Changes are proposed to the scope of the supplementary corporation tax charge on ring fenced profits of UK oil and gas companies, to ensure that it cannot be avoided by electing to transfer capital gains to other group companies outside the ring fence.

Baker Tilly analysis

UK oil and gas companies are subject to a supplementary corporation tax charge of 32% on their profits from oil extraction (their ‘ring fence’ profits). This supplementary charge is supposed to apply to capital gains on disposals of assets within the ring fence too. However, it was possible to avoid the supplementary charge on such gains by electing to transfer them to other group companies outside the ring fence. It is proposed that, in future, such elections will no longer be possible, to ensure that the supplementary charge on capital gains can no longer be avoided in this way.

In detail

UK oil and gas companies are subject to a supplementary corporation tax charge of 32% on their profits from oil extraction (their ‘ring fence’ profits), meaning that they typically pay a combined effective corporation tax rate of 62% on such profits.

The supplementary charge is supposed to apply to capital gains on disposals of assets within the ring fence too. However, some companies have tried to avoid the supplementary charge on gains by arguing that the way the scope of the charge is currently drafted means that capital gains falls outside its ambit. It is therefore proposed to amend the definition of the scope of the supplementary charge to apply to make it clear that it applies to all profits arising within the ring fence, including capital gains, not just trading profits.

It was also possible to avoid the supplementary charge on capital gains by electing to transfer such gains to other group companies outside the ring fence that were therefore not subject to the supplementary charge. As a result, such gains were only taxed at the ordinary corporation tax rate that applies to non-ring fence profits. It is proposed that, in future, it will no longer be possible to make elections to transfer gains from ring fence companies to non-ring fence companies, to ensure that the supplementary charge on capital gains can no longer be avoided in this way.