The Summer Budget

2015 is one of these special years where we have, not one, but two Budgets

Such is the practice in election years.

However, in contrast to the past when pre-election Budgets used to be a damp squib, and usually wholly political, the 2015 March Budget was a more substantive affair.

It included significant measures aimed at encouraging investment in the UK oil industry through lower taxes and the introduction of both the Investment Allowance and the Cluster Allowance.

With such significant changes to the oil and gas regime in that Budget, it was always highly unlikely that yesterday’s Summer Budget, the first Conservative budget in 18 years, would contain any more direct measures to further support the oil and gas sector.

However, the Chancellor still felt it necessary to name-check the sector in his speech re-affirming his on-going interest in the industry.

There was a passing reference to oil and gas in the HMT documentation and Red Book analysis as the extension to the scope of the Investment Allowance - unfinished business from the March Budget - is expected to be delivered via secondary legislation later this year.

The costing is minimal, at only £5million per annum from 2016, but that is more to do with the current loss position that many E&P companies are in rather than the actual economic effect of the extension to the allowance.

Despite the exclusion of the oil and gas sector, the Chancellor cast his net wide with the Summer Budget having an estimated £75billion impact over the life of the parliament.

This is broken down to £46billion from welfare savings and £29billion from tax increases.

The welfare savings have been signposted for some time but the Chancellor managed expectations by deferring the impact of the full £12billion in cuts to the final year of the parliament, and out-manoeuvred some of his critics by the unexpected rise in the minimum wage, now rebranded the living wage.

The tax changes were many and varied including:

  • the phasing out of the bank levy and the imposition of a bank surcharge (expected to yield £1.7billion);
  • a significant increase in insurance premium tax (expected to yield a staggering £8.16billion); changes to vehicle excise duty (expected to yield £3.48billion);
  • the introduction of climate change levy on renewable source electricity (expected to yield £3.9billion); and
  • a further attack on tax evasion (expected to yield £7.2billion)

The measures of most relevance to the local economy in the North-east were a bit of a mixed bag.

On the one hand, some giveaways through increases to the personal tax allowance and the basic rate band, an unexpected further cut in corporation tax to 19% in 2017 and 18% in 2020, and permanently fixing of the Annual Investment Allowance at £200,000.

In total these measures are expected to cost the Exchequer almost £17billion.

On the other hand, further restrictions to tax relief on pension contributions for those earning over £150,000, the acceleration of payment dates for corporation tax, and the abolition of the dividend tax credit accompanied by changes to the tax rates for dividend income.

In total, these measures are expected to yield £20.7billion.

Clearly, the lowering of the corporation tax rate and the new level of the Annual Investment Allowance will be welcome measure for the oil and gas supply chain companies serving the UKCS.

The increase in personal allowances and the basic rate band will also be welcomed.

However, the acceleration of payment dates for corporation tax will adversely impact companies’ cash flows and the changes to the taxation of dividends are a clear attack on those who have sought to manage their exposure to personal tax through the use of service company structures.

For those enjoying very high salaries, the further changes to tax relief on pensions will be disappointing.

It is hard to believe that less than 10 years ago, the tax rules enabled payments in excess of £200,000 to qualify for higher rate tax relief whereas going forward that limit as is little as £10,000 for some individuals.

Furthermore, fundamental reform is a distinct prospect with the Chancellor announcing a full consultation on pensions.