Petroleum Revenue Tax (PRT) is a tax on the profits from oil and gas production in the UK or on the UK continental shelf.

PRT only applies to fields that were approved before 16 March 1993.

These are known as ‘taxable fields’. PRT is a field-based tax but does not apply to fields with development consent after 15 March 1993.

PRT is deductible as an expense for RFCT and SCT.

Thus the marginal rates generally vary between 62% and 81%, though specific field allowances can reduce this towards 30% in some cases.

Oil Gas and Mining - Petroleum Revenue Tax

Corporate Income Tax

UK resident corporations are subject to company tax on the taxable profits they create over the globe.

The tax earlier stood at twenty three per cent and currently has been reduced to twenty per cent.

Taxable profits arising from “oil extraction” or the “acquisition, enjoyment or exploitation of oil rights” within the UK or UKCS are ring fenced and subject to RFCT (oil includes gas in these definitions).

RFCT is an entity based tax and so there aren't any field by field restrictions.

The ring fence rules area unit specifically applied to UK North oil and gas corporations in addition to the standard corporation tax rules.

Taxable Income

Revenue that's obtained from the sale of oil and gas at arm’s length is taxable on the particular value obtained.

However, there are some exceptions to the current rule on non-arm’s length or connected party sales.

Under certain instances, ‘tariff receipts’ are subject to RFCT, SCT and PRT. These represent financial gain from certain assets that are employed by different corporations (e.g. pipelines).

Deduction and allowances

In calculation of taxable financial gain, general operational and administrative costs of a revenue nature are sometimes deductible in full as incurred against the profits of the ring fence trade.

This is often subject to the factors that they're incurred whole and solely for the needs of that ring fence trade. PRT paid is additionally deductible in scheming taxable profits.

Exploration and pre-trade expenditure

Relief is mostly given for all exploration and appraisal expenditure, either as a commercialism expense or capital allowances.

However, relief is mostly obtainable once the corporate has commenced a trade. Tax will so become collectable in kick off years on interest generated on surplus money because the pre-trading ring fence expenditure isn't crystallized to offset this.

The decision to develop a field triggers the commencement of trade for UK tax functions.

The date of approval of the business development by Department of Energy & Climate Change (DECC) is often taken as analogous of the date of the beginning of trade.

Ring Fence Expenditure Supplement (RFES)

The RFES adds an annual supplement to the worth of unused expenditure carried forward from one period to a different to take care of the time value of exploration, appraisal and development prices.

The supplement will increase the worth of unused expenditure carried forward from one period to the subsequent by a compound ten per cent once a year from 1 January 2012 (6% once a year before this date). An organization will claim RFES for a most of six years.

Capital allowances

Capital allowances (tax depreciation) rules that apply to all or UK corporations conjointly apply to upstream corporations. In addition, there are some specific rules:

  • 1st year allowances of 100 per cent are obtainable on qualifying expenditure incurred within the amount of acquisition on plant and machinery (subject to a 5 year ‘use’ test) or mineral exploration and access. This suggests that in practise, most of, if not all, development cost will qualify for immediate relief
  • if 100 per cent 1st year allowances on plant aren't obtainable, plant and machinery ring fence allowances are obtainable at a rate of twenty five per cent on a reducing balance basis (rather than 18 per cent as applies to non-ring fence activities). Similarly, expenditure on mineral exploration and access incurred on certain costs of acquiring mineral assets and connected expenditure is eased by approach of a Mineral Extraction Allowance (MEA) at the rate of twenty five per cent, though a reduced rate of ten per cent applies to certain items; and prices of oil and gas exploration and appraisal commonly attract research and development allowances (RDA) which offer for a 100% write-off of the expenditure for tax functions as incurred.

Field allowances

Field allowances were introduced in 2009 to provide an incentive for development of commercially marginal oil and gas fields.

The field allowance reduces the number of adjusted ring fence profits on that the SCT is charged. The allowance is necessary and no claim is needed.

The original field allowances are available for companies that are licensees in qualifying fields that received their first development consent on or after 22 April 2009, and apply to accounting periods ending on or after that date.

Since this date variety of different field allowances have been introduced. A qualifying field could be a field that on the date of development consent could also be one among the following (the gross quantity of the potential allowance is in brackets):

  • a small field (£150m);
  • an ultra heavy oil field (£800m);
  • an ultra high pressure/high temperature (HP/HT) field (£800m);
  • a deep water gas field (£800m);
  • extra deep water field (up to £3bn;)
  • shallow water gas field (£500m); and

Brownfield development (£250m for non PRT fields and £500m for PRT fields)

The allowance becomes obtainable within the accounting amount that 1st development authorisation happens, but is activated once financial gain is generated from the field.

There are detailed rules on use and transfer of field allowances, but the fastest it can be used is over five years.

Decommissioning prices

Generally, tax relief isn't obtainable for decommissioning provisions created within the monetary statements, but instead relief is given once the expenditure is incurred.

A specific 100% capital allowance is offered for decommissioning expenditure, providing the expenditure is incurred on the decommissioning of plant and machinery that forms a part of a UK offshore installation and also the expenditure is incurred on closing down all or part of an oil field.

Decommissioning of onshore fields might qualify for relief as “demolition” of plant and machinery or mineral asset at twenty five.

Tax relief for decommissioning expenditure is however restricted in respect of expenditure incurred in reference to decommissioning carried out on or after 21 March 2012.

The relief is restricted for SCT functions solely to twenty per cent, that means that effective relief is given at between 50% to 75% (per non-PRT and PRT fields).

Losses

Corporation tax losses could also be carried forward and offset against future profits of the identical trade or set off against different profits arising within the same accounting period.

Trading losses also can be carried back and set off against the entire profits of the previous year or up to a few previous years in case of cessation of a trade.

Losses generated by offshore decommissioning expenditure or ring fence losses generated within the last twelve months of a company’s trade is carried back and offset against profits from 17 April 2002.

There are specific restrictions underneath each general and ring fence corporation tax regimes for the employment of losses wherever an organization undergoes a significant amendment within the nature or conduct of trade inside 3 years before or after a change in possession.

Corporation tax losses may be carried forward and offset against future profits of the same trade or set off against other profits arising in the same accounting period.

Losses also can be relinquished to different group corporations as cluster relief on a current year basis, while protecting the ring fence restrictions.

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