The UK Government has run out of fiscal levers that could be pulled to help the country’s struggling oil and gas industry, a tax expert has said.
Derek Leith, global oil and gas tax leader at EY, said steps taken by successive governments to make the regime more competitive have left “little room for further manoeuvring”.
“Regrettably, at this moment in time there appears to be no fiscal changes that would provide a material, uniform incentive to make investments in the UKCS,” Mr Leith lamented.
He said the sector would have to “carefully navigate” its own way through an “extremely challenging environment”.
Mr Leith was weighing up whether the UK Government could take similar steps to its Norwegian counterpart, which this week included temporary amendments to the upstream tax regime in its budget.
Read his op-ed in full: Are there any tax levers left to pull for the UK oil and gas industry?
He said the British Government had been quicker to “tweak” its tax system over the years. Since 2002, a full tax write-off of capital expenditure has been available to UK oil companies, while in 2016 the supplementary charge was lowered to 10% from a high of 32% in 2011.
The sector has also benefitted from the introduction of an uplift of 10% on trading losses brought forward.
Norway’s measures are mainly based on a 100% write-off of capital investment against the “special” tax applied to income from petroleum extraction. The UK already has that mechanism in place.
Norway is also letting companies monetise any trading losses for 2020-21 in the form of a tax repayment, which “isn’t currently possible in the UK” and is unlikely to be considered.
Mr Leith said: “As is the case with the current Norwegian tax repayments available on losses incurred during exploration, the tax repayment on trading losses in 2020 and 2021 can be ‘pledged’.
“That enables a bank to lend against the security of the tax repayment. UK insolvency law does not allow for tax repayments to be pledged in this manner.”
But the biggest difference between the two regimes remains the tax rate, Mr Leith explained.
In the UK, the top rate of tax is 40%, in Norway it is 78%. Because of the significantly higher rate in Norway, the advancement and monetisation of tax relief makes a material difference to the cashflow of an investor, he said.
In the year the capex is incurred, the proposed changes increase the cashflow benefit associated with tax relief by around 50% to just over 65% of the capex.
Mr Leith added: “It is a sad reality of the current oil price environment that even if the UK government were willing to provide a tax repayment for trading losses in 2020 and 2021, at the UK rate this might not be material enough for companies to re-evaluate their investment decisions and continue to sanction projects.”