Schedule 1: Oil activities: new Chapter 16A of Part 2 of ITTOIA 2005
Overview
695.This Schedule contains provisions relating to the income tax charge on profits from oil extraction and related activities. It rewrites Chapter 5 of Part 12 of ICTA and sections 62 to 65 of FA 1991 by inserting the rules for income tax into ITTOIA after section 225 of that Act.
696.The provisions are inserted at this point because they are, in essence, variations of the general rules relating to trading income in Part 2 of ITTOIA. The starting point is that all normal trading income rules apply unless they are modified by a provision of this Chapter.
697.Some parts of the source legislation apply only for corporation tax – for example, the ring fence expenditure supplement - and are therefore not reproduced for income tax. There is, therefore, no income tax equivalent of the following sections of CTA 2010: 271, 276, 280, 286 to 288, 299 to 301 and 303 to 357. Section 492(2) of ICTA (restriction of relief for trading losses) was rewritten for income tax purposes in section 80 of ITA , and section 16 of ITTOIA is the income tax equivalent of sections 274 and 279 of CTA 2010.
698.A number of PRT definitions are used in the income tax rules, and some parts of the legislation depend on calculations made for PRT purposes. In particular the legislation uses the PRT term “participator” (see section 12(1) of OTA 1975). The legislation for PRT is not itself being rewritten.
699.The rewritten definitions of “exploration and exploitation activities”, “exploration and exploitation rights” and “designated area” are in section 874 of ITTOIA. The extension of the United Kingdom to its territorial sea for the purposes of income tax is in section 1013 of ITA.
700.Oil is used as a shorthand throughout the commentary on these new sections, but unless specifically mentioned the same rules and considerations apply to gas and other associated products.
Section 225A: Meaning of “oil extraction activities”
701.This section sets out the definition of “oil extraction activities” for the purposes of the Chapter. It is based on section 502(1) and (2) of ICTA.
702.Certain definitions are taken from the PRT legislation in section 12 of OTA 1975.
Section 225B: Meaning of “oil rights”
703.This section sets out the meaning of “oil rights” for the purposes of the Chapter. It is based on section 502(1) of ICTA.
Section 225C: Meaning of “ring fence income”
704.This section sets out the meaning of “ring fence income” for the purposes of the Chapter. It is based on section 502(1) of ICTA and section 62(2) of FA 1991.
Section 225D: Meaning of “ring fence trade”
705.This section sets out the meaning of “ring fence trade” for the purposes of the Chapter. It is based on section 502(1) of ICTA.
Section 225E: Other definitions
706.This section sets out further definitions necessary for the Chapter. It is based on sections 493(1A) and 502(1) and (2) of ICTA and section 62(2) of FA 1991.
Section 225F: Valuation where market value taken into account under section 2 of OTA 1975
707.This section specifies that where the market value of oil is included in the calculation of profits for PRT purposes by OTA 1975 in place of the actual sale price, the same price applies for income tax. It is based on section 493(1) of ICTA.
708.The market value is derived by way of a comprehensive scheme put in place for PRT purposes – see in particular section 2 of and Schedule 3 to OTA 1975.
Section 225G: Valuation where disposal not at arm’s length
709.This section applies a market value price where oil is disposed of otherwise than at arm’s length, but where the disposal is not covered by the PRT rules. It is based on section 493(3), (5) and (6) of ICTA.
710.A common application of this rule is where oil is extracted from an oil field that is not within the scope of PRT following the reforms in FA 1993, which took fields given development consent on or after 16 March 1993 out of the scope of PRT.
Section 225H: Valuation where excess of nominated proceeds
711.This section ensures that where the “nomination scheme” adds an amount to the disposal value of oil for PRT purposes, that amount is also added for income tax purposes. It is based on section 493(1A) of ICTA.
712.The “nomination scheme” is part of the mechanism to ensure that the full value of oil extracted from the UK sector is reflected in the profits calculated for PRT and for the ring fence trade. A full description of the scheme can be found in HMRC guidance at OTM 5199.
Section 225I: Valuation where relevant appropriation but no disposal
713.This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining. It is based on section 493(2) of ICTA.
714.Where a market value is applied for PRT purposes by OTA 1975, that market value is used in the calculation of profits for income tax purposes – see subsections (4) and (5). The market value also applies to the non-ring fence business.
Section 225J: Valuation where appropriation to refining etc
715.This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining, and where the PRT rules do not apply. It is based on section 493(4), (5) and (6) of ICTA.
716.In such a case the same calculation of market value is made using the PRT rules as if the PRT rules had applied to the appropriation.
Section 225K: Reduction of expenditure by reference to regional development grant
717.This section restricts a deduction for expenditure incurred to the extent that the expenditure has been met by a regional development grant. It is based on section 495(1), (2) and (7) of ICTA.
718.The main restriction in respect of a grant is applied by section 534 of CAA. This section applies essentially the same restriction to the purchaser of an asset who buys the asset from a connected party, where that connected party received a regional development grant on the original acquisition or construction of the asset.
719.The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for income tax purposes with respect to expenditure incurred on or after 6 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 9.
Section 225L: Adjustment as a result of regional development grant
720.This section supplements section 225K of ITTOIA and section 534 of CAA where the amount of expenditure involved is redetermined at a later date. It is based on section 495(3) to (7) of ICTA.
721.The most likely application of regional development grants in the oil context is for onshore assets such as initial treatment plants to stabilise the crude oil arriving by pipeline. The eligibility of such assets for PRT relief, or the proportion that is eligible, can take some time to agree. As a result, the PRT position (which determines the amount eligible for capital allowances) may not be finalised for some time.
722.Accordingly, capital allowances could be given on the full amount in the “initial period”, disregarding the grant, as section 534(2) of CAA or its predecessors would not have applied at that stage. Subsection (5) ensures that the position can be adjusted in a later period if a change in circumstances occurs.
723.If the change increases the expenditure eligible for capital allowances, subsection (7) treats the person as having incurred additional expenditure.
724.If the change reduces the eligible expenditure subsection (8) treats the person as receiving a trading receipt.
725.In both cases the adjustment is treated as made in the relevant later period (referred to as the “adjustment period”).
726.Section 137 of FA 1982, referred to in the source legislation, was rewritten in section 534 of CAA.
727.The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for income tax purposes with respect to expenditure incurred on or after 6 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 9.
Section 225M: Tariff receipts etc
728.This section brings certain tariff receipts into the calculation of ring fence income if those receipts would not otherwise be included. It is based on section 496 of ICTA.
729.Tariff receipts arise where assets used in the ring fence trade are not used wholly for oil extraction by the owner but are used by other businesses in return for payment of a fee or “tariff”. Typical examples include the use of pipelines and treatment plants.
730.Tax-exempt tariffing receipts arise where the oil field to which the assets are attached for PRT purposes is not within the charge to PRT and therefore the tariffs are not chargeable to PRT.
731.Definitions of “tariff receipt” and “tax-exempt tariffing receipts” have been included to aid users of the legislation.
Section 225N: Expenditure on and under abandonment guarantees
732.This section provides relief against income tax where an oil field participator incurs expenditure in obtaining an abandonment guarantee. It is based on sections 62 and 63(8) of FA 1991.
733.The cost of decommissioning oil fields is eligible for relief under the capital allowances code. But as the majority of oil fields are shared between two or more participators there is a risk that one or more of the participators may not meet their share of the cost when the time comes. As a result participators have taken out guarantees with financial institutions to cover their share. This section provides relief for the cost of obtaining the guarantee.
Section 225O: Relief for reimbursement expenditure under abandonment guarantees
734.This section provides relief for a participator against ring fence profits where some or all of a participator’s share of decommissioning costs is met by a guarantee and the participator subsequently reimburses the guarantor. It is based on section 63 of FA 1991.
735.Section 63(5) of FA 1991 uses the term “accounting period” and therefore appears to confine the section to corporation tax. A similar point arises in section 65(4) of FA 1991. But sections 62 and 64 of FA 1991 and the remainder of sections 63 and 65 do not suggest that they should be limited to corporation tax. They have, therefore, been rewritten in full for income tax with necessary adaptation (such as “tax year” for “accounting period”) – see Change 10 in Annex 1.
Section 225P: Payment under abandonment guarantee not immediately applied
736.This section applies where a guarantor makes payments into a fund and the assets of the fund are subsequently used to cover decommissioning costs. It is based on section 62(4) of FA 1991.
737.In such a case the rules for relief under section 225N or section 225O apply to the expenditure when it is eventually met out of the assets of the fund.
Section 225Q: Amounts excluded from section 225O(1)
738.This section restricts relief where amounts are repaid to a guarantor instead of being applied to meet decommissioning costs. It is based on section 63(2) of FA 1991.
739.This provision is rewritten in full for income tax with necessary adaptation (such as “tax year” for “accounting period”). See the commentary on section 225O and Change 10 in Annex 1.
Section 225R: Introduction to sections 225S and 225T
740.This section sets out the circumstances in which sections 225S and 225T apply, and provides some related definitions. It is based on section 64(1), (2) and (3) and section 65(1) of FA 1991.
Section 225S: Relief for expenditure incurred by a participator in meeting defaulter’s abandonment expenditure
741.This section provides for relief to a participator who meets the decommissioning expenditure that should have been met by another participator (the “defaulter”). It is based on section 64(4) and (5) of FA 1991.
Section 225T: Reimbursement by defaulter in respect of certain abandonment expenditure
742.This section applies where a defaulting participator reimburses another participator who has met the defaulter’s liability for decommissioning expenditure. It is based on section 65 of FA 1991.
743.Relief against ring fence income is given to the defaulter, and the other participator is treated as receiving additional ring fence income.
744.The time limit in subsection (5) was amended from six years to four years by paragraph 27 of Schedule 39 to FA 2008 from a date to be determined by order. This change takes effect from 1 April 2010 by virtue of article 2(2) of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provision and Savings) Order 2009 (SI 2009/403) unless article 10 of that order applies. In such circumstances the transitional provision in Schedule 9 provides that the change takes effect from 1 April 2012.
745.This provision is rewritten in full for income tax. See the commentary on section 225O and Change 10 in Annex 1.
Section 225U: Interest on repayment of APRT
746.This section provides that interest paid to a participator on a repayment of advance PRT is disregarded in calculating profits for income tax purposes. It is based on paragraph 10(7) of Schedule 19 to FA 1982.