Investment Expenditure Draft Regulations 2016
Since the original announcement of the extension of the Investment and Cluster Allowances to include certain operating costs in the summer Budget in early July, we had to wait until 8th October for a scoping document, and on 16 December 2015 the government finally published a draft Statutory Instrument containing the detailed provisions.
The detailed provisions generally follow the approach set out in the scoping document, although the leasing section has been expanded and there is now an anti-avoidance provision, preventing any claim where there is an avoidance purpose.
As a result of these proposals, from 8 October 2015 qualifying expenditure for the purposes of Investment and Cluster Allowances now includes certain operating and leasing expenditure, in addition to the costs of a capital nature originally included, as a basis of calculating the Investment Allowance from 1 April 2015.
To determine eligibility for the Allowances, there are detailed conditions determining whether the additional expenditure qualifies set out separately for operating expenditure and leasing costs.
Conditions A, B and C replicate Tests 1, 2 and 3 in the scoping document of 8 October which require that the operating expenditure should not be on routine repair or maintenance but also be incurred for the purposes of increasing:
(a) the rate at which oil is extracted from a qualifying oil field or a cluster area;
(b) reserves of oil of a qualifying oil field or a cluster area;
(c) the number of years for which it is economically viable to carry out oil extraction activities in relation to a qualifying oil field or a cluster area;
(d) the number of years for which a facility can be used for the purposes of oil extraction activities in relation to a qualifying oil field or a cluster area; or
(e) the amount of tariff receipts or tax-exempt tariff receipts that are earned by the company in respect of upstream petroleum infrastructure.
There is also the requirement that the expenditure is incurred in the course of:
(a) any of the following activities in relation to a facility—
(i) the replacement of equipment that is no longer capable of being used for the purposes of oil extraction activities;
(ii) modification to increase the capacity to carry out oil extraction activities;
(iii) modification to increase the availability to carry out oil extraction activities;
(iv) modification to enable the handling of reduced volumes that arise as a result of reduced operating pressures;
(v) modification to enable the handling of different fluid compositions; or
(b) any of the following activities in relation to an oil well—
(i)water shut off;
(iii) the removal of sand, salt, scale or hydrates.
After the scoping document was issued, it was believed that the first two of the tests would be sufficient to determine what expenditure could be treated as qualifying under the self-assessment regime operating in the UK. However, it is disappointing to see that the other tests, which seem to narrow the scope of qualifying expenditure defining the specific types of assets and nature of works in respect of which the expenditure has been incurred, have been retained in the final document.
There are a number of conditions determining qualifying leasing costs, the most significant being that the lease must be for a period of at least 5 years and relate to a mobile asset whose main function is the production or storage of oil, expenditure on which has not previously qualified for an investment or cluster allowance. There is a further requirement that the asset must be used in a field which received development consent after 8 July, or a project which received a further consent on or after this date (or if the lease is for an asset used in a Cluster, on or after 3 December 2014).
Expenditure will only qualify when paid, so there is no “upfront” relief as there is with capital allowances for certain leasing arrangements. The financing costs inherent in the relief will not qualify and neither will any costs other than those for the provision of the asset, such as personnel and service costs. This may cause compliance difficulties in determining which amounts have to be excluded from composite lease payments.
There is a cumulative limit of qualifying expenditure to the “initial value” of the asset when expenditure on it was first incurred by the company which will restrict claims where expenditure has been incurred before 8 October 2015.
On the basis that the inclusion of leasing costs should put leased assets in the same position as purchased assets these restrictions are disappointing. This was one of the areas of concern at the time of the scoping document; however, regrettably Industry representations appear to have been ignored.
There will be a six week consultation period on the wording of the statutory instrument. Once enacted these changes will have effect in respect of expenditure incurred on or after 8 October 2015, the date of publication of the scoping document.
Overall despite the shortcomings in the details of the proposal, the extension of the scope of the qualifying expenditure for Investment and Cluster Allowance is a welcome development for which industry have been lobbying. It is to be hoped that the detailed conditions can be softened during the consultation phase.