International - taxation of UK oil production

This guide provides a brief summary of the main features of the fiscal regime that applies to companies engaged in oil and gas extraction activities in the UK and on the UK Continental Shelf (UKCS) as at January 2008.

Licensing

The rights to all oil and gas in Great Britain and its territorial sea have belonged to the Crown since the Petroleum (Production) Act 1934. The same Act gave the Government the exclusive right to grant licences to explore for and exploit these resources. Separate legislation applies similar provisions to Northern Ireland. The Continental Shelf Act 1964 extended the licensing powers of what is now the Petroleum Act 1998 to the UKCS. The effect of these Acts is that exploration for and production of oil in the UK and on the UKCS can only be undertaken under the terms of licences issued by the Secretary of State for Trade and Industry.

During a licensing round companies - generally working together in consortia - apply for the licences on offer. If a consortium's application is successful, one of the consortium companies (generally the company with the largest interest in a field) takes responsibility for operating the field under the control of a joint operating committee of all the licensees. The detailed field development and production programmes put forward after the licences have been awarded have to be approved by the DBERR (Department for Business, Enterprise and Regulatory Reform) (formerly the DTI).

Fiscal regime

The current fiscal regime is summarised as follows:

Petroleum Revenue Tax

Petroleum Revenue Tax (PRT) is administered by HM Revenue & Customs Large Business Service- Oil & Gas Sector (LBSOG) –formerly Oil Taxation Office or 'the OTO'. This is a tax which seeks to tax a high proportion of the economic rent (super-profits) from the exploitation of the UK's oil and gas. PRT is a field-based tax: in general, the costs of developing and running a field can only be set against the profits generated by that field. Any losses, eg arising from unused expenditure relief, can be carried forwards or backwards within the field indefinitely. There is also a range of reliefs, including:

  • oil allowance - a PRT-free slice of production
  • supplement - a proxy for interest and other financing costs
  • Tariff Receipts Allowance (TRA) - participators owning assets, for example pipelines, relating to one field will sometimes allow participators from other fields to share the use of the asset in return for the payment of tariffs, and TRA relieves some of the tariffs received from PRT
  • exemption from PRT for gas sold to British Gas under a pre July 1975 contract
  • cross-field relief for research expenditure

PRT is currently charged at 50 per cent on profits after these allowances. For a limited period safeguard relief then applies to ensure that PRT does not reduce the annual return in the early years of production of a field to below 15 per cent of the historic capital expenditure on the field.

PRT was abolished on 16 March 1993 for all fields given development consent on or after that date. This was part of a package of PRT reforms which also included the reduction of the rate of PRT from 75 per cent to 50 per cent and the abolition of PRT relief for Exploration and Appraisal (E&A) expenditure.

Ring Fence Corporation Tax

Ring Fence Corporation Tax (RFCT), also administered by the LBSOG, is the standard corporation tax that applies to all companies with the addition of a 'ring fence'. The ring fence is designed to ensure that corporation tax on profits from oil extraction activities are paid in full as the profits accrue, undiluted by any losses or any other form of relief arising from any other business activities whether in the UK or elsewhere. The ring fence imposes restrictions, for example on excessive interest payments, to achieve this.

Most capital expenditure on oil exploration, field development and decommissioning activities in the North Sea qualifies for a 100 per cent capital allowance in the year it is incurred.

The rate of CT is currently 30 per cent. The reduction of the CT rate and the reform of capital allowances introduced in FA 2007 and effective from 1 April 2008 do not apply to RFCT.

Supplementary Charge on ring fence trades

From 17 April 2002 companies also pay a Supplementary Charge (SC) of 10 per cent (raised to 20 per cent from 1 January 2006) on their profits from a ring fence trade. These profits are the same as for RFCT but with no allowance for any financing costs.

Royalty - abolished from 1 January 2003

Royalty used to be charged at 12½ per cent of the gross value of oil and gas won and saved in a particular licensed area, less an allowance for certain costs.

Administration

PRT is charged on field participators for six-month chargeable periods. Two types of return are submitted to the LBSOG - one by the responsible person (normally the operator) showing the total amount of oil and gas produced from the field, and one from each participator showing their own incomings from each taxable field in which they have an interest. Before expenditure is allowed in an assessment it has to be claimed either by the responsible person for the participators or by individual participators themselves. Expenditure allowed by the LBSOG is given as a deduction against income in the assessment next made after the expenditure is allowed.

Most PRT is paid in six equal monthly instalments (each equal to one eighth of the previous chargeable period's liability), starting two months after the beginning of the period. A payment on account is made by the participators when they submit their return showing incomings from taxable fields.

PRT assessments are normally issued five months after the end of the relevant chargeable period. Any further PRT shown to be due by the assessment must be paid within six months of the end of the chargeable period (or thirty days after the assessment is issued, if later).

RFCT and supplementary charge are payable in three equal instalments.

Interaction of PRT, RFCT and SC

RFCT and SC are charged on a company's ring fence trade CT profits after a deduction for any PRT. (Royalty is deductible in computing taxable profits for all three other taxes.)

The regime which applies to any particular oil field depends on the date on which it received development consent:

  • Fields which received development consent before 16 March 1993 are subject to PRT, RFCT and SC. Where these fields received development consent before 1 April 1982 they would also have been liable to royalty until 31 December 2002.
  • Fields which received development consent on or after 16 March 1993 are subject only to RFCT and SC.

Current (as at 1 January 2008) marginal rates of tax are:

  • RFCT and SC - 50 per cent
  • PRT, RFCT and SC - 75%