In the wake of tumbling oil prices and ongoing fiscal review of the oil and gas industry, the UK government has now issued its consultation document for the proposed investment allowance.
Mairi Massey, energy tax director based in PwC's Aberdeen office, said,"While these proposals are likely to be welcomed by many across the North Sea industry, we believe it would have been helpful for the consultation to include the proportion of expenditure that attracts the allowance.
"In addition, there may be a problem for companies who had been anticipating a field allowance, but not yet received it. They might find the Investment Allowance is less generous and as a result, it's important their voices are heard during this consultation process. Nonetheless, we believe the allowance will be broadly welcomed."
Alistair Dunbar, oil and gas tax specialist based in PwC’s Aberdeen office, added:"One particular area that the Government would like evidence on is the type of expenditure that would attract the allowance. It's important that North Sea firms grab this opportunity to respond to consultation and help shape the fiscal future of our industry - particularly at a time when sustained low oil prices is already placing added pressure on the UKCS."
The UK tax rate for companies with oil licences in the UK Continental Shelf is currently set at 60%; 30% of this is corporation tax and 30% supplementary charge. A number of special category fields that are difficult to develop (such as small fields and deep water fields) are entitled to bespoke allowances that can lower the tax rate on some of their profits to 30%.
However, it can be complicated to determine if a field meets the necessary criteria for an allowance, and the allowances can distort investment as investors may only consider fields that are entitled to allowances.
This factor, in addition to the widely acknowledged need to stimulate investment in the North Sea, has resulted in the government proposing a new investment allowance.
Rather than having to meet field based criteria, the new investment allowance will be based on a proportion of capital expenditure incurred by the oil companies after the allowance is introduced. The allowance becomes available when the oil fields generate income and is then set against the profits subject to the 30% supplementary charge. (The 30% corporation tax charge remains.)
The existing field allowances - except for the recently introduced onshore and cluster allowances - will be replaced by the investment allowances. Any of these allowances that have not been utilised or activated will be converted into field allowances, meaning that no benefit is lost to them.
Adapted from press release by Hannah Priestley-Eaton