BN 15: North Sea Oil Pricing
Who is likely to be affected?
1. Oil and gas companies that operate in the UK or on the UK continental shelf.
General description of the measure
2. Certain companies can exploit the current oil tax pricing rules to
ensure a lower tax price for sales of North Sea production. This can lead
to behaviour that is not tax neutral. The changes to be introduced will
change the current North Sea oil valuation and pricing rules to achieve
a
fairer and less distortive tax pricing system.
3. The measure will impact on;
- pricing for tax purposes of non-arm’s length disposals of oil,
- the scope of the Nominations Scheme, and
- the rules for determining which field blended oil is deemed to be lifted from.
Operative date
4. The new rules will apply on and after 1 July 2006.
Current law and proposed revisions
5. Legislation for determining the monthly market value of oil for non-arms’ length disposals is at Section 2 and Schedule 3 Oil Taxation Act 1975. Changes will be made to arrive at a value for tax purposes that reflects the ways in which that kind of oil is sold at arm’s length.
6. From 1 July 2006, oil disposed not at arm’s length will be split into two categories;
- Category 1 oils will be those that are specified by HM Revenue &
Customs (HMRC) where a published price is readily available. Initially
this will include sales of Brent, Forties, Ekofisk, Statfjord and Flotta.
The oil will be priced based on a five day period using an arithmetic
mean of published prices from price reporting agencies on the date of delivery of the oil and two days either side, known as the 2-1-2 method. - Category 2 oils will be all other types of oil for which there are no published or quoted prices. Here HMRC will agree valuations based on actual arm’s length disposals which reflect market practice more closely than current rules.
7. Legislation on the Nominations Scheme is at Section 61 and Schedule 10 Finance Act 1987 and SI 1338/1987. Changes to be made by Finance Bill 2006 mean that from 1 July 2006;
- the scheme will be limited to arm’s length sales made through forward contracts,
- the time limit for nominating a sale will be reduced from 5pm on the day after the transaction was agreed to within 2 hours from the time the transaction is agreed,
- the process of reconciling nominations will be amended to take account of limiting the scope of the scheme to forward contracts and to take account of the 2-1-2 pricing changes referred to above, and
- any nominations excess will be liable to ring fence corporation tax and supplementary charge in addition to petroleum revenue tax (PRT).
8. Current rules for allocating oil which is mingled from more than one
oil field can be used to arbitrage between fields which pay and those which
do not pay PRT leading to significant tax loss. The arbitrage opportunity
can be extended by buying in non-equity oil. Legislation dealing with disposals
of blended oil is at Regulation 20 SI 1338/1987 and Section 2(5) Oil Taxation
Act 1975. The changes to be made in Finance Bill 2006 will ensure that a
sale of blended oil is allocated proportionately across a company’s
various interests for tax purposes. The rules in Regulation 20(8) will be
repealed. Section 2(5) will be amended to provide for the use of a formula
for determining the allocation. The changes will cover both a company’s
equity oil (from its own field interests) and also any non-equity oil under
its control.
Further advice
9. Draft legislation and a Regulatory Impact Assessment for determining the tax pricing of non-arm’s length disposals of oil were published on the HMRC website on 2 December 2005. A Regulatory Impact Assessment of the changes to the Nomination Scheme and allocation of blended oil is published today.
10. If you have any questions about this change, please contact Mike Crabtree, HMRC Oil and Gas on 020 7438 6576. Information about Budget measures is now available.
