Pausing to review the landscape ahead of Philip Hammond’s debut statement as Chancellor, it is difficult to imagine a more challenging set of circumstances for him to deal with.
The country will watch eagerly to see whether he follows similar approaches to his predecessor George Osborne, and how he deals with the uncertainty that has consumed the markets following the Brexit vote and Trump’s progression to President-elect.
Of particular relevance to those in the oil and gas industry is whether Mr Hammond will make further changes to the North Sea tax regime.
There has been a significant overhaul in the past two Budgets, 2015 and 2016, with tax rates falling and simplification (to a degree) of investment incentives.
While the ring fence corporation tax rate has remained constant throughout at 30%, the rate of supplementary charge fell from 32% to 20% with effect from 1 January 2015, and again to 10% a year later (now combined 40% tax on profits).
In addition, Budget 2015 announced a reduction in the rate of petroleum revenue tax from 50% to 35% with effect from 1 January 2016, and Budget 2016 went further by reducing the rate to 0% from that date.
The highest combined tax rate nominally applying to a UK field has thus fallen from 81%, prior to 1 January 2015, to 40% on the same date a year later.
At the same time, the various incentives available against supplementary charge have been streamlined. A myriad of field allowances were created during the period between 2009 and 2013, which provided incremental deductions against supplementary charge profits.
While beneficial in mitigating the effect of the high supplementary charge rate, the allowances were determined largely by reference to geological or physical criteria and created complexity in the regime.
Budget 2015 swept all these allowances away, and replaced them with a simpler super-deduction against supplementary charge profits equivalent to 62.5% of capital expenditure.
The purpose of the investment allowance is broadly to reward capital investment that leads to incremental revenues – companies investing heavily will effectively be taxed at 30% on a significant part of their profits, whereas companies harvesting profitably are taxed at the “full” rate of 40%.
These changes followed the path for reform set out in HM Treasury’s “Driving Investment” paper, which was issued in late 2014 following consultation with the industry.
In that paper the government stated it would apply the following principles, as it seeks to maximise economic recovery of hydrocarbons while ensuring a fair return on those resources for the nation:
-To be consistent with the objective of maximising economic recovery as new projects become ever more marginal, the overall tax burden will need to fall as the basin matures.
-When making judgements about fiscal policy, the government will consider the wider economic benefits of oil & gas production, in addition to revenues.
-The government’s judgement of what constitutes a “fair return” will account for the competitiveness of commercial opportunities in the UK and UKCS and take account of both prices and costs.
Despite the changing of the guard within Downing Street in recent months, there is no apparent reason for government to change course in relation to its future handling of the North Sea regime.
Against that backdrop, what further changes could be considered for inclusion in the Autumn Statement?
Derek Leith, is an EY partner and head of Oil and Gas Taxation