Global Competitiveness

UK Fiscal Environment

The tax increase for the UKCS announced in the Pre-budget Report in December 2005 saw the supplementary charge to corporation tax (SCT) doubled to 20% from 1 January 2006. As a consequence, new fields are now taxed at a rate of 50% and older fields (pre 1993) which pay PRT, are taxed at 75%. Overall, the effective tax rate on the UK oil and gas industry has risen from 49% to 56%.

When the measures were announced in December, HM Treasury stated that the increase in SCT would raise an additional £2.0 billion in 2006/7; however by the time of the 2006 budget, the estimate was lowered to £0.9 billion. It appears that costs in the North Sea have risen faster and production was lower than anticipated by HM Treasury. The impact of carrying capital allowances from 2005/6 forward into 2006/7 may also have been a factor. In subsequent years, HM Treasury now forecast the increase in SCT will raise around an extra £2.4 billion in 2007/8 and 2008/9.

This was the third substantial change to the tax regime in as many years and reinforced perceptions of fiscal instability in the UK. At the same time fundamental questions remain on the global competitiveness of the UKCS which will not have been helped by the tax increase. It is essential that all parties properly recognise the impact on investment behaviours, without a regime that recognises the global nature of the business long term recovery from the UKCS will be impaired. HM Treasury stated that the increase in SCT was prompted by the increased rate of return by companies operating on the UK Continental Shelf. HM Treasury also promised that there would be no further tax changes for the life of this parliament, to provide some stability for investors, and announced a consultation on structural issues regarding the North Sea fiscal regime. The following sections address each of these issues in more detail and also consider current initiatives to promote the UKCS.