UK: HM Treasury Consults On Decommissioning Relief Deeds

Last Updated: 16 July 2012
Article by Judith Aldersey-Williams and Penelope Warne

Yesterday the Government published its consultation document on "Decommissioning Relief Deeds: increasing tax certainty for oil and gas investment in the UK Continental Shelf".  This consultation follows on from the Government's announcement in Budget 2012 that it would respond to industry's concerns regarding the lack of certainty over how much decommissioning tax relief companies might be able to claim on the costs of decommissioning assets in the UKCS.

This uncertainty makes it harder for assets to change hands, ties up funds in decommissioning security, thus limiting the funds available for new ventures, and deters incremental investment.  (See our earlier  Law-Now regarding the Budget 2012 announcement).  The Government's proposed approach is to implement Decommissioning Relief Deeds ("Deeds") to address these issues.

Overview of proposed Deed

  • Deeds will be available to all companies that have been subject to the UK's oil and gas fiscal regime and their associates (essentially affiliated entities).  This will not cover all entities with a potential liability for decommissioning but will address most situations where decommissioning security is currently required.
  • The Deed would be executed by the Government and individual company counterparties.  One Deed would cover all of a company's assets and would be valid beyond cessation of production by the counterparty.  The Deed would be a standardised document with an individual side note certifying a company's PRT history by field.
  • The Deed would define the type of expenditure on which relief can be claimed. This would be defined in accordance with the tax regime as at the date of Royal Assent to Finance Act 2013. However the Government is reviewing situations where it is presently unclear whether relief is available such as decommissioning studies, well abandonment, removal of drill cuttings and onshore decommissioning.
  • In establishing the amount of relief a company can expect to receive, the consultation proposes to differentiate between "default scenarios" (when a company is required to pay another party's share of decommissioning due to the latter's default) and "non-default scenarios (when a company is meeting its own decommissioning liability).  In a default scenario, the Deed will ensure that a company receives a defined amount of relief in respect of expenditure to meet the defaulting party's obligations.  In a non-default scenario the Deed will provide certainty over the rate of relief a company will achieve in relation to its expenditure on its own obligations.
  • The reference amount is a comparator amount of relief which Deed holders would use to assess whether they would be entitled to make a claim for relief under the Deed.   The reference amount would largely mirror the tax code in 2013, whilst protecting companies in the event of a default.  If the relief a Deed holder receives in respect of its costs at the time of decommissioning is less than the reference amount, the Deed holder will be entitled to claim a shortfall payment from the Government.
  • The Government proposes that the reference amount should be calculated separately in respect of Ring Fence Corporation Tax (RFCT), Supplementary Charge (SC) and Petroleum Revenue Tax (PRT).   The total reference amount guaranteed in the Deed would be the sum of the reference amounts for RFCT, SC and PRT. 
  • From the perspective of those taking security for decommissioning, the key point in the consultation paper is the proposal that for RFCT and SC the Government will effectively guarantee tax relief of 50%, subject to anti-avoidance provisions.  This has the potential to reduce by half the funds tied up in decommissioning security.  For PRT fields it is harder to stipulate a headline rate since actual tax rates vary considerably depending on the circumstances of a field.  However, where a party carrying out decommissioning in a default scenario has insufficient PRT history against which the costs can be offset it will be entitled to a transfer of the PRT history of the defaulting party.
  • For those carrying out their own decommissioning liabilities, they will be guaranteed to receive relief at the rates at which the profits against which the costs are offset were taxed (subject to the 20% cap on SC relief). They will however need to have paid sufficient tax against which to offset the decommissioning costs incurred i.e. relief is dependent on tax history.
  • If PRT is abolished, relief will continue to be available under the Deed in both default and non-default scenarios at the level which the relevant party would have achieved in the last period of account prior to abolition.
  • There would be no circumstances under which entitlement under the Deed would reduce the level of relief that a company could claim under the tax code and the rate of relief would not, except in exceptional circumstances such as default, exceed the rate of tax payable.  

Key Issues to be resolved

The Consultation paper is likely to be broadly welcomed by industry as meeting its main concerns.  However, a great deal of detailed work remains to be carried out in the period between now and the proposed date of publication of draft legislation in November or December to ensure that the proposal can be implemented effectively. The main issues outstanding are:

  • PRT History - The process by which PRT History will be established and transferred in the event of default remains to be resolved.
  • Anti-Avoidance Measures - The Government is concerned to ensure that the Deed cannot be used to inappropriately reduce a company's tax liability and therefore proposes to include in the Deed provisions to avoid artificially inflated claims for relief and to ensure that parties cannot engineer a default to take advantage of the Deed – the details of how this will be achieved remain to be agreed and this is an area of concern as, while the vast majority of companies would not consider using the Deed for illegitimate reasons, ill-defined anti-avoidance provisions could recreate some of the uncertainty the Deed is aimed at removing. 
  • Taxation of Decommissioning Security Agreement Trusts – DSA Trusts can be subject to Inheritance Tax (IHT) and this may result in an increased requirement for security.  The Government has not committed to the removal of IHT but has commented that in deciding whether to do so it will continue to consider the potential for avoidance and consistency with the broader Inheritance Tax and trust policy.  The Government notes that it has not received strong evidence that Income Tax has a significant impact on security requirements and asks for further evidence, for instance that trusts have moved offshore to avoid this.
  • Other technical changes - The Government has acknowledged that there are several technical changes to the tax code that may be necessary or beneficial to ensure the effectiveness of the approach set out in the consultation document including the subsidy rules, interaction with field allowances and other amendments to the tax code.

 The closing date for comments is 1 October 2012.  Please click here for the full consultation document.

Judith Aldersey-Williams is part of the Oil and Gas UK Working Group which has been working with HM Treasury on this decommissioning tax relief issue.

CMS Cameron McKenna has more than 20 UK based energy partners working in its London, Aberdeen and Edinburgh offices.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 10/07/2012.

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