Proposed changes to the use of carried forward losses and potential amendments to the existing Substantial Shareholding Exemption regime were announced at Budget 2016. Consultation documents are now available for comment.

In addition, a new consultation on a possible simplification of the Double Taxation Treaty Passport (DTTP) scheme was announced on 26 May 2016.

Reform to corporation tax loss relief:

• New rules apply from 1 April 2017
• Use of losses carried forward restricted to 50% of profits
• £5m group-level allowance
• Losses carried back not affected
• More flexibility on use of carried forward losses
• Changes not be applied to Ring Fence.

Reform to Substantial Shareholding Exemption:

• Number of options to simplify the existing regime
• Changes to further promote the UK as a holding company location
• Options include: removing the trading requirement at the level of the investor group, increasing the qualifying activities that an investee can undertake; reducing the 10% shareholding requirement, and waiving the investee trading requirement condition post the disposal.

  DTTP scheme review:

• Simplification of the administrative burden
• Expansion beyond corporate to corporate lending
• Funds and partnerships could be included.

If you think the new rules could affect your business and you would like to discuss the details or would like help in putting together a representation, please get in touch:

Here’s the detail with comments from your CW Energy experts:

Reform to loss relief, changes to SSE and DTTP – new consultations published

The government published three consultation documents on 26 May 2016 concerning the reform to corporation tax loss relief, reform of the Substantial Shareholding Exemption (SSE) regime, and the simplification of the existing Double Taxation Treaty Passport (DTTP) scheme.

Reform to corporation tax loss relief

At Budget 2016 the Chancellor announced changes to the use of corporation tax losses, in particular proposing a restriction to the use of losses carried forward together with more flexibility on using carried forward losses against different sources of income.

Last Thursday a consultation document was published asking for views from interested parties on the detailed proposals. It is expected that the new rules will apply from 1 April 2017.

The government does not intend the reform to apply to carried-forward losses relating to ring fence oil and gas activities.

The rules will apply to trading losses, non-trading loan relationship deficits, UK property losses, management expenses, and non-trading losses on intangible fixed assets. Capital losses are however excluded. However, the use of losses against trading and non-trading profits will be calculated separately.

The proposal is to restrict the use of losses carried forward to 50% of total profits arising in the period after 1 April 2017, subject to a de-minimis £5m allowance. The restriction will apply after the use of group relief. Carried back losses will be excluded from the restriction, and be available to offset any profits remaining after a loss carry forward restriction has applied.

The £5m allowance will operate on a group level. That is £5m of profits within the group can be sheltered by carried forward losses without restriction, with the taxpayer having a free choice over which profits to use in this way.  The restriction will then be applied to the remaining profits (after group relief claims have been made).

It is envisaged that there will be a step calculation for arriving at the losses that can be used. Pre 1 April 2017 losses will be used in priority to post 1 April 2017 losses.

Unused losses which have been subject to the restriction can be carried forward in the usual manner.

On a positive side, there will be increased flexibility over the usage of post 1 April 2017 losses carried forward against the taxable profits of different activities and the taxable profits of group companies. however, the “schedular system” for computing corporation tax profits will remain unchanged.

Comment:

The restriction to using losses is clearly unwelcome, particularly for cyclical businesses, so we are pleased that the government intends to protect ring fence activities. However, companies with non-ring fences activities could be significantly affected and may want to consider making representations.

The consultation closes on 18 August 2016 and the government expects responses in the form of answers to a number of questions addressed in the consultation document.

Download a copy of this Government Consultation Document

Reform to the Substantial Shareholding Exemption (SSE)

A potential reform to the SSE regime was also announced by the Chancellor at Budget 2016, however at that time it was unclear what sort of changes could be expected.

The current consultation contains a number of proposals regarding the possible simplification of the regime with an intention of further promoting the UK as a holding company location and attracting further inward investment. The government wishes to remove some of the impediments to the current rules applying without providing a blanket exemption.

The current regime exempts chargeable gains arising on the disposal of shares in certain circumstances. For the exemption to apply a number of conditions must be met, amongst which are a requirement that the investment was at least 10% of the investee, and that the investor and investee were both broadly trading groups.

Amongst options for change in respect of which the government is seeking views are the following:

• To remove the condition that the company making the disposal must be part of a trading group
• To expand the qualifying nature of activities that an investee can undertake
• To make less fundamental changes to the current investor and investee tests
• To amend the ordinary share capital requirement so that partnerships could also benefit from the exemption
• To reduce the substantial shareholding requirement which is currently 10% To extend the qualifying ownership period from 2 to 6 years.

Comment:

The possible changes are not thought likely to have a significant impact on companies involved in oil and gas activities.  However, the removal of the trading requirement for investor groups would be a welcome removal of a level of uncertainty that can exist in certain transactions.

The consultation closes on 18 August 2016 and the government expects responses in the form of views to a number of options contained in the consultation document.

Download a copy of this Government Consultation Document

Double Taxation Treaty Passport (DTTP) scheme review

The consultation is aimed at renewing and extending the scope of the DTTP scheme. The government is not intending to change the existing legislation and instead it is asking for views on how the current administrative procedure could be simplified.

As background, borrowers in the UK are obliged to withhold income tax (WHT) at the basic rate (currently 20%) on payments of interest to overseas lenders (on loans of over a year in duration). If the lender is resident in a territory with which the UK has a tax treaty, the rate of WHT may  be reduced.

The DTTP scheme was introduced so that an overseas lender was not required to produce proof of residency and other official documents to HMRC for each new loan in order for the payments to be made without WHT or at a reduced rate under the Treaty. Under the scheme the overseas corporate lender applies for a “treaty passport” which can be used to make multiple loans to UK borrowers.

Currently the DTTP scheme applies only to corporate to corporate lending. The main proposal is to extend the scheme to encompass funds and partnerships including overseas partnerships.

The government is also seeking views on the operation of the renewal process as well as the application of sanctions for misconduct.

The consultation closes on 12 August 2016 and the government expects responses in the form of answers to a number of questions addressed in the consultation document.

Download a copy of this Government Consultation Document

Please contact us if you would like to discuss, require help with representations or have any questions.

The enactment of the reduction in Supplementary Charge rate to 10% announced at Budget 2016 is probably delayed until the autumn.

• The progress of Finance Bill is delayed by EU Referendum
• The timing of the report stage and the third reading (when the change can be accepted as substantively enacted) in the House of Commons is not yet known
• The effect of the new rate cannot be reflected in the accounts until the rate has been substantively enacted
• For accounting purposes, tax balances may not be able to be re-calculated using the new rate in the September quarter results such that recognition would be delayed to the December quarter results.

If you think this could affect your business and you would like to understand more details please get in touch:

Here’s the detail:

Possible delay in enactment of reduction in the SCT rate to 10%

We understand that the government has indicated that the progress of the Finance Bill may be delayed by the EU referendum and therefore may not receive Royal Assent before Parliament rises for the summer recess on 21st July.

MPs passed a “carry over” motion in respect of the Bill on 11 April, to enable it to continue to be debated in the new term of Parliament which commences on 5th September.

However there will be less than two weeks before Parliament rises again for the conference season on 15th September, resuming on 10th October.

The Finance Bill has had its second reading and the next step is the Committee stage, but this has not yet been scheduled. Similarly the timing of the report stage and the third reading in the House of Commons is not yet known. This is important as the Report stage/third reading is when the bill would be treated as substantively enacted.

It is therefore conceivable that the Finance Bill may not gain Royal Assent before 21st July or indeed that it will be as substantively enacted before this date.

If this happens it is also possible that it may not get Royal Assent before the end of September and again it is possible that substantive enactment might be delayed until after this date.

Given the Provisional Collection of Taxes Act only allows measures which came into force on Budget Day to remain effective for seven months, the Bill must become law prior to 16th October to avoid those measures lapsing but this only acts as a back stop.

What this means is that there is a possibility that it would not be possible to reflect the recent reduction in the SCT rate for accounting purposes in the September quarter results such that recognition would be delayed to the December quarter results.

Please contact us if you would like to discuss how this could effect your business or have any questions.

The Chancellor stated that his Budget delivered the biggest boost to the oil and gas industry in over 20 years. So why is the whole industry not celebrating?

A reduction in tax rates provides no immediate benefit to those not currently paying tax as a result of past and current investment, namely the vast majority of the industry at present. On the other hand it provides a windfall benefit to those who are tax paying whether or not they are planning to invest in the UK.

We think it would have been preferable that any Government giveaway should have been targeted directly at encouraging investment in the sector. A Norwegian style rebate of potential tax relief on exploration was always going to be too expensive in the current economic climate, but the cost of the measures, as set out in the Treasury Red Book, could have been used to provide a limited subsidy against targeted investment in the basin.

The reduction in the PRT and SCT rates will no doubt be welcomed by those paying or expecting to pay such taxes in the short to medium term. However are those companies the ones who will be prepared to invest in the North Sea? They might be, but there is no guarantee.

PRT paying fields were developed before 1993 and many own old infrastructure on which many other fields depend. It is vital that there is investment in these assets but will their owners want to invest in them even following the rate reductions? The owners are often groups with large international portfolios and may well have better investment opportunities elsewhere. The UK North Sea is a notoriously expensive place to do business and the hurdle rates that international companies put in place to value investment decisions can be difficult to meet for a UK North Sea investment.

In the short term investment in PRT paying fields has been made more attractive than that in other fields because current expenditure can give rise to immediate recovery of past PRT paid through loss carry backs. A very clever piece of lobbying by those companies and perhaps this will encourage investment!

We believe a better approach for PRT would have been to provide tax reductions by way of investment allowances such that they were only available to those prepared to invest in the assets. The principle has already been set by the reinvestment allowance for capital gains and the Investment Allowance for Supplementary Charge, so it is a shame that the Chancellor did not look at precedent to determine how best to incentivise the sector.

We also don’t think the reduction in the SCT rate is well targeted. For those prepared to invest there is already the investment allowance which ensures that all but real super profits will be sheltered from SCT. It is those companies who are not spending which are likely to pay SCT at the full rates and it is those companies which are therefore likely to benefit the most.

If it was felt that future investment needed the further encouragement of paying lower taxes we think a reduction in the main CT rate would have been more appropriate. Perhaps government should have looked to extent the investment allowance regime into the CT world.

One of the main challenges for the North Sea is trying to help get assets into the hands of those wanting to invest. The confirmation by HMRC that their view of existing law is that sellers who retain the obligation to decommission would be able to obtain CT relief is welcome. However for PRT fields it appears that under existing law the only way for this to work is for such companies to stay on the licence which is unlikely to be a preferred route in many cases.

As it stands the value of PRT assets to the current owners has just gone up overnight as a result of the reduction in the rate, benefitting the owners but making it more expensive for companies wanting to acquire those assets.

Further it is only those companies which have previously paid PRT which can obtain effective relief for investment. Anyone wanting to acquire such interests and invest, without any PRT paying history, must wait until cessation of production to recover the benefit of past PRT paid. A more useful measure would have been an extension of the loss carry back to previous owner rules.

Overall our view is that the rate changes do little for those companies wanting to invest, they also do not help to get assets into the hands of those companies while providing a windfall to companies in harvest mode. We believe that they are likely to provide little or no benefit to the sector as a whole in the long run with no guarantee that savings will be reinvested by the few companies that are actually expected to be tax paying in the medium term.

When the tax exempt tariff (TETR) rules were introduced over 10 years ago we understand that government secured an undertaking from major infrastructure owners that they would pass on the benefit arising from the fact that new tariffs were taken out of the charge to PRT to the users of the infrastructure.

However, although such tariff income was exempt from PRT the host field was required to disallow part of their cost for PRT to reflect the use of qualifying assets in earning the exempt tariffs. There was still therefore a PRT cost to the host field owners.

Now that PRT has effectively been abolished, i.e. set at a 0% rate, this implies that there is a windfall for a number of the fields earning such tariffs as there will no longer be the increased PRT liability as a result of the disallowed costs for a number of these fields.

Other infrastructure owners earning taxable tariffs may also be in a better position following the reduction to 0%.

Therefore companies in user fields which pay tariffs to PRT infrastructure owners should review their position and revisit their tariff agreements to see whether there is any opportunity to negotiate reduced tariff rates to reflect this PRT windfall.

If companies should like to discuss this area please get in touch with your normal CW Energy contact.

The Chancellor announced in the Budget Statement on 16^th March that the rate of Petroleum Revenue Tax (PRT) would be reduced to nil and supplementary charge to 10%. Both these changes are to be back dated and effective from 1 January 2016 and therefore should be taken into account in the instalment payments for periods beginning on or after that date.

For accounting purposes the changes should be reflected in the figures for the first balance sheet date ended after the changes are enacted or substantively enacted. For these purposes substantively enacted is when the change is virtually certain to pass into law.

1.  Petroleum Revenue Tax

The resolution giving rise to the reduction in the PRT rate from 35% to 0% for the chargeable periods ending after 31 December 2015 was passed in the House of Commons on 22 March under the provisions of the Provisional Collection of Taxes Act 1968.

Comment:

No further instalment payments are required for PRT paying fields. Any instalments paid in respect of the chargeable period to 30 June 2016 should now be refunded. We would advise companies to write to their PRT inspector setting out the amount of refunds to be processed.

For reporting purposes the reduction in rate will be effective for periods ended on or after 22 March.    

2.   Supplementary Charge (SC)

The reduction in SC from 20% to 10% for the accounting periods commencing on or after 1 January 2016 is expected to be enacted when the Finance Bill receives Royal Assent.

Comment:

The reduction in the rate of SC will result in lower instalment payments being due. Under the existing regime the first instalment payment for Corporation Tax and Supplementary Charge is required after six months and 13 days after the first day of the accounting period. For example, a company with a 12 month accounting period beginning on 1 January 2016 the first instalment payment would be due on 14 July 2016.

It is possible that the change may not be enacted by this date but we understand that HMRC expect instalments to be calculated using the new rate.    

For reporting purposes we would expect the reduction in rate to be effective for periods ended on or after the date when the Finance Bill has its third reading in the House of Commons which under the normal parliamentary process would be in July.     

If you would like to discuss any of the above changes please speak to your usual contact at CW Energy or contact us on +44(0)20 7936 8300.

In his latest Budget George Osborne has introduced a number of measures to reduce the fiscal burden on the oil and gas industry and to clarify the regime for future years. There were a number of positive changes for industry as well as insulation from the swingeing changes to loss and interest relief that will apply to all other companies

1. Abolition of PRT

The chancellor announced that PRT is to be “effectively abolished” with effect from 1 January 2016.

Comment:

PRT will in fact remain, but with a reduced rate of 0%.

The reduction in the rate to 0% will be very welcome for those fields which are expected to have a net PRT liability going forward and indeed will represent a welcome cash flow saving for those fields expecting to pay PRT which would be repaid on decommissioning.

The stated motive behind the rate reduction is to simplify the regime for investors and level the playing field between investment opportunities in older fields and infrastructure and new developments.

In practice we believe that the measure will have mixed effects.

There will be some fields where we would expect PRT returns will no longer be needed, but returns will still be required for fields where there is an expectation or indeed a possibility that losses will be carried back into periods before 2016.

Rather than create a level playing field, it would seem that investments in PRT fields now become attractive from a fiscal point of view when compared to non PRT fields in the near term with income being taxed at 0% but spend which could create losses and PRT tax repayments.

2. SCT rate reduction

As widely speculated before Budget day, the Chancellor has announced a reduction in the rate of Supplementary Charge.

Supplementary Charge will reduce to 10% from the current rate of 20% with retrospective effect from 1 January 2016.

Comment:

Given that there are few companies paying CT and SCT in the North Sea the immediate benefit of a reduction in the SCT rate is likely to be enjoyed by only a small number of companies currently tax paying.

For the significant number of companies with tax losses the immediate impact of a reduction in the SCT rate will be a book hit as the value of any deferred tax asset will be reduced.

The reduction in rates will need to be reflected in the accounts for the next balance sheet date following enactment, which may be in the next few days if Government adopts the procedures used for previous rate changes.

Of course the reduction in the SCT rates does make future projects more attractive and assets more valuable.

3. Investment, Onshore and Cluster Allowance changes

3.1          Extension of Relevant Income definition

Secondary legislation will extend the definition of “relevant income” for Investment Allowance and Cluster Area Allowance (but not the Onshore Allowance) purposes to allow tariff income to activate the allowance.

Comment:

Up to now production income from a field was required to activate the Investment Allowance for expenditure in respect of a field. This disadvantaged fields with large amounts of tariff income where expenditure was incurred in respect of the tariff activity, as there was no field income to activate the field allowance. This change will be welcomed by the companies in these fields and should help to encourage expenditure on such systems.

3.2          Disqualification of expenditure on assets which have previously generated a field allowance

The government is amending the Onshore, Cluster Area, and Investment allowances to disqualify expenditure incurred on the acquisition of an asset in certain circumstances from generating allowance.

In particular, legislation will be introduced disqualifying the generation of onshore allowance on the acquisition of an asset on which allowance was previously generated, or where allowance was previously generated through the incurring of leasing expenditure on that asset.

Further, the generation of investment allowance on the acquisition of an asset prior to the determination of an oil field, where that asset has already generated allowance will also be disqualified.

These measures will have effect for expenditure incurred on and after 16 March 2016.

Comment:

These measures tighten up the definition of qualifying expenditure for the various allowances which should have little effect in practice.

 4. Decommissioning

HMRC have published a technical note to clarify that companies that retain decommissioning obligations after the sale of an asset will be able to access corporation tax relief for those costs.

Comment:

Although only dealing with the CT aspects of decommissioning, this is a helpful clarification which confirms the view that a number of companies previously held. In particular the note clarifies that it is not necessary for the seller to remain on the licence, only that they should directly incur the costs. It should help companies dispose of interests in mature fields free of the decommissioning obligation to new companies without the uncertainty over the tax position of decommissioning relief.

Issues still remain with the PRT legislation in that it appears to require a company which retains an obligation to incur costs to remain on the licence to enable effective relief to be available. There is a clear disjoint here which it is hoped can be resolved but would appear to need a change in law.

There is a suggestion that further measures may be introduced to facilitate the transfer of late life assets, which is welcome.

5. Other Matters

5.1          The Government is to provide a further £20million of funding for seismic surveys in 2016-17.

Comment:

It is hoped that this will in a small way stimulate some further investment in the Basin.

5.2          There are a number of proposed changes to the general corporate tax regime which are specially excluded from applying to ring fence activities.  These are:

• restriction on the use of carried forward losses and the increased flexibility on using losses against different sources of income
• the extension of the categories of income subject to royalty withholding taxes (which only apply to trade marks and brand names and not oil related royalties).

5.3          There are other proposed changes where it is not yet clear whether they will apply to ring fence activities.  These are:

• instalment tax payment dates for “large” companies
• limitations on the deductibility of interest expense
• hybrid mismatch situations
• transfer pricing adjustment rules

Comment:

Industry has previously lobbied to be excluded from any tax payment and financing deduction changes on the basis that the ring fence regime is already fit for purpose in these respects, and will no doubt continue to do so.

5.4          The operation of the substantial shareholding exemption (SSE) is to be reviewed to make sure it is still meeting the original objectives.

Comment:

This relief is very generous and allows many transactions to be undertaken on a tax free basis so it is hoped that no unwarranted restrictions will be put on its application.

5.5          UK Guarantee scheme

It has been announced that the Government will consider using the scheme for oil and gas infrastructure projects.

Comment:

This could prove a catalyst for getting some of the North Sea’s infrastructure hubs into the hands of companies best suited to managing these assets provided the other tax hurdles of achieving this can be overcome.

CW Energy LLP

March 16, 2016

The draft clauses for the Finance Bill 2016 contain a number of initiatives promoting or requiring tax transparency.

1.  Publication of Tax Strategy

A key requirement is for “large” businesses to publish a tax strategy.

The draft rules follow on from a consultation last year, and will be applied to UK headed groups, or exceptionally single UK companies, with turnover of more than £200m or a group balance sheet asset total of more than £2bn, (which is the same test as applies for the senior accounting officer rules), but also to any UK companies which are either themselves, or are part of a worldwide group, that is within the scope of Country by Country Reporting requirements, i.e. global turnover of more than €750m. The obligation could therefore fall upon standalone UK incorporated companies, UK incorporated companies which head up UK or worldwide groups, or UK incorporated companies which are owned by non UK incorporated companies. These tests are applied in respect of the previous financial year.

If any of the tests are met the disclosure obligation is imposed upon the top UK incorporated company. Where however foreign groups do not hold all their UK companies through a single UK incorporated holding company there may be more than one UK incorporated company in the group that is subject to the publication obligation.

Publication must be made on the internet, presumably most conveniently on the group’s website, and must remain accessible, free of charge, for at least a year after publication, or until the next update to the strategy. As drafted the rules on publishing are not prescriptive, but it does appear that this obligation could be met by publishing one policy to cover each company/sub-group, or by each company/sub-group publishing its own policy. As the requirement is to publish the strategy “on the internet” there appears to be no reason why a UK entity which is required to publish its strategy could not procure their non UK parent to publish their strategy on the parent’s website to satisfy their obligations.

The measure will have effect for financial years beginning after the date of Royal Assent to Finance Bill 2016.
The rules will require groups or companies to publish a tax strategy in relation to UK taxation within the relevant financial year. This effectively means that a strategy does not need to be published for the first time until the end of December 2017 for December year end companies, although many groups will no doubt consider publishing earlier than this. The strategy must then be updated at regular intervals not to be less than 9 months nor more than 15 months after publication of the previous strategy.

The tax strategy must set out—

(a) the approach of the UK group/company to risk management and governance arrangements in relation to UK taxation,

(b) the attitude of the group/company towards tax planning (so far as affecting UK taxation),

(c) the level of risk in relation to UK taxation that the group/company is prepared to accept, and

(d) the approach of the group/company towards its dealings with HMRC.
A penalty is payable either for the non-publication of a tax strategy, or if the information contained within the published strategy does not meet the requirements of the legislation.  The initial penalty for failing to publish a strategy is £7,500 and a similar penalty may be levied for failing to maintain it free of charge for at least a year. There are further penalties at the rate of £7,500 per month for every month of non-compliance starting with a date 6 months from the last day on which the rules could have been complied with. There do not however appear to be any penalties for failing to adhere to the published strategy.

Comment:

Whilst, like the SAO rules, there are penalties for non-compliance, in practice it would seem that once a group has formulated its tax strategy, which presumably will not change much from year to year, and published that on its website, there should not be much ongoing workload other than to make sure it still reflects current conditions. 

We would be pleased to discuss the content of any tax strategy statements that companies may be considering publishing.   

2.  Framework for Co-operative compliance and other HMRC initiatives

Separately, as part of the document which summarises the responses to the consultation document, HMRC have published their intention to adopt a Framework for Co-operative Compliance (https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/484117/Improving_Large_Business_Tax_Compliance_-_summary_of_responses__M-7501-02_.pdf) , to replace the proposed voluntary code of practice, which elaborates upon the way in which HMRC seeks to encourage ‘low risk’ behaviour. The intention is to bring this in with effect from April 2016.

Where the parties work within the framework HMRC undertakes to prioritise resource to address areas of genuine uncertainty, commercial urgency and absolute risk. The framework also explicitly recognises that businesses may seek to escalate unresolved issues to the relevant HMRC Deputy Director.

On the other side of the coin a number of measures are aimed at combatting aggressive behaviours.

Whilst these are apparently aimed at a narrow field of targets the measures have been widely discussed and their profile is likely to be raised with the publication of the Finance Bill.

They include:

• Rules to permit HMRC to put businesses into a ‘Special measures’ regime. Having identified these ‘aggressive’ businesses, the regime denies them access to non-statutory clearances, potentially increases the penalties levied on them for non-compliance and permits HMRC to publicly identify them as subject to the ‘Special measures’ regime.
• Provisions in respect of criminal and civil sanctions countering offshore avoidance by individuals, and their advisers.
• A proposed potential penalty of 60% of the tax due in cases successfully tackled by the GAAR.

However the proposed corporate offence of failure to prevent the facilitation of fraudulent tax evasion by associated persons is due to be reconsidered in a further round of consultation before it is considered for inclusion in Finance Bill 2016.

Comment:

It would seem that the Framework for Co-operative Compliance is an extension of the initiative that LBS tried to persuade oil and gas companies to sign up to a few years ago.

Given the slant is on measures that favour HMRC, companies may find some of these requirements for “co-operative compliance” unnecessarily restrictive and may prefer to live with the consequences of not adhering to the framework.

CW Energy LLP
February 2016

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 8^th 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.

Operating expenditure

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;

(ii) fracturing;

(iii) the removal of sand, salt, scale or hydrates.  

Comment:

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.

Leasing expenditure

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.

Comment:

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.

Comment:

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.