UNITED KINGDOM: GENERAL METADATA

Data documentation

General notes

The fiscal year in the United Kingdom runs from 1 April to 31 March. Following OECD convention, data are allocated to the starting calendar year so that data covering the period April 2016 to March 2017 are allocated to 2016.

Producer Support Estimate

Taxation of the oil and gas sector in the United Kingdom occurs through a variety of taxes. Notably, fields approved for development prior to 16 March 1993 were subject to the old Petroleum Revenue Tax (PRT) - a project-based tax levied on the profits from a given field - instituted in 1975. In the last several years the PRT rate was amended twice, being reduced from 50% to 35% in January 2015 and then being cut to nil in January 2016. . The PRT allowed for the full deduction of both operating and capital expenditures. It did not, however, allow the deduction of interest costs and other financing charges from taxable profits.

Meanwhile, oil and gas corporations that have invested in approved fields after 16 March 1993 are also subject to a modified version of the regular corporation tax, namely the Ring-Fence Corporation Tax (RFCT). The imposition of a "ring fence" around upstream oil and gas activities means that these particular activities are to be treated separately for tax purposes from any other trade in which oil and gas companies may be engaged. This therefore allows upstream oil and gas activities to be taxed differently at the company-level. Differences in taxation include, for instance, the impossibility for companies to use losses in other activities as deductions against the income arising from oil and natural gas extraction.

While all fields are subject to the RFCT, those that were approved for development prior to 16 March 1993 could deduct the amount of PRT taxes paid from their RFCT tax base. This ensured that the fields that were still subject to the old PRT regime were not taxed twice on the same profits. In addition, all types of fields are liable to the so-called Supplementary Charge (SC), which was introduced in the Finance Act of 2002. The SC is currently a 10% tax on profits from oil and natural gas production that is levied on top of the RFCT.

The immediate write-off of both capital and exploration-and-development expenditures is normally considered under the systems in many countries to amount to a preferential tax treatment. The reason is that in calculating taxable profits in most income-tax systems, capital expenses are allocated over the period to which they contribute to earnings. Allowing the immediate writing-off of these types of expenditure therefore provides companies with something akin to a zero-interest loan from the government since it delays the collection of taxes. A present-value calculation would indeed show a positive transfer from the government to the companies benefiting from such provisions.

However, when combined with impossibility for companies to deduct interest costs and other financing charges, the immediate write-off of both capital and exploration-and-development expenditures may not be considered a preferential tax treatment. Instead, this particular combination of tax provisions may approximate what is known as a "cash-flow" tax system. Cash-flow tax systems can be theoretically equivalent to the more common imputed-income tax systems where the objective is to levy a neutral business tax (Boadway and Bruce, 1984). For that reason, provisions such as the expensing of exploration and development costs may not be preferential tax provisions in the particular case of the United Kingdom.