The draft legislation, which forms part of draft Finance bill 2018/19, also amends the petroleum revenue tax (PRT) rules on retained decommissioning costs.

The ability of oil and gas operators to access tax relief on their decommissioning costs depends on the extent of their tax payment history. The TTH is intended to level the playing field between existing operators and new entrants to the UKCS.

The changes to the PRT legislation will ensure that relief is available without the necessity of structuring complex sale and purchase agreements, which will simplify the transfer of late-life assets.

The TTH will allow a seller of an interest in a UKCS oil licence to transfer some of its tax history to the buyer of the field. The buyer will then be able to set the decommissioning cost of the field against the TTH.

TTH will be available for licence transfers that receive Oil and Gas Authority (OGA) approval on or after 1 November 2018.

The measure will also give PRT relief when a seller retains a decommissioning liability. Relief will be available to the buyer where the seller subsequently incurs decommissioning expenditure or where the seller provides the funds for the buyer to decommission. This will also apply to licence transfers that receive OGA approval on or after 1 November 2018

HMRC says the fact that no relief is currently available in certain circumstances has led to unnecessary complexity in sale and purchase agreements.

On the sale of an interest in a UK oil licence, a seller and buyer will be able to make a joint election to transfer some of the seller’s historic ring fence profits, together with the tax charged on those profits (the ‘tax history’), to the buyer.

Following the election, the buyer will be able to carry back decommissioning losses against this transferred tax history to generate tax repayments under certain circumstances. The transferred tax history will immediately cease to be available to the seller.

To prevent the commodification of tax history, and to ensure TTH will place buyers in an equivalent position to sellers, the TTH will only become part of the buyer’s history, and be capable of providing tax relief for the buyer’s decommissioning losses, once it is ‘activated’.

Activation is dependent on the acquired field having permanently ceased production, and the total decommissioning costs for the buyer’s acquired interest in the field being greater than the profits accrued on the buyer’s interest in the field since acquisition.

The difference between the post-acquisition profits and the total decommissioning cost of the relevant field interest gives the amount of TTH that is activated.

This will mean that buyers must track the profit or loss of their acquired field interest. This ‘tracked profit’ will not affect the company’s tax liability while the field is producing - it is merely a shadow calculation for the purposes of activating TTH.

Once activated, the TTH becomes part of the buyer’s tax history and so if the buyer makes a claim to carry back a decommissioning loss, the loss can be set against the TTH subject to the normal loss carry back rules. This enables the buyer to get tax relief for the decommissioning.

The changes to the PRT legislation will also be introduced in Finance Bill 2018/19. The anti-subsidy rules will be amended so that where the previous participator provides the current participator with funds for decommissioning, the current participator will be entitled to relief.

In addition where the previous participator carries out decommissioning directly their costs will be deemed to have been incurred by the current participator and will also be eligible for relief.

The Treasury’s impact assessment suggests the Exchequer will see an additional £5m in tax in 2017/18 as a result of the measure rising to £20m the following year. It will then provide £10m in 2019/20 and 2020/21, hitting £25m in 2022/23.

Oil and gas taxation: transferable tax history and retention of decommissioning expenditure is here.

Report by Pat Sweet