In his Pre-Budget Report, the Chancellor Gordon Brown announced that once again he intends to raise the level of taxes levied on UK North Sea oil & gas production, with effect from 1 January 2006.

Despite the windfall of bumper North Sea tax receipts resulting from current high oil price levels, Gordon Brown has decided to raid the North Sea for additional revenues by increasing the level of the Supplementary charge to Corporation Tax (SCT) by 10% to 20%.

In 2002 the Chancellor introduced the 10% SCT charge for North Sea activities in addition to 30% Corporation Tax (CT) and as recently as his March 2005 Budget had introduced special rules accelerating the timing of tax instalment payments for North Sea profits compared to all other industries.

Julian Small the partner that leads Deloitte’s UK oil & gas tax practice commented:

“The Government claimed that the 2002 changes put in place a stable regime for the future of the North Sea, raising a fair share of revenues whilst promoting long term investment.  However, as today’s announcement confirms, the UK remains one of the world’s most volatile upstream oil & gas fiscal regimes, with the Government once again deciding to take a greater share of North Sea profits. 

“This will no doubt have a serious impact on how the UK is regarded, with the danger being that other international investment alternatives are seen as more attractive because of lower fiscal risk, hastening the decline of North Sea production”.

The government expects that this change will yield up to £2 billion of additional tax in 2006/07 and detailed forecasts prepared by Deloitte’s Petroleum Services group using its PetroScope® North Sea cashflow model indicate that it reduces the total discounted Net Present Value of North Sea assets by £8.7 billion (approximately 16%).

A limited investment incentive has been announced which will allow companies to preserve the benefits of tax relief on North Sea expenditure which cannot be utilised immediately.  Companies will also be able to defer tax relief on expenditure from 2005 to 2006, allowing the expenditure to be relieved against the new higher rate of tax.

In addition, following a short period of consultation, changes to the transfer pricing rules for North Sea oil have also been announced today.  Under the current regime, for oil sales otherwise than at arms length, the price subject to tax is a monthly market value determined by HM Revenue & Customs.  The Government believes that setting prices for a period as long as a month means that the reference price may not reflect the value of the oil at the time of delivery, and are introducing a reference price based on deliveries of oil in a five day window.  These measures will come into effect from 1 July 2006.  In addition there is to be ongoing consultation about an extension of the scope of these valuation rules, which the industry believes could have wide ranging implications for London as a major oil market.

Finally the Government has stated that there will be no further increases in UK North Sea taxation in the life of this Parliament.

Ends

Notes for editors:
Fields granted development consent by the DTI before 16 March 1993 are subject to Petroleum Revenue Tax (PRT) at a rate of 50% in addition to CT (30%) and SCT (previously 10%).  As PRT payments are deductible for CT/SCT purposes the marginal tax rate for such fields was 70%, rising to 75% after today’s announcement. 

All other fields developed since then are only subject to CT/SCT at a combined rate of 40%, rising to 50% after today’s announcement. 

The only material difference between the calculation of taxable profits for CT/SCT purposes is that financing costs are not tax deductible in calculating SCT whereas they are for CT purposes provided certain conditions are met.

Deloitte Petroleum Services delivers focused decision support tools and the consultancy required by companies to compete in today’s fast-paced global oil and gas industry.  PetroScope® is a life-of-field, discounted, cash-flow model capable of analysing oil and gas assets across the globe.  In addition to its modelling capacity, PetroScope® can be supplied with country databases, which are updated regularly with data on field ownership, forecast production, revenues, project costs and tariffs.

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