The development of innovative technology solutions has never been more crucial to the oil and gas industry than it is right now.
The adoption and integration of new technologies has been happening like never before as the industry seeks to lower development, production and decommissioning costs while operating in more extreme and remote environments.
Uptake of research and development (R&D) relief within the sector continues to be relatively low when compared with other UK industry sectors.
While companies are increasingly aware of R&D relief, there is still some misperception that only fundamental research and development activities qualify, rather than the broad range of developmental and operational activities undertaken to maximise recovery or reduce costs, that collectively progress industry knowledge and expertise.
Companies operating within the UKCS, for example, are routinely undertaking eligible activities as they seek to extend the operating life of mature hydrocarbon fields and ageing reservoirs through the development of enhanced oil recovery techniques.
Their assets are often beyond their original design life, heavily congested and contain obsolete equipment, but still require to be repaired, maintained and operational, and meet with stringent industry regulations and standards.
Companies continuously strive to improve their equipment, processes and technologies and need to develop methods to integrate and automate these solutions in an economically feasible manner. Production of hydrocarbons from complex formations requires the development of enhanced modelling tools to ensure reservoir viability.
At the end of an asset’s useful life, decommissioning presents its own unique set of challenges. So clearly, many companies are continuously innovating, with multiple potentially qualifying R&D projects progressing simultaneously.
Qualifying cost categories include staff and contractor costs, project-related consumables and software licences, payments to research institutions/subcontractors and a proportion of utilities spend. Smaller companies can obtain a cash refund of up to 33% of their qualifying spend.
For larger companies, the Research and Development Expenditure Credit (RDEC) scheme is available, providing a pre-tax 12% credit for outside the ringfence expenditure on similar qualifying cost categories.
The pre-tax credit rate for inside the ringfence qualifying expenditure is 49%, with the RDEC payable even where there is no corporation tax liability (subject to certain caps).
Under each scheme, R&D relief can also be applied retrospectively, up to two years following the end of the accounting period.
The guidelines relating to what activities qualify for R&D relief are long and can be difficult to interpret.
However, firms can rely on specialist R&D service providers, who can assist you across a wide range of areas including identifying activities which qualify for relief, establishing the eligible expenditure, analysing and mitigating the impact of grants, and preparing a robust claim.
Johnston Carmichael’s innovation taxes team has the skills, in depth sector knowledge, tax and technical expertise and experience of liaising with HMRC to develop streamlined approaches to an R&D claim process, ensuring that claims made for R&D relief are robust yet maximised.
David Ward, Tax Partner and Head of Innovation Taxes, Johnston Carmichael
For more information visit our website johnstoncarmichael.com