The measure

The Government has today announced details of a new UK tax regime which will apply to all onshore oil and gas projects (whether conventional or unconventional e.g. shale) granted development consent on or after today's date.

In summary based on today's announcement the new UK onshore tax regime looks as follows:

Onshore Allowance

  • All onshore oil and gas production will be taxed within the ring fence, and a new ‘onshore allowance’ will be available for qualifying sites (i.e. sites whose development in whole or part is authorised for the first time on or after 5 December 2013) which will reduce the effective tax rate from 62% to 30% by exempting a portion of a company's profits from the supplementary charge.
  • The amount of profit exempted will equal 75% of the qualifying capital expenditure a company incurs on a qualifying site subject to certain capacity limits (for production yield).
  • Companies will start to generate and hold the allowance as soon as they incur qualifying capital expenditure from 5 December 2013.
  • The amount of activated allowance (i.e. made available to offset against profits) in any accounting period will however be no more than the amount of production income from the site.
  • The activated allowance will be available to use against any of the company's ring fenced profits subject to supplementary charge (i.e. it will not be restricted to set off against profits from onshore oil and gas production).
  • Any unutilised activated allowance will be carried forward to the next accounting period.
  • It will be possible to transfer unactivated allowances between sites by election. The earliest the election can be made is the beginning of the fourth accounting period of the company after that in which the allowance was generated.
  • It will be possible to defer commencement of the above rules to 1 January 2015, where development is authorised for the first time on or after 5 December 2013 but before 1 January 2015. Deferral is by way of joint election by companies that are licensees in the oil field.

Ring Fence Expenditure Supplement (RFES)

The RFES will be extended for all onshore oil and gas projects from six to ten accounting periods.

These measures follow on from consultation over the summer (‘Harnessing the potential of the UK's natural resources - a fiscal regime for shale gas’). The Government's response to the consultation will be published on 10 December 2013.

Who will be affected?

Companies undertaking UK on-shore exploration and production projects.


These measures will have effect in respect of qualifying capital expenditure incurred on or after 5 December 2013 in relation to qualifying onshore oil and gas activity. Draft legislation released today will be incorporated into Finance Bill 2014.

Our view

This is a major development for UK onshore oil and gas taxation and the extension of the allowance to all new onshore projects (rather than just a focus on shale) recognises that onshore projects may involve the extraction of both conventional and unconventional hydrocarbons and face similar commercial issues.

The framework announced today removes one of the major concerns with the original proposals by allowing full, albeit deferred, tax allowance in respect of failed sites (e.g. sites where flow rates are too low to be economic). This is a very welcome development as failed sites are a real risk in the early days of the UK shale industry. The relief therefore allows companies to proceed with exploration with greater confidence.

UK onshore production, including shale gas, could make a significant contribution to the UK's future energy needs, though UK shale is still in very early stages. Certainty in respect of the tax regime is welcome but is just one of a number of areas which will determine how the UK shale gas industry progresses. The importance of a fit for purpose planning system, together with industry's ability to engage with local communities and address environmental concerns are critical. The next few years will be an exciting time for the industry.

Research and insight

Major changes in UK tax Major changes in tax
The latest briefing paper on two major tax issues: international tax reform in the shape of BEPS, and transparency
European Tax Survey European Tax Survey
The findings of Deloitte's survey of tax professionals from almost 1,000 companies across Europe
Patent Box Patent Box
Think inside the box
UK GAAP The future of UK GAAP
What's changing?
Employment status Employment status
The challenges of engaging freelancers and temporary workers
Environmental Taxes Guide Environmental Taxes Guide
A starting point to map a business' environmental tax footprint
Sustainable tax strategy Sustainable tax strategy
Practical guide to help companies