Guidance

Ring Fence Corporation Tax: tariff receipts

Published 1 December 2017

The purpose of this technical note is to provide further background and information on the Autumn Budget 2017 announcement on tariff income. The announcement clarifies that activities by petroleum licence holders (participators) which give rise to tariff income in relation to UK oil and gas assets fall within the oil and gas ring fence tax regime. This clarification will allow the delivery of the expansion of the Investment and Cluster Area Allowances, as announced in Budget 2016.

Background

Companies operating in the UK Continental Shelf (UKCS) have been subject to a special tax regime since 1975. This includes special rules for corporation tax (the ring fence) and a separate tax designed to capture the economic rent on the UK’s oil fields (Petroleum Revenue Tax or PRT). There have been many changes to the regime as the UKCS has matured. Initially income from the use of assets by other oil companies (such as use of pipelines to transport oil and gas) (tariff income) was excluded from the regime but such tariff income was brought into both PRT and the ring fence in 1983. PRT no longer applies to oil and gas fields which received development consent after 1993.

Originally, definitions for both PRT and Ring Fence Corporation Tax (RFCT) regimes derived from the same legislation and so single definitions of tariff receipts were not provided. The consolidation of the legislation for corporation tax (now in Corporation Tax Act 2010 (CTA 2010)) has required numerous cross references between the Corporation Tax Act 2010 and the Oil Taxation Acts of 1975 and 1983. It is these which have given rise to a potential uncertainty regarding the treatment of tariff income arising in respect of non-PRT assets.

Initial consultation with industry on the expansion of Investment and Cluster Area Allowances for Supplementary Charge (SC) announced at Budget 2016 (extending the definition of relevant income to include tariff receipts) highlighted this potential uncertainty surrounding the definition of tariff receipts. The uncertainty concerns whether or not a correct interpretation of the current legislation creates a distinction between third party income received by participators in respect of PRT and non-PRT assets^{[footnote 1]} , with only the former being chargeable to RFCT and SC as tariff income within Section 291 CTA 2010.

HM Revenue and Customs (HMRC) past practice has generally been to treat all tariff income arising from oil and gas assets as within the ring fence regime. This has also accorded with the general practice in industry.

Policy

HMRC is of the view that the changes made in 1993 were designed solely to abolish PRT for new fields and there was no intention either to affect the RFCT treatment of tariff receipts or to create a distinction between PRT and non-PRT assets. HMRC’s intention is to maintain a consistent approach of the treatment of tariff income for RFCT and SC purposes regardless of whether it arises from a PRT or a non-PRT asset. HMRC has engaged in informal consultation with industry, advisors and representative bodies over the last 6 months to establish current interpretations of legislation and current practice. The evidence received was that industry have generally treated all tariff income within the scope of the ring fence tax regime, and have not in practice drawn any distinction between PRT and non-PRT assets. HMRC also invited industry to raise any instances where tariff income from non-PRT assets has been treated as outside the ring fence tax regime, but no representations to this effect have been received.

Therefore, the intention behind the legislation announced at Autumn Budget 2017 is to continue this treatment and put beyond doubt that activities by petroleum licence holders in the UK and on the UKCS, which give rise to tariff income in relation to oil and gas assets, are oil extraction activities, regardless of whether the tariff is from a PRT or non-PRT field. This means that profits from these activities are subject to RFCT and SC and as such taxpayers can also benefit from the special reliefs available.

Changes being made to legislation

Tariff receipts are brought into the scope of the ring fence trade by section 291 CTA 2010, and are specifically defined in section 291 (9) by reference to the definitions in sections 6 and 6A of Oil Taxation Act 1983.

To ensure legislation makes no distinction between the treatment of tariff income arising from PRT and non-PRT assets for RFCT and SC purposes, the definition of tariff receipts will be amended in section 291 of CTA 2010. This will leave the provisions in OTA83 s6 and s8 intact.

The legislation will take effect for accounting periods beginning on or after 1 January 2018.

Historic treatment

As industry’s general practice has been to historically treat all tariff income from oil and gas assets as being within the scope of the ring fence tax regime, it is anticipated that most companies will not be affected by this clarification. To prevent any uncertainty in this area HMRC confirms that it will not enquire into company tax returns concerning whether or not tariff income has arisen from PRT or non-PRT assets, and the consequential tax effects of this differential with respect to accounting periods ending on or before 31 December 2017. This will allow industry to focus on investing in the UKCS infrastructure with the help of the anticipated expansion of the Investment and Cluster Area Allowances, which will now be deliverable with this clarification.

If however companies wish to discuss their specific circumstances, please email: nicola.garrod@hmrc.gsi.gov.uk or tanzana.uddin@hmrc.gsi.gov.uk directly and HMRC will work with companies on a case by case basis.

1. This is because the definition of tariff receipts refers to those assets recognised by Oil Taxation Act 1983 (OTA83) as a “qualifying asset”; a qualifying asset is defined at OTA83 s8 as one which is recognised for the purposes of PRT only. ↩