A Liberal Democrat MP who claims to have monitored the oil and gas industry for 40 years has warned that tax increases could result in a ‘huge loss’ of investment affecting future jobs, export opportunities and tax revenues.
Risks
A Liberal Democrat MP who claims to have monitored the oil and gas industry for 40 years has warned that tax increases could result in a ‘huge loss’ of investment affecting future jobs, export opportunities and tax revenues.
Risks
MPs debated clause 7 of the Finance Bill, which increases from 20% to 32% the supplementary charge on the profits of oil and gas production, in a Committee of the whole House on 3 May. Liberal Democrat MP Malcolm Bruce argued that the oil and gas industry ‘takes risks in regard to weather, geology, exchange rates and cost unpredictability, as well as taxation’.
The industry is complex, he said. ‘Government decisions might lead it to a review of investment, which I suggest could lose production, jobs and export opportunities. It is possible to retrieve the situation, however, if we have an active process of negotiation.
‘I accept that the current spot price of Brent crude, at $125 a barrel, allows for unforeseen profits, at least for some fields. However, that does not apply to gas fields or to fields with large quantities of associated gas and, as ministers will know, that is not the price that many operators actually realise, as they often contract their production at an average well below the spot peak,’ he added.
Bruce said he was asking ministers to consider the ‘real and legitimate concerns’ of the industry and to accept that ‘there is a danger of losing as much as £20 billion of investment and between one and two billion barrels of production over the next 10 years or so’.
‘Imbalance’
Justine Greening, Economic Secretary to the Treasury, replied: ‘Clause 7 forms the second part of the [fair fuel] stabiliser, which ensures that when oil prices are high, as they are now, and oil and gas production is more profitable, the companies that benefit more from that are asked to pay more.’
She added: ‘The recent very high sterling oil price has resulted in unexpectedly high profits for oil and gas companies, although at the same time it has resulted in financial pain for motorists and the wider economy. The government therefore decided that it was appropriate to increase the rate of supplementary charge, to redress that imbalance.’
Chris Huhne, the Energy Secretary, told the Commons Energy and Climate Change Committee on 4 May that the increase will have no significant impact on investment and is justified by the need to repair the national finances, the Financial Times reported.
The current law
‘A company operating in the UK or on the UKCS is liable to corporation tax on its profits. However the UK tax code puts a ring fence around profits from UK and UKCS oil and gas production to ensure they are not reduced by losses from other activities. This ensures the Government achieves its desired taxation from the exploitation of a national natural resource.
‘CTA 2010 s 279 details the ring fence treatment and provides that certain oil-related activities conducted as part of a trade are to be treated for the purposes of corporation tax as ‘a separate trade, distinct from all other activities carried on by the company as part of the trade’. These “upstream” activities are:
any oil extraction activities (CTA 2010 s 272)
the acquisition, enjoyment or exploitation of oil rights (CTA 2010 ss 273 and 274).
In addition to ring fence corporation tax, profits derived from upstream activities are subject to an additional tax, the supplementary charge (CTA 2010 s 330). The supplementary charge is currently charged at 20%.
Proposed revisions
‘[Finance Bill 2011 clause 7] will increase the rate of the supplementary charge to 32%.
‘The rate at which companies obtain relief for decommissioning expenses will be changed by Finance Bill 2012, with effect from Budget 2012, to deny relief against the increase in the amount of supplementary charge.’
A Liberal Democrat MP who claims to have monitored the oil and gas industry for 40 years has warned that tax increases could result in a ‘huge loss’ of investment affecting future jobs, export opportunities and tax revenues.
Risks
A Liberal Democrat MP who claims to have monitored the oil and gas industry for 40 years has warned that tax increases could result in a ‘huge loss’ of investment affecting future jobs, export opportunities and tax revenues.
Risks
MPs debated clause 7 of the Finance Bill, which increases from 20% to 32% the supplementary charge on the profits of oil and gas production, in a Committee of the whole House on 3 May. Liberal Democrat MP Malcolm Bruce argued that the oil and gas industry ‘takes risks in regard to weather, geology, exchange rates and cost unpredictability, as well as taxation’.
The industry is complex, he said. ‘Government decisions might lead it to a review of investment, which I suggest could lose production, jobs and export opportunities. It is possible to retrieve the situation, however, if we have an active process of negotiation.
‘I accept that the current spot price of Brent crude, at $125 a barrel, allows for unforeseen profits, at least for some fields. However, that does not apply to gas fields or to fields with large quantities of associated gas and, as ministers will know, that is not the price that many operators actually realise, as they often contract their production at an average well below the spot peak,’ he added.
Bruce said he was asking ministers to consider the ‘real and legitimate concerns’ of the industry and to accept that ‘there is a danger of losing as much as £20 billion of investment and between one and two billion barrels of production over the next 10 years or so’.
‘Imbalance’
Justine Greening, Economic Secretary to the Treasury, replied: ‘Clause 7 forms the second part of the [fair fuel] stabiliser, which ensures that when oil prices are high, as they are now, and oil and gas production is more profitable, the companies that benefit more from that are asked to pay more.’
She added: ‘The recent very high sterling oil price has resulted in unexpectedly high profits for oil and gas companies, although at the same time it has resulted in financial pain for motorists and the wider economy. The government therefore decided that it was appropriate to increase the rate of supplementary charge, to redress that imbalance.’
Chris Huhne, the Energy Secretary, told the Commons Energy and Climate Change Committee on 4 May that the increase will have no significant impact on investment and is justified by the need to repair the national finances, the Financial Times reported.
The current law
‘A company operating in the UK or on the UKCS is liable to corporation tax on its profits. However the UK tax code puts a ring fence around profits from UK and UKCS oil and gas production to ensure they are not reduced by losses from other activities. This ensures the Government achieves its desired taxation from the exploitation of a national natural resource.
‘CTA 2010 s 279 details the ring fence treatment and provides that certain oil-related activities conducted as part of a trade are to be treated for the purposes of corporation tax as ‘a separate trade, distinct from all other activities carried on by the company as part of the trade’. These “upstream” activities are:
any oil extraction activities (CTA 2010 s 272)
the acquisition, enjoyment or exploitation of oil rights (CTA 2010 ss 273 and 274).
In addition to ring fence corporation tax, profits derived from upstream activities are subject to an additional tax, the supplementary charge (CTA 2010 s 330). The supplementary charge is currently charged at 20%.
Proposed revisions
‘[Finance Bill 2011 clause 7] will increase the rate of the supplementary charge to 32%.
‘The rate at which companies obtain relief for decommissioning expenses will be changed by Finance Bill 2012, with effect from Budget 2012, to deny relief against the increase in the amount of supplementary charge.’
