HM Treasury have published a discussion paper asking for comments on possible changes to the tax treatment of sales of late life assets in order to improve the availability of tax relief for decommissioning expenditure to buyers of such assets. The paper focuses on three main issues
- How a transfer of tax history from the seller to the buyer of a late-life asset would work.
- The implications of sellers of PRT fields retaining decommissioning costs.
- The use of tax losses to offset against decommissioning costs once a company has been sold.
Tax relief is available for the cost of decommissioning. Such costs can be used against
- Current year profits and gains
- Surrendered intra-group by way of group relief
- Carried-back – indefinitely in the case of PRT and against profits of a ring fence trade for any accounting period ending on or after April 17, 2002 for RFCT and SC.
The difficulty arises where a late-life asset is sold and the buyer may not or may not be confident that it will be able to generate sufficient profits to offset the entire decommissioning cost. In the context of sales of mature producing assets in the UK North Sea the lack of tax capacity to fully utilise tax reliefs on decommissioning expenditure may well render transactions uneconomic for certain buyers, restricting M&A activity and potentially having an adverse impact on the goal of Maximising Economic Recovery.
Transferable tax history
The Treasury paper considers the possibility of allowing part of the seller’s tax history to be transferred to the buyer. This would enable the buyer to use the seller’s profits which have been subject to RFCT and SC against any decommissioning costs. The paper asks for comments on
- The appropriate methodology to use in allocating a seller’s tax history between different fields. For example, the tax history could be allocated based on the taxable profits of each field, using the income from each field or by agreement between buyer and seller.
- Restrictions on the use of the seller’s transferred tax history to prevent it being treated as a tradeable commodity. The paper suggests that the tax history could only be used to cover decommissioning costs or be restricted to the field it is transferred with.
- Whether the transferred tax history profits should be used before or after the buyer’s profits from the field.
- Whether the transferable tax history should transfer with the asset on subsequent sales – or whether it should remain with the first buyer.
- How a premium payable by a buyer for acquiring a transferable tax history should be taxed.
- Administration of a transferable tax history regime by HMRC – including whether a transfer of tax history should be mandatory or optional.
Sellers of PRT fields
Where a seller of a PRT field retains an obligation to pay for decommissioning costs but is no longer on the licence at the time these costs are incurred (and so is not a participator), neither the buyer nor the seller is entitled to claim the costs as deductible for PRT.
The paper considers whether an appropriate solution would be to
- Deem a transfer of the licence to the seller, so that the seller can offset decommissioning costs against PRT
- Treat the seller as incurring costs on behalf of the buyer, so that the buyer can offset the decommissioning costs against PRT.
Use of losses following a company sale
Where a company is sold which contains oil and gas assets and there is a major change in the nature or conduct of a trade within three years (five years from April 1, 2017), losses can be extinguished. This is a particular concern where decommissioning occurs – whilst the company will continue to have a trade in oil and gas extraction, changes often occur in the management and business process. There is currently a lack of clarity as to when such changes will result in the forfeiture of tax losses. The paper asks for suggestions of measures that will increase certainty whilst still preventing tax avoidance.
The discussion paper indicates the Government’s desire to support activities in the North Sea and to attract investment to extend the operational life of late-life assets. It is clear from the paper that the Government has not yet decided what changes to make and whether such changes will apply only to new transactions or to both new and historic transactions. All comments on the paper should be submitted by June 30, 2017. The oil industry is working on developing its own proposals to address this issue which will be presented to HMRC as part of the consultation process. It is expected that any proposed changes will be announced in the Autumn Budget 2017.