UK Govt Allows Transferable Tax History: Update

(Writes through, with additional comments)

With effect from November 2018, companies buying into UK producing assets will be able to inherit the seller's tax history for that field, qualifying them for relief at time of decommissioning, following the government's autumn budget November 22.

The one-year delay is to allow time for the industry to agree on the mechanism for doing this. It will allow buyers to value an asset on the same terms as the seller, instead of being deterred by the uncertainy of the cost of decommissioning.

Offshore lobby group Oil & Gas UK (OGUK) had campaigned for this change, as it removes an obstacle in the way of investors with no tax history. OGUK Deirdre Michie said: "We note the measure is intended to be effective by November 2018 and are committed to work closely with Treasury to ensure the change delivers the intended outcome... Transferable tax history will not permit the purchaser to gain greater tax relief than the vendor and will be at no net cost to the Exchequer."

The problem had forced buyers and sellers to find creative solutions, as seen in Serica's purchase of BP's Bruce, Rhum and Keith fields announced November 21. 

Michie said: “While there have been a number of deal announcements in the basin over the last year, these have mostly been for less mature assets, have been extremely complicated and taken a very long time to negotiate. This tax measure should help complete deals more quickly and in a more efficient way."

Independent Oil & Gas CEO Mark Routh said: "We welcome this new innovative tax policy which is precisely what a mature oil and gas province such as the North Sea needs to stimulate deals, increase activity and therefore achieve higher production and revenue from the sector."

New entrants are the hoped-for solution to the UK's declining oil and gas output. There are believed to be 20bn barrels of oil and gas equivalent remaining so the government is anxious to avoid premature field closure – especially as many fields rely on third-party infrastructure to bring their output to market. 

Lawyers pleased, but details missing

The news was broadly welcomed in the tax community also. “The oil and gas decommissioning tax incentive changes encourage production and should also raise tax revenues. However, this is a tax incentive to encourage investment and must not be called a ‘loophole’ by successive governments, and should not be over-complicated by [the tax office's] fear of avoidance. Tax relief and incentives on oil and gas assets should not be considered as tax avoidance, and therefore should not fall under anti-abuse rules, even if tax is one of the main purposes of the investment,” commented international law firm White & Case partner, Michael Wistow.

Tax partner at Slaughter & May, William Watson, said: "The measures announced today will remove one of the more significant barriers to new investment in mature fields, namely the inability of incoming participators to access the tax history of the seller.  From November next year this will open up the potential market for smaller specialists focussed on late life assets, as tax relief for decommissioning costs is a critical part of the calculation for them.”

And senior tax consultant at another law firm Norton Rose Fulbright, Chris Bates, said that finance minister Philip Hammond had "made good on his pledge in the Spring Budget 2017 to prolong and maximise productivity in the North Sea.... This should alleviate the current bottleneck around  the transfer  of mature fields in the North Sea to late life specialists."

Fiona Legate, a senior North Sea analyst at upstream consultancy Wood Mackenzie, noted: “The mechanics of transferring tax history are yet to be announced, but we expect the calculations will be complex. The UK is the first country to bring in such a measure and it’s likely other countries with mature hydrocarbon plays will be watching this legislation and its success closely.”

It was announced on the day that upstream regulator OGA announced strong interest in the 30th licensing round that offers mature blocks and which closed to applications November 21.