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Potential tax cuts for the North Sea oil and gas industry?

Precise discuss the possible changes to taxation that could be implemented imminently in the North Sea oil industry.

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With less than 24 hours to go before the Budget is unveiled, the North Sea oil and gas industry is on tenterhooks waiting to find out how much of a helping hand it’s going to get. For the first time in years there is now a sense that the North Sea is not a ‘cash cow’ to be milked by governments. As the BBC reports, “the Greek proverb says when milking a cow, be careful not to pull the udders off”. Indeed over the past few months, thousands of jobs have been lost in the global industry as the price of oil plummeted.

Add to that the fact that this is one of the most highly taxed industries and it’s clear something needs to be done to shore up this essential sector. They pay not just 30% in corporation tax but also a 30% supplementary tax. The main industry body Oil and Gas UK reports that for older fields the rate can rise as high as 80%.

Last October the Chancellor was criticised for not doing more for the industry when he cut the supplementary tax rate from 32% to 30%. It had been hiked up during the good times of 2011 when prices per barrel averaged $111.

It’s now $55 and it’s hoped the Treasury will do a lot more – like cutting a further 10% of that tax. Oil and Gas UK chief executive Malcolm Webb commented, “A double-digit reduction in the Supplementary Corporation Tax charge, plus a single simplified Investment Allowance, is urgently needed in order to help re-establish the competitiveness of the UK oil and gas industry.

“The Chancellor is well-informed of industry’s current situation and I trust he will do the right thing for this sector and for the country on Wednesday.”

In October after the budget received a lukewarm welcome, the chief secretary to the Treasury told a specially convened meeting of industry players that it was going to do everything possible to shore it up, that it recognised the essential part it played in the economy and that for a strong future, the industry needed to be able to portray a confidence that was then seriously lacking.

It’s interesting to note that a recent survey suggests exactly that has happened in the last five months. In its fourth annual survey into the industry, the Bank of Scotland says says, “Our survey acknowledges the impact of the falling oil price and rising cost of production on UK oil and gas companies but the sector has weathered tough conditions in the past and firms remain committed to generating growth despite these challenges.”

Significantly it found that 92 out of 102 firms intend to grow this year – up a whopping 62% from last year. A large part of this it says will be down to diversification.

It indicated that companies were looking to expand abroad, move into renewable energy fields as well as shale gas production and decommission old oil and gas platforms. The number of companies considering mergers and acquisitions is also up from last year when a tenth suggested interest in this. It’s now a quarter.

Better yet – more than two thirds said they expected to be able to increase staff numbers over the course of the next two years.

The Bank of Scotland report backs the need for taxation action, saying that “the basket of measures the government can take – better incentives and reliefs, cuts in supplementary corporation tax, increased sharing of information, better access to subsea installations – are seen as important, particularly to encourage longer-term growth.”

We’ll be watching what happens in the Budget tomorrow, and if you follow us on Twitter, we’ll be uploading the details that matter to you. Get ready for good news!