As the Budget is announced this week, Derek Leith, UK head of oil and gas taxation at EY, has taken up the role of Energy Voice’s guest editor. Follow along each day as he spells out the challenges and triumphs the industry faces.
Following the Chancellor’s final Budget for this Parliament much of the commentary focuses on the further welfare cuts apparently implicit in his fiscal projections. Although those of us in the North East of Scotland are interested in these matters, our more likely pre-occupation is trying to understand the likely impact of the changes to the North Sea fiscal regime.
On balance, I think the changes announced yesterday were at the top end of realistic expectations of what the Chancellor might do.
Certainly the supplementary charge (SC) rate reduction merely takes us back to the pre 2011 level of SC, but the Investment Allowance should mean that those companies investing in the North Sea will see their effective corporate tax rate reduced, perhaps to below 40%.
Similarly the petroleum revenue tax (PRT) change will make a difference to those older larger fields which support some of the key infrastructure in the North Sea. However, the analysis becomes more complex in relation to these fields because future profits may be effectively sheltered from PRT as a result of the PRT refund that they will receive when decommissioning occurs.
So the change in rate will, for some at least, be merely a cash flow advantage, whereas for others it will be an absolute benefit.
Therein lies the difficulty for HMT in making tax changes because it is not always easy to properly understand the behavioural impacts of these changes. There is evidence that the Chancellor understands that and he has stuck to making general changes rather than further tinkering with the regime.
Reducing tax rates undoubtedly have the biggest impact on investor sentiment and the Chancellor has quite rightly directed his efforts towards enhancing the attractiveness of the UK for oil and gas investment.
So what is likely to be the impact?
On the one hand we have claims that it should bring £5bn of investment back into play, that would otherwise not have happened; but others question what effect a measure costed at £1.3bn over 5 years can really have.
However, those in the latter camp fail to appreciate that the high capital investment in recent years coupled with project delays and a low oil price means that many companies are not forecast to pay corporate tax in all of the next five years and therefore the rate reduction and Investment Allowance costs nothing to HMT in that period for these companies.
So on balance I favour those who say it will have a significant positive impact. Judging by the buzz in the room at this morning’s Chamber of Commerce Business Breakfast the industry is feeling more positive today.
The other factors at play are the oil price, which no-one in the UK can control, and the cost base in the UKCS which we can influence. What the announcements made yesterday should mean is that the job losses in industry will not be as significant as they would have been if the Chancellor had not taken these steps.
But, the industry still has to rebase its costs and work hard to improve efficiency and innovation within the UKCS. The Chancellor has delivered at least a first step in creating a better, more competitive tax regime for the oil and gas industry, the onus is now on the industry to do its part.