HMRC: Don't Milk Economic Recovery in the UK, Maximise it

Just before Christmas I thought Santa Claus had arrived early. There was a bulletin published by HMRC with updates on the rules that determine how the investment allowances on supplementary corporation tax would be calculated.

I unwrapped the present carefully, hopeful that the folks at the Treasury had read the letter I had sent up the chimney to them.

I'm not joking, I had written twice to the Treasury pointing out how they had a golden opportunity to put the Maximise in MER:UK, by treating the cost of the chemicals, polymers or solvents, which underpin most EOR techniques, as investment expenditure; thus boosting the investment allowance and giving EOR projects extra relief from supplementary corporation tax.

I had written an article here too and I know that other companies, large and small, were lobbying for the same relief.

What's that I hear, someone bleating in the distance that we shouldn't be subsidising oil companies by giving them tax relief. For clarity this wasn't to get relief from corporation tax, which is levied on oil companies at a higher rate than every other business in the UK, no it was to get relief on the extra tax levied on oil companies on top of the higher rate of tax we already pay. It's not a subsidy to get a relief from an extra high burden of taxation levied on the oil industry alone and those who claim that these are subsidies reveal their own intellectual dishonesty when they make that claim. 

Apologies for the rant, but I have opinions, sometimes they slip out, and I have no corporate guardians filtering my views.

HMRC's accompanying article started promisingly, it said that operational expenditure would be investment expenditure if it "increases the rate or amount of oil that can be extracted from a field". Great I thought, and then I did the job thoroughly by reading through the draft regulations. It turns out there will be three conditions to be satisfied before operating expenditure could be treated as investment expenditure, conditions A, B & C. Any decent EOR investment would fly through condition A (increasing the reserves of oil of a qualifying oil field) and condition B (not routine repair or maintenance expenditure) but it also had to meet condition C. Turns out Condition C is a narrow list of things that HMRC thinks might increase oil production or recovery, EOR wasn't on the list.

You can imagine my disappointment when I found that there was no goodie wrapped up in the HMRC publication. It's not that the rules proposed are bad, they make sense, it's just that they are far too narrow. There were other sensible tweaks to the rules to deal with operators who want to lease rather than build equipment, routine and wise stuff. But nothing bold.

Nothing that helps those companies that are prepared to take a risk on an EOR project, nothing to encourage investment in technologies that are not quite certain. It wouldn't take much, just add the below as paragraph (c) to section 3.(4) of "The Investment Allowance and Cluster Area Allowance (Investment Expenditure) Regulations 2016".


(c) any of the following activities in relation to a reservoir—
     (i) purchase of additives to fluids injected into the reservoir;
    (ii) purchase of gases or solvents injected into the reservoir;
   (iii) purchase of fuel to generate steam injected into the reservoir.


Maybe those words aren't exactly right, maybe I've asked for too much, but you know the worst thing that could possibly happen if those words are wrong is that a profitable EOR project would only pay a marginal tax rate of 30% (which is the higher rate of CT that oil companies pay) rather than a marginal rate of 50% (which would apply if supplementary CT did kick in). If that possibility encourages companies to invest in EOR that's an unalloyed good. Using steam on our fields just about triples reserves – that means it triples the volumes we would pay 30% tax on. In almost all circumstances the Treasury is quids in. 

Frankly, right now the oil price is so low that there is, I believe, only one company in the UKCS paying tax. Maybe that means it doesn't matter, or maybe this is the time to make radical changes in the tax structure. Now when the overall tax take has actually gone negative there is a real chance for HMRC to alter the tax system so that rather than just Milking Economic Recovery in the UKCS, the fiscal rules would really encourage Maximising Economic Recovery, sadly they fumbled and dropped the ball.

Of course the ball is still bouncing at their feet, go on George, pick the darned thing up.