Appendices - A) Fiscal Regime

Our industry is the highest taxed in the UK. Fields developed since March 1993 are taxed at 40% comprising Corporation Tax at 30% plus a Supplementary Charge at 10%. The marginal tax rate rises to 70% on fields which were developed prior to 1993 with the imposition of Petroleum Revenue Tax at 50% in addition to Corporation Tax and the Supplementary Charge.

Figure 48: Marginal Government Take from Fields Ranges from 40% to 70%

Corporation Tax (CT) and Supplementary Charge (SCT)

The combination of SCT and CT mean that all new fields developments are taxed at a minimum rate of 40%.

Corporation Tax (CT) is applied to all company profits in the UK at a rate of 30%. However the CT regime applying to the oil and gas exploration and production industry is modified and extended, and production has been subject to two additional imposts, Royalty and Petroleum Revenue Tax (PRT), although Royalty was abolished from 1 January 2003.

The Supplementary Charge to Corporation Tax (SCT) was introduced at a rate of 10% in the April 2002 budget, which also saw the introduction of 100% First Year Allowances for UKCS capital expenditure. Since the introduction of 100% First Year Allowances, all costs are effectively tax deductible as incurred, with the exception of long life assets which secure a 24% First Year Allowance, and 6% of the remaining balance on a reducing balance basis.

Taxable profits derived from the extraction of oil and gas from the UKCS are also “ring fenced” so that losses from other activities cannot be offset against ring fenced profits. Also stringent rules are applied to ensure that only interest relating to UKCS projects is deductible within the ring fence. The taxable profit for SCT differs from CT in that finance costs are not deductible.

2005 Budget

In the budget in March 2005 measures were announced to accelerate the payment of ring fenced Corporation Tax and Supplementary Charge from companies operating on the UKCS. Previously, most companies made two quarterly payments during an accounting period and two after the end of the accounting period. As a result of the budget changes, oil and gas companies will now make two-thirds of their payments on account during the accounting period and the remaining one-third in the month after the end of the period. The measures accelerate tax payments of around £1 billion into Fiscal year 2005/06 but do not increase the overall rate of taxation. During the first accounting period ending after 30 June 2005 there is a transitional arrangement.