Taxpayers face £24bn bill from oil and gas decommissioning reliefs

Tax reliefs to support decommissioning of the UK’s offshore oil and gas infrastructure are set to cost £24bn, although the actual figure is highly uncertain according to a report by the National Audit Office (NAO), which says there are there are gaps in the government’s understanding of the costs and benefits of changes to the tax regime

Oil and gas operators in the UK are increasingly decommissioning their infrastructure, spending over £1bn on this annually since 2014. The government allows operators to recover some of this expenditure through tax reliefs, by deducting costs from their taxable profits and potentially claiming back some taxes they have previously paid.

Tax revenues from oil and gas have declined from a recent high in 2011-12 due to lower oil and gas prices and operators incurring high levels of expenditure that is tax deductible. In 2016-17, the government paid out more to oil and gas operators in tax reliefs than it received in revenues, resulting in total repayments of £290m.

The Office for Budget Responsibility expects net annual receipts from the oil and gas sector to recover slightly, rising from £1.2bn in 2017-18 to a projected £2.4bn in 2022-23.

The Oil & Gas Authority (OGA), which was established as a new regulator and to work with the industry to reduce costs and find efficiencies, estimates that decommissioning will cost UK operators a total of between £45bn and £77bn.

HMRC forecasts that associated tax reliefs will cost the taxpayer approximately £24bn from 2018-19 to 2062-63.

The total cost of decommissioning to taxpayers could be higher because the government is ultimately liable for the cost of decommissioning assets that operators lack the financial resources to decommission.

The Department for Business, Energy and Industrial Strategy has acted to mitigate this risk by requiring nine operators to set aside a total of £844m to pay for decommissioning in the future.

The NAO found that there are gaps in the government’s understanding of the costs and benefits of changes to the tax regime.

HMRC has not historically calculated the total combined cost of decommissioning tax reliefs it has already given to operators, but plans to publish this information for the first time in January 2019. NAO pointed out that given the importance of the tax regime on influencing operators’ investment decisions, it needs to be able to assess whether changes to tax rules are maximising the oil and gas that operators extract.

NAO report, Oil and gas in the UK – offshore decommissioning is here.

Report by Pat Sweet

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