Appendices - A) Fiscal Regime (continued...)

Royalty

Royalty was abolished from 1st January 2003. Prior to this date, fields which had received development consent before 1st April 1982 received a charge at 12.5 per cent on the gross value of oil and gas produced, less an allowance for the costs of conveying, treatment and initial storage.

Exploration

The 2004 budget confirmed the introduction of the Exploration Expenditure Supplement (EES) as a result of the Exploration Consultation process conducted during 2003. The objective is to encourage exploration and appraisal by companies new to the UKCS, and the EES will ensure that the value of ring fenced losses available for carry forward is maintained during the period a new entrant is developing their business in the UK.

Research and Development (R&D)

Research and Development (R&D) expenditure in the UK is an allowable charge for taxation purposes. R&D attracts an uplift of 25% on revenue expenditure in the case of large companies and 50% in the case of small and medium companies. Capital expenditure on R&D does not qualify for uplift.

Unlike many other industries, many companies sub-contract all or part of their R&D; however, the tax credit is received by the company that executes the R&D work rather than the originating company that finances the work and ultimately bears the risk. There are exceptions made for work sub contracted to certain non profit making organisations.

With the technical challenges that lie ahead for the industry, promoting research and development (R&D) will become ever more important. The industry is supporting a proposal to allow companies that sub-contract R&D to obtain the tax credit rather than the subcontractor; this would enable the initiator of the R&D to benefit from the uplift and encourage further use of new technology to unlock incremental and new reserves in the UKCS.