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UK government announces North Sea tax cuts

03 December 2014

UK Chancellor George Osborne has announced a series of tax measures designed to encourage investment in the North Sea oil and gas sector. In his Autumn Statement, he said a supplementary charge on oil firms' profits would be cut from 32% to 30%. Industry body Oil and Gas UK described it as "an important first step towards improving the fiscal competitiveness of the UK North Sea".

Stock image
Stock image

Other new measures included a new "cluster area allowance". It is aimed at encouraging companies to invest in ultra-high pressure and high temperature clusters.Mr Osborne said there had been record investment in the North Sea this year.But he warned that lower oil prices "clearly presents a challenge to this vital industry".

Treasury Chief Secretary Danny Alexander is due to expand onthe UK government's proposals in Aberdeen on December 4.

Alan McCrae, head of energy tax at PwC, said: "The UK government has been listening carefully to the concerns of the oil and gas industry and gaining a clearer understanding of the many issues it faces as it seeks to maximise opportunities in a maturing and challenging environment.

"The reduction in the supplementary charge rate from 32% to 30%, the extension of the Ring Fence Expenditure Supplement from six years to 10 years and the new cluster allowance will be welcomed by many in the industry and will be seen by some investors as an important signal that the UK is prepared to listen to their concerns."

Last week, business leaders renewed calls for North Sea tax breaks after a survey suggested confidence in the sector was at its lowest level for six years.

North Sea industry association Oil & Gas UK said the these were important first steps to reduce tax burden on ‘vital’ UK industry and improving the fiscal competitiveness of the UK North Sea. 

In a statement, the association said:

“This is the first cut in tax rates for the UK North Sea in 21 years. The industry currently pays tax on oil and gas production at special rates of between 62 and 81 per cent. The move will reduce these to 60 and 80 per cent respectively.

“Oil & Gas UK welcomes the announcement of the extension to the ring fence expenditure supplement (RFES) and the introduction of a new allowance which aims to encourage investment in the development of high pressure, high temperature fields within cluster areas. 

“The industry association is also encouraged by the Treasury’s stated intention to reduce North Sea tax rates further.  The Government needs to send a strong signal that the UK continental shelf is open for business.”

Following the announcement, Oil & Gas UK chief executive Malcolm Webb said:

“We understand the economic constraints under which today’s Autumn Statement is delivered. Therefore we take the Chancellor’s announcement of a reduction in the industry’s tax rate as an important first step to improve the fiscal competitiveness of the UK North Sea. 

“Oil & Gas UK also welcomes the extension of the ring fence expenditure supplement, which will allow investors to offset their costs against future production for a period of up to ten years instead of the current six years.  This move, which brings the offshore in line with onshore oil and gas production, could help attract new entrants into the basin and is just one of a range of fresh measures needed to help improve the investment outlook.

“However, these can only be seen as first steps towards improving the overall fiscal competitiveness of the UK North Sea.  We will certainly need further reductions in the overall rate of tax to ensure the long term future of the industry. Given the current crisis in exploration, we also need to see measures to promote exploration activity across the basin. HM Treasury has further proposals to discuss with the Industry tomorrow and we look forward to hearing these.

“The UK offshore oil and gas industry faces difficult times.  Over the last three years, exploration activity has slumped, production has declined by 40 per cent and operating costs have risen by 40 per cent.  We now see a $40 fall in the price of oil.

“However, with strong commitment from HM Treasury, the swift implementation of the Wood Review and industry action on cost and efficiency, we can today be a little more optimistic about the future.  The Autumn Statement underlined the importance of this industry and the contribution it makes to our economy. This offers us a way forward.”

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