REV BN 13: Technical Changes to Petroleum Revenue Tax

Who is likely to be affected?

1. Companies producing oil or gas in the UK or on the UK continental shelf from fields that are liable to petroleum revenue tax (PRT).

General description of the measures

2. Two technical measures are proposed to remove anomalies in the current PRT rules and prevent tax leakage. The first measure prevents companies generating an artificial cost for PRT by buying a North Sea asset from a connected company at an inflated price. The second measure prevents the creation or enhancement of unrelievable field losses in fields through the successive transfer of field interests.

Operative date

3. Connected company transactions – for expenditure incurred on or after today.

4. Unrelievable field losses – to terminal losses (that is, losses allowable after all production from the field has ceased) accruing in a chargeable period ending after today, with special rules to take account of certain profits accruing before today.

Current law and proposed revisions

Connected company transactions

5. When an asset, such as an interest in a pipeline or onshore terminal, is acquired by a participator in a PRT-liable oil field (that is a field given development consent before 16 March 1993) from a connected company, or in a transaction otherwise than at arm’s length, the cost of the asset allowable for PRT is restricted to the arm’s length cost to the group. This is to prevent profits being shifted out of PRT through transactions with other companies within the group. In certain circumstances the corresponding disposal or tariff receipt chargeable on the vendor or tariff recipient is also limited to cost but otherwise the disposal or tariff receipt is equivalent to the market value of the asset.

6. These rules can give rise to potential mismatches. Where the market value of the asset is lower than the price paid for it by the connected company but the asset is acquired from that connected company at the higher (historic) price then the amount allowed for PRT to the payer will be higher than the amount charged on the recipient.

7. The changes being introduced today will in future ensure that the cost allowed for PRT does not generally exceed the amount charged to PRT in the connected company’s hands.

Unrelievable field losses

8. Under current rules, when a field ceases production, any terminal losses (which will usually arise from the costs of decommissioning the field) are first carried back against the participator’s past profits from the field and second against the profits of any participator from whom the current participator acquired the field interest. Once these past profits are exhausted the excess becomes an unrelievable field loss which may then be set against the profits from any other PRT-liable field in which the loss-making participator has an interest.

9. The purpose of unrelievable field losses is to provide PRT relief where fields make an overall loss over their lifetime. However, the current rules enable unrelievable field losses to be generated from fields (which may be very profitable over their lifetime) by means of successive transfers of field interests late in field life.

10. The changes being introduced today will ensure that a terminal loss is carried back against the assessable profits of all previous participators who held the relevant field interest with the exception of previous participators whose profits could not have been taken into account before today. Any excess will then become an unrelievable field loss in the hands of the loss-maker. The changes will also ensure that the current rules that prevent an unrelievable field loss being inflated by expenditure unrelated to the field cannot be circumvented by the transfer of a field interest prior to the accrual of a terminal loss.

Further advice

11. If you have any questions about this change, please contact Energy Group, Inland Revenue on 020 7438 7216.

www.inlandrevenue.gov.uk