Finance Act 2015

Finance Act 2015

2015 CHAPTER 11

Introduction

Section 47 and Schedule 11: Extension of Ring Fence Expenditure Supplement

Summary

1. This section and Schedule increase the number of accounting periods in which a company can claim ring fence expenditure supplement (RFES) from 6 to 10. Losses, expenditure and supplement generated before 5 December 2013 will be excluded from supplement claimed under the additional 4 periods. This removes the need for the existing Extended Ring Fence Supplement and Schedule 11 abolishes this. This section and schedule will allow companies to maintain the value of their expenditure and losses for longer. These supplemented losses can then be carried forward to offset profits for corporation tax purposes. This will have effect in relation to accounting periods ending on or after 5 December 2013.

Details of the Section

2. Section 47 introduces Schedule 11.

Details of the Schedule

3. This Schedule amends Chapter 5 of Part 8 of the Corporation Tax Act (CTA) 2010 and removes Chapter 5A of the same Part.

4. Paragraph 2 alters the Chapter overview to increase the number of accounting periods in which RFES can be claimed from 6 to 10.

5. Paragraph 3 provides in section 309 where the rules on accounting periods are subject to new and existing special provisions. New special provisions relate to accounting periods straddling 5 December 2013.

6. Paragraph 4; subparagraph 2 increases the number of accounting periods in which RFES can be claimed from 6 to 10.

7. Paragraph 4; subparagraph 3 provides for the concept of initial and additional periods. This distinguishes between the first 6 periods for which a company makes a claim, “the initial 6 periods” and further claims under the amended legislation, “the additional 4 periods”. The latter must not begin before 5 December 2013. If the accounting period which straddles 5 December 2013 falls after a company’s initial 6 periods, then that accounting period is dealt with as two separate periods.

8. Paragraph 5 sets out that the calculation of the mixed pool must take into account the new adjustments detailed in the new section 318A.

9. Paragraph 6 provides that reductions to the mixed pool due to the disposal of capital assets must be made subject to the adjustment in new section 318A.

10. Paragraph 7 introduces new section 318A. This prevents the additional 4 claims from being made in respect of pre-commencement expenditure incurred and supplement generated before 5 December 2013. Subsections (2) to (4) provide that following a company’s 6 initial claims (or if later, 5 December 2013), the mixed pool is reduced by the value of pre-commencement expenditure incurred and supplement generated before 5 December 2013.

11. New section 318A, subsection (5) provides that for the purposes of calculating the mixed pool for the additional 4 claims, any reduction under section 317 should not include the value of disposals which relate to expenditure incurred before 5 December 2013.

12. New section 318A, subsections (6) to (8) set out how expenditure incurred and supplement generated in a pre-commencement period which straddles 5 December 2013 is apportioned for the purposes of making the adjustment. The period is to be treated as two separate pre-commencement periods: one falling before 5 December 2013 and one falling on and after that date. Expenditure incurred and supplement generated in this period are apportioned between the two in proportion to the number of days in each. If this works unreasonably or unjustly, the company may elect a different basis for apportionment if this is just and reasonable.

13. Paragraph 8 sets out that section 326 is read subject to section 327 and 328 for the initial 6 claims but is also read subject to new section 328A for the additional claims.

14. Paragraph 9 sets out that if the ring fence pool is reduced under section 327, this is done subject to provisions of section 328A.

15. Paragraph 10 introduces new section 328A. This prevents the additional 4 claims from being made in respect of losses incurred and supplement generated before 5 December 2013. This adjusts the ring fence pool following the initial 6 claims, or if later, 5 December 2013.

16. New section 328A, subsections (1) to (6) set out that at this time, the ring fence pool is to be reduced. The value of this reduction is to be the value of the amount carried into the pool under the Exploration Expenditure Supplement, ring fence losses and supplement generated before 5 December 2013 and if the company commences business after that date, the value detailed in subsection (4), paragraph (c), minus any previous reductions made to the pool under sections 327 or 328.

17. New section 328A, subsection 4, paragraph (c) prevents the value of any pre-commencement expenditure and pre-commencement supplement from remaining in the adjusted pool due to this amount being treated as commencement year expenditure. The paragraph sets out that if a company commences trading on or after 5 December 2013, then any commencement year loss is also included in the reduction but only up to an amount equal to the value of pre-commencement expenditure or pre-commencement supplement generated before 5 December 2013.

18. New section 328A, subsection 7 removes any amount generated under Exploration Expenditure Supplement from the pool of non-qualifying losses.

19. New section 328A, subsection 8 to 10 operate for section 328A in the same way that subsections (6) to (8) of section 318A operate for that section. (See Paragraph 11). These subsections provide for the apportionment of losses incurred, supplement generated and reductions to be made in an accounting period which straddles 5 December 2013.

20. New section 328A, subsection 11 paragraph (a) sets out that if a loss is removed from the Ring Fence Pool under section 328A and that loss is subsequently carried forward under section 45, this does not require the pool to be reduced under section 327 in respect of that loss.

21. New section 328A, subsection 11 paragraph (b) sets out that if a company has losses which are removed from the pool under this section then these are to be carried forward under section 45 before any losses that remain in the pool.

22. Paragraph 11 removes reference to Extended Ring Fence Supplement in the overview of Part 8 CTA 2010.

23. Paragraph 12 amends the index of defined expressions to include the concepts of the initial 6 and additional 4 periods and to remove all statutory references to Extended Ring Fence Supplement and Chapter 5A.

24. Paragraph 13 abolishes Extended Ring Fence Supplement by repealing Chapter 5A of Part 8 CTA 2010.

Background Note

25. In addition to corporation tax (CT), oil and gas companies are also subject to an additional tax, the supplementary charge (SC), on adjusted ring fence profits arising from oil-related activities. For the oil and gas industry, CT is set at 30% for profits of more than £1.5m and 19% (the small profits rate) for profits of more than £300k. The SC is set at 32%.

26. Companies are allowed to set qualifying expenditure against profits for CT purposes. For companies engaged in a trade where it may take some years to show a profit, the value of the expenditure will be reduced by the time they come to be utilised.

27. The oil and gas trade is subject to high start-up costs and a relatively lengthy period of likely unprofitability. RFES currently allows companies inside the oil and gas ring fence to uplift their ring fence losses or, in the period before they are trading, their “qualifying pre-commencement expenditure”, by 10% for up to 6 accounting periods to maintain their time value until they can be offset against future profits.

28. Presently, companies may claim further supplement under Extended Ring Fence Expenditure Supplement against expenditure, losses and supplement relating to onshore oil and gas related activities which were generated after 5 December 2013. This supplement may be claimed in respect of 4 periods at a rate of 10%.

29. A call for evidence entitled Review of the Oil and Gas Fiscal Regime was launched on 14 July 2014 and closed on 3 October 2014. The initial findings including a summary of responses were published on 4 December 2014, entitled Driving Investment – a plan to reform the oil and gas fiscal regime.

30. This section and Schedule extend the number of accounting periods for which companies can claim RFES from 6 to 10 for expenditure incurred and losses and supplement generated after 5 December 2013. This recognises the extended period before they are able to utilise those amounts and will allow companies to maintain the value of their expenditure for longer.