Campaign group Global Witness has warned that a UK Treasury tax break designed encourage the sale of old oil and gas assets could result in a delayed £3 billion tax bill.
In a new report, the organisation has advised the government to postpone the implementation of a new tax history scheme, due to come into effect in November.
The new scheme would see the buyers of of equity interests in UK oil and gas fields be allowed to acquire the tax histories of the sellers in order to be able to carryback and fully utilise tax deductions for the costs of decommissioning, known as Transfer of Tax History (TTH).
Global Witness said the TTH is designed to “foster a level playing field between those situations where there is an asset sale versus situations where current owners retain their interests through to decommissioning”.
The campaign group said that it considered the TTH deal to be “fiscally dangerous and inadequately justified”.
“As a result, it should be immediately and indefinitely postponed, pending a full assessment of the true potential cost of the policy.”
The report goes on to say: “Before considering impacts of TTH the maximum decommissioning tax refund exposure to the UK Government in the future has been estimated by HMRC to be £24 billion.
“But, extrapolating too far into the future can be somewhat misleading. Technology, costs, markets and tax rules have been shown in the past to change dramatically over a period of even ten years.
“Additionally, ten years also reflects a rough average period of time from a typical date of acquisition until the date of decommissioning. Consequently, this analysis has focused only on the next ten years, over which total decommissioning costs have been estimated to be £18 billion (based on the UK Oil and Gas Industry Association estimate of £1.8 billion of decommissioning costs per year times ten years.)”
The HMRC policy paper on oil and gas taxation claims: “Extending the productive lives of late-life oil and gas fields is an important aspect of this objective, as it leads to new investment, delaying decommissioning and supporting activity in the UKCS for longer.”
“The measure should encourage new investment into late assets in the UK and UKCS which should lead to additional production of oil and gas, helping to increase the UK’s energy security, and supporting jobs and supply chain opportunities.”