New reliefs for decommissioning and transferable tax history provide a boost for investment in late life assets in the North Sea

The UK has published draft legislation on 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 changes focus on two 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 draft legislation and guidance demonstrate the UK Government’s desire to support activities in the North Sea and to attract investment to extend the operational life of late-life assets. A consultation on the detail of the proposals will be open during Summer 2018. Businesses looking at late-life asset sales should consider whether they wish to make a TTH election and consequently whether they wish to delay obtaining approval from the Oil & Gas Authority to enable them to benefit from the changes in legislation.

The draft legislation provides that:

• The seller of an interest in an oil and gas interest on the UKCS can transfer part of their tax history (TTH) to the buyer. The significance of this is that the buyer may be able to use losses arising on decommissioning to offset the seller’s profits triggering a repayment of historic tax.
• The new rules apply to licence transfers which are approved by the Oil & Gas Authority on or after 1 November 2018.
• The new regime is elective. 
• The amount of TTH which can be transferred is capped at (1) the lower of the seller’s profits for relevant periods which have been taxed at the main ring fence profits rate, not subject to marginal relief and not previously the subject of a TTH election; and (2) broadly, twice the estimated cost of decommissioning based on the estimate in a decommissioning security agreement entered into in the 12 months prior to the transfer. 
• The seller’s profits for its most recent accounting periods must be transferred first.
• If a buyer on-sells the licence interest it acquired together with TTH, it can also on-transfer the tax history it acquired.
• Tax history can only be transferred between associated companies if either (1) the licence interest and TTH are hived into an associated company which is sold to a third party; or (2) the licence and TTH are transferred first to an associated company and within 90 days on-transferred to a third party.
• Buyers are required to stream profits and losses resulting from a licence interest which it acquired with TTH (a so-called TTH asset). The purpose of this streaming is to determine the amount of TTH which can be used to offset decommissioning costs.
• For the purposes of calculating the tracked profits, carry forward and carry back losses attributable to the TTH asset are not carried back or forward so as to reduce the tracked profits.

• Company A buys a licence together with the seller’s tax history of profits of £5,000.
• Company A makes net profits of £1,000 from the licence interest (this is the net amount of profits and losses made by Company A over the period it has held the licence).
• Company A incurs decommissioning costs of £4,000.
• The amount of TTH available to Company A to offset decommissioning costs is £3,000 (£4,000 - £1,000) – which is less than the quantum of tax history transferred.

Where a seller of a PRT field retains an obligation to pay for decommissioning costs but is no longer listed 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 draft legislation contemplates that where such costs are met by the seller (regardless of whether the seller has retained responsibility for decommissioning) the buyer will receive tax relief for such expenditure. This will apply to changes in field ownership approved by the Oil & Gas Authority on or after 1 November 2018.

The draft legislation and guidance demonstrate the UK Government’s desire to support activities in the North Sea and to attract investment to extend the operational life of late-life assets. A consultation on the detail of the proposals is open until [24] [31] August 2018. Businesses looking at late-life asset sales should consider whether they wish to make a TTH election and consequently whether they wish to delay obtaining approval from the Oil & Gas Authority to enable them to benefit from the changes in legislation.