CW Energy LLP

Finance Bill 2021

The Finance Bill 2021 was published on 11 March 2021.  We set out below our comments on the key provisions that may affect oil and gas companies.



The Finance Bill includes amendments to clarify and expand the circumstances where expenditures on decommissioning plant and machinery may qualify for the special capital allowance relief for ring fence companies. The changes are aimed at expenditures incurred at a time where formal approval of an abandonment programme has not yet been received.

For decommissioning expenditure to qualify for the special allowance further conditions must also be met e.g. that the asset concerned has been used in the trade of the company incurring the costs.  These further conditions have not been amended.

There are three broad areas where the rules have been changed.

  1. Preparing an abandonment programme, condition or agreement

Costs incurred:

  • in preparing an abandonment programme for approval, or
  • preparing for the imposition of a condition or agreement imposed by or agreed with the Secretary of State

are treated as being general decommissioning expenditure.

When the claim is made, the abandonment programme, condition or agreement must be one that it was reasonable to anticipate would wholly or mainly relate to decommissioning of the relevant offshore plant or machinery.

  1. Preservation costs

The rules are amended so that costs incurred in preserving plant or machinery prior to the approval of an abandonment programme are accepted as being general decommissioning expenditure.  When the claim is made it must be reasonable to anticipate that the reuse or demolition of the plant or machinery will be:

  • authorised or required by or in connection with an approved abandonment programme, or
  • a condition to which the approval of such a programme will be subject, or
  • a condition or agreement imposed by or agreed with the Secretary of State.


  1. Costs complying with an expected decommissioning requirement

Conditions to make a claim

The rules are amended so that costs may be claimed as qualifying as general decommissioning expenditure where costs are incurred in “doing something else” which it is reasonable to anticipate will be authorised or required by:

  • an approved abandonment programme, or
  • a condition to which the approval of such a programme will be subject, or
  • a condition or agreement imposed by or agreed with the Secretary of State.

However, this “doing something else in advance of regulatory approval category of expenditure will be treated as never having qualified if the five-year clawback rule applies.

Five-year clawback rule

Unlike the “preparation and planning” costs set out above, the extension of the rules to cover costs incurred in “doing something else” in anticipation of regulatory approval is subject to a potential clawback.

The costs are treated as never having been general decommissioning expenditure unless either of the following conditions are satisfied:

  • an abandonment programme is approved and the programme, or a condition to which the approval of the programme was subject, authorises or requires the decommissioning of the plant or machinery to which the expenditure relates; or
  • a condition is imposed or an agreement is made with the Secretary of State before the approval of an abandonment programme and that condition or agreement authorises or requires the decommissioning of the plant or machinery to which the expenditure relates

within five years of the end of the accounting period in which the expenditure was incurred.


The exact scope of the “approval” requirements has been subject to discussion between industry and HMRC for a number of years and has led to a degree of uncertainty in this area.  The explicit clarification of this area of the law is welcome, particularly the reworking of the rules around planning and preservation costs.  However, the five-year clawback rule on “doing something else” expenditures could result in unwanted commercial behaviours (e.g. decommissioning being accelerated to guarantee tax relief where it would be cheaper to delay and decommission the plant with other assets). 

While the linking of the tax code to government sanction of decommissioning has been a feature of the tax code for many years, it leaves the taxpayer having to rely on the detail provided in the government approval or condition.  Linking individual expense items to those approvals, conditions or agreements can sometimes be difficult.

Companies should continue to consider carefully these rules to make sure claimed costs qualify, and that documentation is prepared and maintained as evidence to support claims.  The maintenance of records is particularly important here as the precise nature of costs incurred in say 2021 may only be supported by regulatory sanction in 2026.

HMRC have asked taxpayers to come forward where there are any difficulties in obtaining approval from BEIS in the format required to support a deduction for valid decommissioning costs.

Other Capital allowances

As announced in the Budget a temporary increase in capital allowances rates for qualifying expenditure on plant or machinery incurred from 1 April 2021 up to and including 31 March 2023 has been introduced.  The new rules apply to three separate categories of expenditure:

  • A “super deduction” at a rate of 130% of expenditure on new plant or machinery. This applies to expenditure that would previously have qualified for an 18% writing down allowance.  Any assets used wholly or partly for a ring-fence trade are excluded from these super deduction rules;
  • A first-year allowance of 50% on most new plant or machinery that is “special rate” expenditure. This applies to expenditure that would previously have qualified for the 6% special rate writing down allowance (for non-ring fence assets).  This allowance is not prevented from applying where the asset is used wholly or partly for a ring fence trade.  Therefore, where a company has special rate expenditure on new assets that are used partly for a ring-fence trade and partly for another qualifying activity these rules can allow a non-ring fence first-year allowance of 50% to be claimed (for both the ring-fence and non-ring fence elements).
  • A first-year allowance of 100% on any (i.e. not necessarily new) plant or machinery that is not special rate expenditure where the assets are used partly for a ring-fence trade and partly for another qualifying activity. The allowance provided by this change is to be allocated to the ring-fence and other qualifying activity on a just and reasonable basis. The rules had previously allowed a 25% writing down allowance for the ring-fence element and an 18% writing down allowance for the non-ring fence element of the asset.


For these rules to apply the cost needs to be incurred between 1 April 2021 and 31 March 2023.  For the first two categories above, for expenditure incurred under contracts entered into before 3 March 2021, the usual rules are switched off and expenditure is deemed to be incurred when the contract was entered into.  The usual rules for determining when expenditure is incurred apply to the third category.


While the super deduction is not available for ring fence traders, many companies may be able to take advantage of these new capital allowance rules. The interaction with the Annual Investment Allowance rule and the increase in the CT rate to 25% at the end of this period needs to however be analysed.  

Companies should do so with care as there are more conditions that need to be satisfied than is apparent from the headline.  The requirement for the asset to be new is not particularly helpful where oil companies are looking to reuse assets.

Temporary extension of trading loss carry-back rules

A temporary extension to the corporation tax loss relief rules will have an effect for company accounting periods ending in the period 1 April 2020 to 31 March 2022. For companies with a December year-end, this will affect losses generated in the periods ended 31 December 2020 and 31 December 2021. For these periods any trade loss carryback will be extended from the current one year carry back to a three year carry back. The additional two-year carry-back is limited to a maximum of £2m per group per 12 month loss period.

For ring fence companies it will mean that losses that are not attributable (wholly or partly) to decommissioning expenditure will be capable of carry-back to the two years prior to the 12 month period currently permitted. The effect of the current one-year carryback is unchanged (and not limited by the £2m group allowance).

The Finance Bill makes it clear that where there is a decommissioning loss being carried back (under Section 40 CTA 2010) that provision shall have priority and therefore none of the £2m group allowance is used up by a decommissioning loss carry-back claim.


The Finance Bill confirms that the ring-fence losses carried back that are attributable to decommissioning expenditure will not use the £2m group allowance. 

These rules may offer additional relief for companies with an appropriate tax profile.

Repeal of Interest and Royalties Directive

It was announced at Budget that the UK law that implemented the EU Interest and Royalties Directive would be repealed for payments made on or after 1 June 2021.

The Finance Bill also included an anti-forestalling measure that from 3 March 2021 disapplies a withholding tax exemption where a payment is made directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure that an exemption is secured.


While these rules were of generally limited application any companies that intend to use these rules from Budget to 31 May 2021 should consider whether they could potentially be caught by the anti-forestalling measure and look to see whether a double tax treaty claim could be made in its place. If no such treaty is available to offer full relief then they may want to look at recasting arrangements to reduce or eliminate the level of withholding.

Hybrid and other Mismatches

Hybrid entities and permanent establishments

The Hybrid and other Mismatches rules are to be amended to lessen the severity of the measures that counteract double deductions and deductions for which there is no reciprocal taxable income.

The Finance Bill 2021 contains particular provisions, applied by election, which must be made by the end of this year.  Where the election is made the effect applies retrospectively. The most relevant provisions are those involving hybrid entities and permanent establishments.

These rules may apply to a UK subsidiary of a US corporation that is ‘checked’ into the US entity for US tax purposes. The original rules denied such a UK company a tax deduction if the deduction was not counted against taxable income arising both in the UK and the US (“dual inclusion income”).  In some cases, for example, the US would not recognise a receipt (on the same transaction that gave rise to the UK company’s deduction) or the US would also recognise the same expenses as a deduction and there was, therefore, insufficient dual inclusion income. Whilst the original rules made some provision for counting income derived from the expenditure as dual inclusion income, the rules simply did not address the point that in these cases there was also taxed income (in the UK hybrid) for which no deduction was allowed, where the US made payments to the UK. This imbalance has now been recognised, and such income from the US company (in this example) would now be recognised as “dual inclusion income”.

The rules are complex, they apply to all UK resident hybrid entities and to transactions with non-UK resident hybrids and the example above is simplified.

There is to be a similar provision reflecting permanent establishment income from the host company, for which the host receives no tax deduction, but the receipt is taxed in the permanent establishment.

Another measure, that is not retrospective, will permit affected UK companies to ‘use’ other UK companies’ surplus dual inclusion income on making a claim.

Connected party debt

A further amendment to the rules removes the potential for UK companies released from debts owed to connected parties (and not taxed on the release) from being caught by the hybrid rules where the counterparty receives a deduction. The potential for this issue to arise is limited in the current rules, but the amendment will address certain circumstances where HMRC recognise that the current rules are not proportionate, or don’t work as intended.


The effect of the rules is particular to each case and relies upon identifying the transactions with hybrids. CW Energy can assist in evaluating the impact of the rules, but the new rules are welcome. 

Tax rates

As the Finance Bill contains a clause enacting the announced increase in the main rate of non-ring fence corporation tax to 25% with effect from 1 April 2023, this rate will have to be taken into account in book deferred tax calculations ending after the legislation is “substantively enacted”. A Bill is treated as substantively enacted for IFRS purposes following the third reading in the House of Commons. The Bill timetable is not currently known but if the third reading occurs before the end of June the new rate would have to be reflected in any half-year statements for companies with December year ends (or the final accounts of any companies with June year ends).

As announced in the Budget the rate of diverted profits tax is to be increased from 25% to 31% at the time the main non-ring fence corporation tax rate increases to 25%. The DPT rate applicable to ring-fence trades however remains unchanged at 55%.

CW Energy LLP
March 2021