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Last Updated: Thursday, 17 March, 2005, 10:28 GMT
Oil firms hit by tax adjustment
North Sea oil rig
Oil firms have will to pay more tax next year
Offshore oil and gas firms will have to pay 1bn ($1.9bn) more in tax next year as a result of changes to the tax regime included in Wednesday's Budget.

Chancellor Gordon Brown is to raise the extra money from North Sea operators by bringing forward corporation tax payments due in 2006/7 to 2005/6.

The measure will not increase the overall tax burden on the industry but firms will incur extra financing costs.

The huge profits made by oil firms have prompted calls for a windfall tax.

Fiscally neutral

The industry has estimated the measure will result in firms having to pay 25m in additional annual financing costs.

He [the chancellor] will get more money now and a little bit less later
Michael Tholen, UK Offshore Operators Association

However, it denied that the move - which will be used to fund spending pledges for pensioners and house buyers - amounted to a windfall tax.

"The chancellor benefits from getting tax earlier but the overall tax take is the same over the life of the North Sea," said Michael Tholen, economic director of the UK Offshore Operators Association.

"He [the chancellor] will get more money now and a little bit less later."

Tax take

Offshore operators, such as BP and Shell, currently pay 40% corporation tax on their profits.

Oil firms are also liable for a petroleum revenue tax (PRT) of 50% on the profits of fields developed before 1993.

2003-4: 4.3bn
2004-5: 5.2bn (forecast)
Source: UK Offshore Operators Association

Overall, offshore operators pay taxes of between 40% and 70% depending on their PRT liabilities.

They paid 4.3bn in taxes to the UK Exchequer in 2003-4 and this figure is projected to rise to 5.2bn in 2004-5.

The chancellor's measure will align payments of the two taxes more closely but will not increase the total amount of tax owed.

The acceleration of corporation tax payments will result in higher financing costs - the industry says these will initially be 13m, rising eventually to 25m.

However, these are small compared with the profits being generated at what is a boom time for the industry.

Boom time

Boosted by the rise in oil prices to $55 a barrel last year, BP and Shell made after-tax profits of 8.7bn and 9.3bn respectively in 2004.

The scale of these profits prompted calls by consumer groups and some politicians for a windfall tax to be levied on oil companies to help people struggling to pay their energy bills.

Offshore groups expressed confidence that the new tax regime would not discourage investment in the North Sea.

"The signal, I hope, is one of fiscal stability and that, if anything, should attract greater investment," Mr Tholen added.

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