No Budget tax cut for oil and gas companies

oil rig

Chancellor Gordon Brown has excluded oil and gas companies operating in the
North Sea and north-east Atlantic from his 2p cut in corporation tax.

Brown omitted to reveal the bar when he announced the tax cut in his budget
speech, and Treasury officials were unaware of the exclusion.

The decision was conveyed to the oil and gas industry by way of a letter from
financial secretary John Healey to the trade body the United Kingdom Offshore
Operators Association (UKOOA).

Commons Leader Jack Straw, challenged over the bar by Aberdeenshire West and
Kincardine Liberal Democrat MP Sir Robert Smith, said it was because the
industry has a different corporation tax structure to that of other UK

Officials said that the offshore industry has such generous capital
allowances – up to 100% of the cost of new exploration, appraisal and
development work – that it would have suffered from the re-structuring of
capital allowances needed to finance the rate reduction.

The decision appeared to catch the industry by surprise despite detailed
talks at official level to discus long-term restructuring of the tax on the
industry, with a pledge by Brown that the burden of taxation will not be
increased during the life of the current parliament, in May 2010 at the latest.

One source speculated it means Brown will delay major changes until after the
next general election and then impose reforms that will increase the overall tax
take further.

The industry already pays corporation tax at 30p in the pound, plus two
surcharges of 10% each – a total tax rate of 50%.

Critics claim the surcharges are at least partly responsible for a reduction
in North Sea revenue from an expected £13bn to just £7bn.

UKOOA chief executive Malcolm Webb said: ‘The Treasury clearly recognises
that lower taxes are good for business, but unfortunately fails to apply that
principle to our industry.’

He added: ‘the chancellor was quick to raise the tax take from this industry
when he saw oil and gas prices rising towards $60 dollars a barrel, but now that
the price of gas (which makes up almost half of total UK production) has fallen
to the equivalent of $20 per barrel, he sits on his hands.

‘With cash flows from UK gas fields now under severe pressure and the average
cost of new developments running at $25 per barrel, doing nothing is simply not
good enough. The Treasury needs to wake up to current realities.’

Related reading