Budget 2016: Tax breaks for North Sea sector

The Chancellor delivered tax breaks for the North Sea industry. Picture: Andrew Milligan/PA Wire

George Osborne said he was responding to the slide in crude prices by halving the supplementary charge on ring-fenced products to 10 per cent, and scrapping the petroleum revenue tax. The announcement prompted Tory MPs to gesture wildly at the SNP benches, urging them to support the move.

“We are only able to provide this kind of support to our oil and gas industry because of the broad shoulders of the United Kingdom,” the Chancellor said.

“None of this support would have been remotely affordable if, in just eight days’ time, Scotland had broken away from the rest of the UK, as the nationalists wanted.

• READ MORE: Budget 2016: As it happened

“Their own audit of Scotland’s public finances confirms they would have struggled from the start with a fiscal crisis under the burden of the highest budget deficit in the western world. Thankfully, the Scottish people decided that we are better together in one United Kingdom.”

Deputy First Minister John Swinney has claimed that “indecision and inconsistency” from Westminster over energy policy has put investment and jobs at risk.

He had written to the Chancellor urging him to use his Budget to help the industry, one of Scotland’s “main industrial and economic success stories”.

The Treasury said the abolition of the petroleum revenue tax would “simplify the regime for investors and level the playing field between investment opportunities in older fields and infrastructure and new developments”, while the cut in the supplementary charge would “send a strong signal that the UK is open for business and in recognition of the exceptionally challenging conditions that are currently facing the sector”. Both cuts will be backdated to 1 January.

• READ MORE: Budget 2016: Key points at a glance

But Derek Leith, head of oil and gas tax at accountant EY, said the moves would fall short of industry hopes.

“Since 2011 there has been a compelling case to lower the tax burden to recognise the maturity of the basin, the high cost base, and the falling production efficiency of older assets which support vital offshore infrastructure,” he said.

“The case for a significant change to the oil and gas regime has been exacerbated by the collapse in the oil price. Decisive action by the government was required to send a strong signal to investors.”

Leith added: “Today’s changes, while welcome, are a missed opportunity to be more radical and abolish supplementary charge completely which would have simplified the regime by sweeping away the complexity of investment allowance and its interaction with decommissioning losses.”

However, Richard Cockburn, energy partner at law firm Bond Dickinson, said the reduction in the supplementary charge could encourage operators to take a second look at projects that had previously seemed uneconomic.

He said: “Oil & Gas UK has been predicting investment approvals of less than £1 billion this year relative to a typical annual figure of £8bn over the last five years, so the Chancellor’s reform has come at an opportune time.”

The UK government will also provide a further £20 million of funding for a second round of seismic surveys in a bid to encourage exploration in the North Sea.