New changes for decommissioning tax rules will help end “areas of dispute” between the industry and UK government, according to a leading expert.
Accompanying the Chancellor’s Budget last week, the Treasury unveiled changes to corporation tax for decommissioning.
The measures aim to end a “big debate” which has been taking place between industry, the Treasury and regulator OPRED over what can qualify as a decommissioning cost, and therefore subject to tax relief.
Derek Leith, global oil and gas tax leader at EY, said there has been “quite a lot of frustration building on the industry front” over the legislation, which said that costs must be in relation with “an approved abandonment programme”.
This causes issues over to the long-winded process and “heap of expenditure” in the lead up to getting a decommissioning plan approved.
Other issues, which Mr Leith terms “mid-life” decom – removing a redundant accommodation module, for example, when modernising an old platform – might also run into debate with regulators who don’t view that as part of an overall approved decom programme.
The new rules widen the scope, clarifying that certain costs prior to the approval of an abandonment programme do still qualify as decommissioning expenditure.
Mr Leith said: “There’s been operational losses in the North Sea as a result of the low oil price in 2015, and then again in 2020, there’s been much more scrutiny of decommissioning claims that have been made.
“HMRC are highly involved and inquiring into and scrutinising decommissioning claims.
“What we found is they were very, very challenging around some areas of spend where OPRED, or whoever the relevant party was, hadn’t actually formally agreed with something.”
Email: “Does you agree this is part of decommissioning?”
Mr Leith said being able to include pre-approval costs was “in the spirit” of the original legislation, but not always read as such.
“For the past year and a bit there’s been a big debate …as to whether people in industry had to keep pestering people in OPRED with emails saying ‘oh you know, we’re about to do X, do you agree that’s part of decommissioning?’
“So what the provisions do is they are trying very hard to narrow the areas of dispute between industry and government.
“Clearly, industry feels it’s worthwhile to reduce contentious items and to secure, in my mind, that the work is undertaken at the most appropriate time to get to the best economic result.”
HMRC’s increased scrutiny comes from the huge costs associated with decom, and as the number of abandonment plans steadily rise as assets age and become uneconomic.
The National Audit Office said in 2019 that decommissioning was expected to cost £58.3bn, with around £24bn of that met through UK tax relief.
Last year the Oil and Gas Authority said the total estimated decom bill had fallen to £48.2bn, based on 2017 prices.
HMRC said the new clarification is expected to have “negligible” impacts on the government and oil and gas firms, with a spokesman adding “it’s more about providing clarity and certainty to businesses in the sector”.
Mr Leith said: “Suffice to say, they wouldn’t be putting it on the statute books if they didn’t think it was something that was helpful to have on, and we certainly do think it is helpful as well.”