UK Tax Change to Help Asset Sales
A major obstacle to UK asset sales – the cost of decommissioning – will be eased from November 1 this year, following an agreement between the government and producers to change the 1975 Oil Taxation Act. This is now out to consultation until the end of August.
Transferable tax history (TTH) will mean that tax paid on output from a field, which is recoverable for decommissioning costs, will count as though paid by the buyer of that field. Without it, the buyer and seller would have to agree a value.
According to Oil & Gas UK, which represents the offshore community and campaigned for the change, TTH will not permit the purchaser to gain greater tax relief than the vendor would have, and will be at no net cost to the finance ministry.
The agreement excludes decommissioning expenditure for which the new participator is liable but which has been, or is to be, met directly or indirectly out of a payment made by the old participator. Otherwise, decommissioning expenditure that is incurred by the old participator, after the end of the transfer period, is to be treated for the purposes of the law as having been incurred by the new participator.
Offshore regulator Oil & Gas Authority (OGA) told NGW July 31 that this option will be available for licence transfers that receive its approval on or after November 1.
The finance ministry told NGW the same day that draft legislation on TTH was published for technical consultation as part of the draft Finance Bill 2018-19 on July 6 and this consultation will close August 31. It published an Outline of TTH in the Autumn Budget 2017, explaining the mechanism. TTH will be optional and the precise amount of tax history to be transferred from the seller to the buyer will be a matter of negotiation between the parties involved, subject to overriding safeguards that the amount transferred is not excessive.
Before decommissioning comes the so-called cessation of operations when, in late field life, the field operator and licensees are encouraged to confirm with OGA whether the OGA will have any objection to the field ceasing production, permanently, at a specified time. Under guidelines published July 31, licensees will have first to satisfy the OGA that all economic development opportunities have been pursued, both for the field and for any associated current or future developments including alternative use such as CO2 storage, and that any infrastructure access considerations have been addressed.