Appendix 1. Fiscal Regime

Petroleum Revenue Tax (PRT)

PRT of 50% raises the marginal rate of tax to 75% for many oil and gas fields. It is applied on all fields which received development consent before 16 March 1993, and to tariff arrangements existing prior to 9 April 2003 relating to pipeline systems and other facilities which in some part service a PRT paying field. Tariff contracts arranged on or after this date are exempt from PRT, as addressed in the Finance Act 2004. PRT is applied to profits on a field-by-field basis in six-month chargeable periods. If losses arise, the ability to surrender losses to other fields is extremely limited.

PRT is deductible for CT and SCT. Capital and operating costs are also deductible. No deduction is allowed for interest, but most capital incurred pre payback (see below) qualifies for an additional deduction of 35% (uplift). As most fields subject to PRT are past payback, the significance of this relief is now very limited.

Payback is the period in which total cumulative income exceeds total cumulative expenditure. This period not only determines the cut off for uplift but also dictates the number of six-month periods for which safeguard applies.

Safeguard was introduced as a safety net for the benefit of the less profitable fields, essentially to ensure that in the early years of field life the PRT cannot exceed a level that would reduce the participators after tax profit below a minimum return on investment in the field. It limits PRT in each six-month chargeable period to 80% of the excess profits over 15% of cumulative capital which has qualified for uplift. It applies to the period from the start of production to the period of payback plus half as long again. It will not apply if it calculates PRT in excess of the “normal” calculation.

An “Oil Allowance” can be applied for fields with development consent on or before 31 March 1982, which makes the first 250,000 tonnes per six-month period, up to a cumulative total of 5 million tonnes, PRT free. For southern fields the amounts are 125,000 and 2.5 million tonnes, and for all other taxable fields 500,000 and 10 million tonnes respectively.

A “Tariff Receipts Allowance” is available for some income streams. This makes the first 250,000 tonnes of throughput for each user field per six-month period, PRT free.

Gas sold under contracts entered into before 30 June 1975 is exempt from PRT.

As mentioned above, new tariff business for transportation, processing, and other services provided through the use of UK and UKCS infrastructure, which is transacted under contracts entered into on or after 9 April 2003 will be exempt from PRT. The use of UK and UKCS infrastructure will need to be in relation to:

1. A field receiving development consent on or after 9 April 2003; or
2. An existing field using a new evacuation route, but only if that field has not to date made use of non-field assets, which have qualified for PRT relief.

While the exemption covers new tariff business contracted on or after 9 April 2003, it will only apply to income and expenditure received and incurred under such contracts since 1 January 2004.