North Sea oil and gas ring fence activities 
The government today has confirmed that it is proceeding with a package of reforms with regards to UK North Sea taxation. The announced changes, in particular the extension of relief for decommissioning expenditure, are a positive step and will be welcomed by the industry.  These changes are helpful as they address a number of anomalies and concerns. However the result is not the major overhaul of the tax system significantly enhancing the future sustainability of the UK North Sea that some would have hoped for.

Relief for decommissioning costs
Companies will be able to carry back losses arising in respect of decommissioning expenditure to 17 April 2002.  An increase from before where the carry back was for a maximum of three years.

The government has also announced that decommissioning expenditure incurred following cessation of a ring fence trade should attract relief until the decommissioning has been properly completed.  Previously only expenditure incurred in the three years following cessation attracted relief.

Capital allowances
The 100% First Year Allowances regime will be extended to mid-life decommissioning and new expenditure on long life assets. 

In addition, the increased rate of writing down allowances for existing long life assets of 10% (previously 6%) will also apply to ring fence activities.

Petroleum Revenue Tax
The government has announced that former licence holders that bear a decommissioning liability as a result of default by a subsequent licence holder have access to PRT relief.

Companies will also be able to elect for a field to come out of the PRT regime altogether where it will not become liable to PRT due to the availability of allowances.

In addition to the above changes, the closing of the following loophole has been announced:

North Sea management expenses
Draft legislation has been published which, with effect from today, will prevent companies claiming a deduction for expenses of managing an investment business against ring fenced profits.

The accompanying HMRC press release notes that the draft legislation is intended to close a ‘loophole’ in the rules governing the taxation of ring fenced activities that arose following the relaxation in 2004 of the provisions regarding relief for expenses of management.

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