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Appendices Fiscal Regime Corporation Tax (CT) is applied to all company profits in the UK at a rate of 30%. However, the CT regime applying to the oil and gas exploration and production industry is modified and extended, and production has been subject to two additional imposts, namely Royalty and Petroleum Revenue Tax (PRT). Royalty, however was abolished from 1 January 2003. As a consequence of the Finance Act 2002 a number of changes were made to the UKCS fiscal regime and now we find that marginal tax rates range from 40% to 70%. The two most significant changes for oil and gas were the introduction from 17 April 2002 of the Supplementary Charge to Corporation Tax (SCT) at a rate of 10% and the introduction of 100% First Year Allowances for UKCS capital expenditure. Figure 26: Marginal Government Take from Fields Ranges from 40% to 70% Royalty: This applied to fields which had received development consent before 1st April 1982 applying a charge at 12.5 per cent on the gross value of oil and gas produced, less an allowance for the costs of conveying, treatment and initial storage. Following the announcement in the Pre-Budget Statement on 27th November 2002, Royalty was abolished from 1st January 2003; some 30 fields benefited from its abolition. Petroleum Revenue Tax (PRT): This continues to apply to fields which received development consent before 16th March 1993. It also applies to tariff arrangements existing prior to 9th April 2003 which relate to pipeline systems and other facilities which in some part service a PRT paying field. Tariff contracts arranged on or after this date are exempt from PRT, as addressed in the pending Finance Act 2004. A 50% rate is applied to profits on a field-by-field basis in six-month chargeable periods. If losses arise the ability to surrender to other fields is extremely limited. PRT is deductible for CT and SCT. Capital and operating costs are also deductible. No deduction is allowed for interest, but most capital incurred prior to payback (see below) qualifies for an additional deduction of 35% (known as "uplift"). As most fields subject to PRT are past payback, the significance of this relief is now very limited. Payback is the point at which total cumulative income exceeds total cumulative expenditure. The period at which this point occurs not only determines the cut off for uplift but also dictates the number of six-month periods for which safeguard applies. Safeguard was introduced as a safety net for the benefit of the less profitable fields essentially to ensure that in the early years of field life the PRT cannot exceed a level that would reduce the participators after-tax profit below a minimum return on investment in the field. It limits PRT in each six-month chargeable period to 80% of the excess profits over 15% of cumulative capital which has qualified for uplift. It applies to the period from the start of production to the period of payback plus half as long again. Safeguard will not apply if it calculates PRT in excess of the "normal" calculation without uplift. An "Oil Allowance" can be applied for fields with development consent on or before 31 March 1982, which exempts PRT on the first 250,000 tonnes per six-month period, up to a cumulative total of 5 million tonnes. For southern fields the amounts are 125,000 and 2.5 million tonnes, and for all other taxable fields 500,000 and 10 million tonnes respectively. A "Tariff Receipts Allowance" is also available. This exempts PRT on the first 250,000 tonnes of throughput for each user field per six-month period. Gas sold under contracts entered into before 30 June 1975 is exempt from PRT. As mentioned above, new tariff business for transportation, processing, and other services provided through the use of UK and UKCS infrastructure, which is transacted under contracts entered into on or after 9th April 2003 will be exempt from PRT. The use of UK and UKCS infrastructure will need to be in relation to: a)   A field receiving development consent on or after 9th April 2003; or b)   An existing field using a new evacuation route, but only if that field has not to date made use of non-field assets, which have qualified for PRT relief. While the exemption covers new tariff business contracted on or after 9th April 2003, it will only apply to income and expenditure received and incurred under such contracts from 1 January 2004. Corporation Tax (CT): This applies to all company taxable profits at a rate of 30%. Since the introduction of 100% First Year Allowances in 2002, all costs are effectively tax deductible as incurred, with the exception of long life assets which secure a 24% First Year Allowance, and 6% of the remaining balance on a reducing balance basis. Taxable profits derived from the extraction of oil and gas from the UKCS are also "ring fenced" so that losses from other activities cannot be offset against ring fenced profits. Also stringent rules are applied to ensure that only interest relating to UKCS projects is deductible within the ring fence. Supplementary Charge (SCT): This applies to all ring fenced profits at a rate of 10%. The taxable profit for SCT however differs from CT in that finance costs are not deductible. Exploration and Appraisal: The 2004 budget confirmed the introduction of the Exploration Expenditure Supplement (EES) as a result of the Treasury's consultation with the industry during 2003. EES aims to encourage exploration and appraisal by companies new to the UKCS and will ensure that the value of ring fenced losses available for carry forward is maintained during the period a new entrant is developing their business in the UK. Taxation on Mature Fields and Historic Tariff Arrangements: The aggregate marginal rate of tax is 70% when accounting for PRT, CT and SCT. This remains high by international standards, when taking into account the maturity of the UKCS province and the high costs incurred pre-tax in maintaining the asset integrity of current developments, and in making further investment to access and develop ever smaller accumulations within the mature fields themselves or in nearby satellites. The high aggregate rate penalises the additional drilling activity that is essential to enable maximum recovery. Competition for exploration and development funds in the global market is intense. In the instance of the UK's mature fields, the fear is still that high costs (of which tax is one) may cause the premature cessation of production and early decommissioning. Once closed the potential for the development of satellite reservoirs will be lost forever and it could also cause the premature cessation of other larger fields which are connected to pipelines which cease as the large host fields to which they are connected decommission. Research and Development: With the technical challenges that lie ahead for the industry, research and development (R&D) will become ever more important. The drive to simplify the definition of R&D for tax purposes can only encourage new technology to unlock incremental reserves in the UKCS.