UK Introduces New Brown-Field Tax Allowance

by King & Spalding

The Additionally-Developed Oil Fields Order (Order) was made on 15 November 2013 and is treated as having come into force on 1 April 2013. The Order introduces a new allowance which reduces the amount of adjusted ring fence profits subject to the Supplementary Charge (SC) for fields that have already recently received development approval and are to undergo additional development (additionally developed oil fields or ADOFs). The Order is intended to support investment in additionally developed oil fields and in particular in respect of the West of Shetland field.

UK Oil and Gas Taxation

The UK Government currently benefits from oil and gas production in the UK and UK sector of the continental shelf (UKCS) in the following three ways:

  • Ring Fence Corporation Tax (RFCT). The normal UK corporation tax regime is modified in its application to companies producing oil in the UK and UKCS: a "ring fence" applies to prevent taxable profits from oil and gas extraction from being reduced by losses from other activities or from availability of certain deductions. The rate is currently 30% (section 4 Finance Act, 2013 (FA 2013)). Despite a reduction in the main rate of corporation tax (from 30% to a proposed rate 20% between 2007 and 2015), the RFCT will remain at 30% for profits from oil extraction in the UK and the UKCS;
  • Supplementary Charge (SC). 32% with effect from 24 March 2011 (previously 20%) (section 330, CTA 2010). This is not strictly corporation tax, but is charged as if it were an amount of corporation tax on ring fence profits with no deduction for financing costs; and
  • Petroleum Revenue Tax (PRT). Currently at 50%. This is an additional level of tax on the profits derived from fields which received development consent before 16 March 1993.

The taxes are not entirely cumulative, as PRT can be deducted when calculating RFCT and SC.

In 2009 HM Revenue & Customs introduced a field allowance to reduce the amount of adjusted ring fence profits subject to the Supplementary Charge for "qualifying" marginal fields given development consent on or after 22 April 2009. Qualifying fields are small fields, ultra heavy oil fields, ultra high pressure/high temperature fields and remote deep water gas fields.

Additionally-Developed Oil Fields Order 2013

The effect of the Order is to extend the field allowance to ADOFs, thereby removing an amount of income from the scope of Supplementary Charge. The field allowance can, over time, be offset against the SC payable by the companies involved in the ADOFs. Once that allowance is exhausted, the field will, in effect, pay the full Supplementary Charge rate of tax. (Chapter 7, Part 8, CTA 2010.)

The Order specifies the five conditions that a project must satisfy for an oil field to be an ADOF subject to the field allowance. It also explains how to calculate the total field allowance for an ADOF and makes consequential changes to Chapter 7 of Part 8 of CTA 2010 that reflect the extension of the field allowance to, and the new concept of, additionally-developed oil fields.

The 5 Conditions

The five conditions that a project must satisfy to benefit from the extended field allowance are:

Condition A: The project was authorised by the appropriate authority on or after 7 September 2012.

Condition B: The cost per tonne of the project is more than £60. The Order explains how to calculate the cost per tonne of the project by dividing the expected capital expenditure by the amount of additional reserves in tonnnes.

Condition C: The additional reserves of oil that the field has as a result of the project have not been taken into account in calculating the cost per tonne of any qualifying project that has previously been authorised in relation to the field. A project authorised in relation to an oil field is a "qualifying project" for this purpose if a field allowance has at any time been held for the field as a result of the project.

Condition D: As of the authorisation day, the whole of the oil field lies on the seaward side of the baselines from which the territorial sea is measured.

Condition E: The project does not involve enhanced oil recovery using carbon dioxide.

Calculation of ADOF Field Allowance

The Order amends the CTA 2010 to introduce detailed mechanics for calculating the field allowance for an ADOF which is a qualifying project. The following formula applies for qualifying ADOFs which are not cross boundary:



AR is the amount of additional field reserves of oil (in tonnes) as a result of the project, and

CPT is:

  1. where the cost per tonne of the project is £80 or more, £80, and

  2. in any other case (where the cost per tonne of the project is less than £80 but more than £60), the cost per tonne of the project (expressed in pounds).

A different calculation applies for qualifying ADOFs which are cross boundary.

For more information about whether a field qualifies for the field allowance, or on how to calculate the field allowance for an ADOF please contact the authors.

 Kevin Conway
 +44 20 7551 7530

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 Nina Howell
 +44 20 7551 7543

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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