Closing corporate tax: tariff revenue

Who is likely to be affected

Oil and gas companies that operate in the UK or on the UK continental shelf (UKCS).

General description of the measure

This measure clarifies that the activities of oil licensees in the UK and on the UK continental shelf which give rise to tariff revenues, in relation to UK oil and gas assets, are oil extraction. This means that profits from these activities are subject to Ring Fence Corporation Tax (RFCT) at 30% and additional costs (CS) to 10%.

This measure amends the definition of tariff revenue in the legislation to clarify that there is no distinction between RFCT and CS objectives between the treatment of third-party income from former (PRT) and new (no PRT) oil fields.

Political objective

The UK oil and gas industry has made and continues to make significant contributions to the UK economy. The sector supports over 300,000 jobs, contributes to UK energy security by supplying around half of our primary energy needs and has paid around £330 billion in production taxes to date.

Therefore, to continue to support the industry, this measure is intended to provide certainty by placing beyond doubt that all tariff revenues collected by licensees fall within the scope of the closure regime. Being under the closure regime provides companies with generous allowances for capital expenditures, including decommissioning.

This clarification will provide certainty to the oil and gas industry, while building on the 2016 budget announcement of the expansion of investment zone and cluster allocations to include tariff revenue. This is to encourage investment in UKCS infrastructure, improving the incentive for owners to maintain their investments and reducing early dismantling of key infrastructure. This is in line with the government’s commitment to maximizing economic recovery and the principles set out in “Driving Investment: a plan to reform the oil and gas fiscal regime”.

Context of the measure

In 2015, the Investment Zone and Cluster Allocations for CS were presented. These have allowed oil and gas companies to invest in the UKCS generate an allowance which could then be used to reduce profits subject to CS.

Budget 2016 announced the expansion of these allocations to include fare revenues. However, following informal consultation with industry and analysis of the legislation, a degree of ambiguity has been found in the current legislation which makes it difficult to achieve the expansion as planned. This distinction in legislation is likely due to various changes in legislation and previous consolidation of tax laws.

After talking to industry about current practice and reviewing the original intent of the policy, the government is now amending the legislation to confirm the treatment that all tariff revenue from licensees should be at the inside the fence and subject to RFCT and CS.

Further information and information on this measure is provided in the published technical note.

Detailed proposal

Effective date

The measure will apply to accounting periods beginning on or after January 1, 2018.

Current law

Section 291 of the Corporation Tax Act 2010 (CTA 2010) brings the activity of collecting “tariff revenue” within the scope of the peripheral oil and gas trade as an oil extraction activity. This means that the profits from this activity are subject to RFCT and CS.

Tariff revenue is specifically defined in section 291(9) of the CTA 2010 by reference to the definitions in Sections 6 and 6A of the Petroleum Taxation Act 1983 (OTA 1983).

Proposed revisions

Legislation will be introduced in the Finance Bill 2017-18, modifying the definition of tariff revenue in Article 291 of the CTA 2010 ensure that there is no distinction between the treatment of tariff revenue from PRT and no PRT assets for RFCT and CS purposes

Summary of impacts

Impact on Treasury (£m)

This measure should have no impact on the Treasury.

Economic impact

This measure should not have significant economic impacts.

Impact on individuals, households and families

This measure has no impact on individuals or households since it only affects businesses.

The measure should not affect the formation, stability or breakdown of the family.

Equalities impacts

It is not expected that there will be any negative impacts on groups sharing protected features.

Impact on businesses, including civil society organizations

Of the roughly 200 oil and gas companies that operate in the UK or on the UK continental shelf, only those that collect tariff revenue will be affected.

This measure will have a positive impact on the oil and gas industry by clarifying that all tariff revenues are within the scope of circular closing. This will allow the new statutory instrument to be in place, meaning that companies will then be eligible to activate the investment and cluster area allowances, which will reassure the industry. This measure should have a negligible impact on the administrative costs of companies. One-time costs could include familiarization with this clarification of existing rules. It is not expected that there will be any ongoing costs. This measure will have no impact on civil society organisations.

Operational impact (£m) HM Revenue and Customs (HMRC) Or other

There will be no operational impact on HMRC.

Other impacts

Wider environmental impact: On air quality and climate change, the oil and gas industry is heavily regulated to ensure that its production methods do not lead to pollution. Investment in oil and gas production is needed even as the economy decarbonizes. Justice impact test: This measure will introduce new legislation that may impact the number of appeals, although the impact is expected to be minimal.

Other impacts were taken into account and none were identified.

Monitoring and evaluation

The measure will be reviewed through regular communication with affected taxpayer groups and monitoring of tax revenues and activity in the North Sea oil and gas sector.

Additional tips

If you have any questions about this change, please contact Nicola Garrod by phone: 03000 589251 or email: nicola.garrod@hmrc.gsi.gov.uk.

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