Taxation of North Sea oil

This note gives a short description of the way North Sea oil is taxed, before discussing the reforms that have been made to the fiscal regime since 2000.

Companies operating in the North Sea pay three separate profit-based taxes on oil and gas production: corporation tax, petroleum revenue tax (PRT), and a supplementary charge. Total receipts from these taxes were £4.7 billion in 2013/14. By comparison receipts from ‘onshore’ corporation tax are forecast to be £36.7 billion in the same year. 

Revenues from North Sea oil and gas production have fluctuated dramatically over the last twenty years, following peaks and troughs in world oil prices. From the late 1990s revenues grew consistently, before falling dramatically with the world economic recession in 2009. Although revenues grew strongly in the next three years, they have fallen sharply since 2011/12, and are projected to continue to fall in future years. In March 2015 the Office for Budget Responsibility revised its forecasts for annual revenues significantly, from around £2.6bn from 2015 to 2020, to £0.7 billion over the same period.

Over this period there have been three major reforms to the fiscal regime.

First, in its 2002 Budget the Labour Government introduced the ‘supplementary charge’ on ring fence profits. The charge was first set at 10%. Subsequent increases in oil prices and industry profits led to the then Chancellor, Gordon Brown, announced that the charge would be set at 20% from January 2006.

Second, in his 2011 Budget the Chancellor, George Osborne, announced that the supplementary charge would be set at 32%, while tax relief for companies’ expenditure on decommissioning would be restricted.  At the time Mr Osborne proposed that the extra receipts would be used to cut excise duties on road fuel: specifically, an immediate 1p cut in the main duty rate, a suspension in the duty ‘escalator’ – the commitment to increase duty rates in real terms each year – introduced by the Labour Government in 2009, and a delay in the two inflation-only increases set for April 2011 and April 2012.  Mr Osborne went on to explain that if oil prices fell back down ‘on a sustained basis’, the extra supplementary charge would be removed, and the duty escalator would be re-imposed.

In his Autumn Statement in December 2014 the Chancellor announced a number of changes in the wake of the reductions seen global oil prices, including “an immediate reduction in the rate of the supplementary charge from 32% to 30%.” Mr Osborne also withdrew the commitment to raise excise duties on road fuels in the event of lower oil prices: “despite falling fuel prices, let me make this absolutely clear: we have cut fuel duty and we will keep it frozen.” As oil prices continued to fall, Mr Osborne announced a second series of measures in his Budget four months later, including a cut in the supplementary charge to 20%, backdated to January 2015, and a reduction in the rate of petroleum revenue tax, from 50% to 35%, from 1 January 2016.