There has already been significant discussion of the interaction between tax and late-life asset transactions in relate to operations based in the UK Continental Shelf (UKCS), but the government has yet to make a decision on a potential change to the rules. The Treasury says the purpose of this consultation is to improve its understanding of the issues and identify areas where modifications to the taxation regime could help put late-life assets into the hands of new entrants willing to invest in them.

The discussion paper highlights the issue around decommissioning obligations. Currently the fiscal regime recognises the significant costs of this by allowing licensees to claim tax relief on decommissioning expenditure, which is calculated in reference to the tax that has previously been paid by the company carrying out the decommissioning, (the ‘tax history’).

While current UKCS licensees who are selling their assets often have decades of tax history to rely upon and can be confident of claiming relief when they come to decommission, new entrants have to be confident that the acquired asset will generate enough tax history over its remaining life to equal the decommissioning costs at the end of the field’s life.

The Treasury acknowledges that the tax history value gap may be acting as a break on potential investment in late-life assets, while in some cases ownership of infrastructure moves from oil companies to independent infrastructure specialists, who fall outside the oil and gas ring fence for tax purposes.

Transferable tax history

The consultation considers the option for creating some form of transferable tax history (TTH), which would permit a seller to transfer a portion of their ring fence corporation tax payment history to the buyer, alongside the asset as part of the deal. Currently, this is not possible as tax history is attached to the company who originally paid the tax and cannot be transferred.

The Treasury notes that ‘a transferable tax history would represent a significant departure from the current system of tax relief,’ and invites comments on how it might operate, suggesting that determining the tax history for an asset could be very difficult, as details of individual fields’ income and expenses are generally not kept in a format that could be used.

The government also has significant concerns that any TTH could lead to tax history being treated as a tradeable commodity. One possible means of preventing this could be through imposing restrictions on how the TTH could be used. Such restrictions could include limiting the use of TTH to decommissioning and/or restricting the use of TTH to the asset it is transferred with. In such cases, the transferred TTH would need to be allocated on a field by field basis.

A fundamental point for any TTH would be whether a transferred TTH would be attributed to the company or the asset. If TTH was attributed to the asset, the TTH would be transferred with the asset on subsequent sales. If attributed to the company, it would stay with the company on disposal of the field.

If TTH was introduced, it would need to be decided if the tax history generated by the asset following the acquisition could be utilised before the TTH, or the TTH could be set against the decommissioning costs without regard to the profits earned by the asset. Alternatively, the decommissioning cost could be set against the buyer’s total post-acquisition tax history, which would include profits from the buyer’s other oil assets.

There is also the question of the treatment of tax losses once a trade has been transferred. Under the current rules, if a company has a change of ownership and a major change in the nature or conduct of its trade in a three year period, its losses can be extinguished.

Any TTH would require new administrative structures to be created to verify and track any transfer of tax history, which could introduce additional costs for both industry and government.

TTH could it be mandatory to transfer an asset’s associated tax history when the asset is transferred.

Michael Burns, oil and gas partner at law firm Ashurst, said: ‘The possibilities of a potential TTH for UKCS assets and a revised regime that makes it easy for those selling upstream assets to sell without retaining decommissioning expenses for an asset and ensure that the buyer receives the related tax benefits of incurring those expenses are definitely positive steps forward for the industry.

‘The consultation process will need to address the detailed mechanics together with other issues posed by the concept of a TTH such as taxpayer confidentiality and the question whether an on-transfer of the TTH should be allowed on a subsequent sale.  However, it's very much hoped that a package can be introduced by the time of the Autumn Budget.’

The Treasury has said it will establish an expert panel composed of industry stakeholders to consider the issues identified in the paper in greater detail. This will have approximately four meetings in London and Aberdeen, connected by videoconference, with the first meeting in April.

The deadline for comments on the consultation is 30 June.

Tax issues for late-life oil and gas assets is here.