of PRT per tax period and for the life of the field. Any production above these amounts is subject to PRT at the prevailing rate.

95

ECONOMIC REPORT 2014