Finance Act 2019: Transferable Tax History in the UK North Sea
Finance Bill 2019: Impact in the North Sea
UK’s Transferable Tax History (TTH) should help facilitate transfers of UK North Sea assets, particularly for newer participants.
The UK’s Transferable Tax History (TTH) was brought onto the UK statute books on Royal Assent of Finance Act 2019 on 12 February 2019.
TTH should help facilitate transfers of UK North Sea assets, particularly for newer participants. It is designed to allow companies to transfer some of their tax history and enable purchasers to obtain effective tax relief for their decommissioning expenditure that would otherwise not be available.
It is an example of Government being innovative in the way they manage challenging tax issues in the North Sea which have been seen to hinder the ability to attract new investors and raise the capital required to meet the goal of Maximizing Economic Recovery.
Background to the announcements
In 2017 HM Treasury published a consultation on the taxation of late life assets:
‘These assets could continue to produce oil and gas for years to come, but, without further investment, could reach the end of their productive lives and be decommissioned sooner. Encouraging investment in strategically important assets is in line with the government’s objective of Maximising Economic Recovery from the UK’s oil and gas reserves. Part of this investment could include new, innovative investors taking over older, late-life assets’.
Losses arising from decommissioning expenditure can be carried back against ring fence trading profits from April 2002. That relief is capped at the amount of tax paid by that company.
Since new entrants do not have a tax payment history against which they can carry back future losses on decommissioning, this created a fiscal barrier which prevented assets from changing hands. TTHs are designed to allow a transfer of tax payment history on the sale of the oil field.
TTHs represent a new concept within UK tax law as a response to one of the challenges faced by new entrants and their ability to obtain effective tax relief for decommissioning.
Overview of the TTH legislation
The original draft legislation has been subject to a process of consultation and development since it was first introduced. The final legislation takes into account some of the points raised during the consultation. It is anticipated that the TTH will work as follows:
- 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 the seller’s historical ring fence profits and the related tax history to the buyer. TTH comprises taxable profits subject to ring fence corporation tax and the associated adjusted ring fence profits subject to the supplementary charge to tax.
- The amount of TTH that may be transferred is to be limited to double the estimated decommissioning cost of the asset, once certain adjustments have been made to that estimate. The decommissioning cost is to be based on the estimate in a relevant decommissioning security agreement at the time of the election.
- The TTH will only provide tax relief for the buyer’s decommissioning losses, once it is activated, which is when:
- the acquired field has permanently ceased production; and
- the decommissioning costs for the relevant field is greater than the taxable ring fence profits from the asset post acquisition.
- The difference between post-acquisition profits and decommissioning costs gives the amount of TTH that is activated. The legislation requires that profits and losses be allocated between assets where possible on a cost-by-cost basis but overheads should be allocated on the basis that ‘produces a sensible result’.
- Buyers must track the profit or loss of the acquired field and submit a record to HMRC on an annual basis. A nominated individual, the ‘Senior Tracking Officer’, must also certify to HMRC that the company has suitable arrangements and taken all reasonable steps to track, appropriately, the profits attributable to the TTH asset.
- Connected party transactions are only eligible to make a TTH election in two circumstances:
- the corporate restructuring condition: where another TTH election has been made on the same asset with a third party in the period up to 90 days before or 90 days after the licence transfer date; or
- the hive down condition: where two associated companies cease to be associated with each other within 90 days of the licence transfer date.
The final legislation takes into account some of the comments raised during the consultation process, particularly around the interaction of TTH and adjusted ring fence profits subject to supplementary charge to tax.
Petroleum Revenue Tax (PRT) relief for decommissioning
Separately, Finance Act 2019 legislates for changes to PRT relief on decommissioning.
PRT relief will also be available 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.
TTH and the expanded relief to the PRT relief on decommissioning are available for licence transfers that receive Oil and Gas Authority approval on or after 1 November 2018.
Companies entering into a TTH election on an asset transfer, are required to file the election with HMRC within 90 days following the licence transfer date, or 1 June 2019, whichever is later.
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