Finance Act 1988

Oil licences

62Disposals of oil licences relating to undeveloped areas

(1)If, at the time of the material disposal of a licence, the licence relates to an undeveloped area, then, to the extent that the consideration for the disposal consists of—

(a)another licence which at that time relates to an undeveloped area or an interest in another such licence, or

(b)an obligation to undertake exploration work or appraisal work in an area which is or forms part of the licensed area in relation to the licence disposed of,

the value of that consideration shall be treated as nil for the purposes of the [1979 c. 14.] Capital Gains Tax Act 1979 (in this section referred to as “the 1979 Act”) and the appropriate legislation relating to capital allowances.

(2)For the purposes of this section a “material disposal” is a disposal (which includes a part disposal) which occurred or occurs before or after the passing of this Act, other than,—

(a)so far as concerns the 1979 Act, a disposal which is made otherwise than by way of a bargain at arm’s length; and

(b)so far as concerns the appropriate legislation relating to capital allowances, a disposal in relation to which Schedule 7 to the [1968 c. 3.] Capital Allowances Act 1968 (sales between connected persons etc.) has effect.

(3)If a material disposal of a licence which, at the time of the disposal, relates to an undeveloped area is part of a larger transaction under which one party makes to another material disposals of two or more licences, each of which at the time of the disposal relates to an undeveloped area, the reference in subsection (1)(b) above to the licensed area in relation to the licence disposed of shall be construed as a reference to the totality of the licensed areas in relation to those two or more licences.

(4)Where a claim is made under section 68(5)(b) of the [1985 c. 54.] Finance Act 1985 (claims to substitute, for indexation purposes, a 1982 market value for cost on certain disposals between 1st April 1985 and 5th April 1988) for the purpose of computing the indexation allowance on a material disposal of a licence which, at the time of the disposal, relates to an undeveloped area and, accordingly, it is assumed for that purpose that, on 31st March 1982, the licence concerned was sold and immediately reacquired, then, for that purpose, section 34 of the 1979 Act (effect of capital allowances on allowable expenditure) shall apply in relation to any capital allowance—

(a)made in respect of the expenditure actually incurred in providing the licence, and

(b)so made for an accounting period ending on or after 1st April 1982,

as if the allowance (or, if the accounting period begins before that date, a time-apportioned part of the allowance) were made in respect of expenditure which, on that assumption, was incurred in reacquiring the asset on 31st March 1982.

(5)In relation to a material disposal of a licence which at the time of the disposal relates to an undeveloped area, being a disposal—

(a)which is a part disposal of the licence in question, and

(b)part but not the whole of the consideration for which falls within paragraph (a) or paragraph (b) of subsection (1) above,

section 35 of the 1979 Act (apportionment of expenditure etc. on part disposals) shall not apply unless the amount or value of the part of the consideration which does not fall within one of those paragraphs is less than the aggregate of the amounts which, if the material disposal were a disposal of the whole of the licence rather than a part disposal, would be—

(i)the relevant allowable expenditure, as defined in section 86 of the [1982 c. 39.] Finance Act 1982 (indexation allowance on certain disposals); and

(ii)the indexation allowance on the disposal.

(6)Where section 35 of the 1979 Act has effect in relation to such a disposal as is referred to in subsection (5) above, it shall have effect as if, for subsection (2) thereof, there were substituted the following subsection—

“(2)The apportionment shall be made by reference to—

(a)the amount or value of the consideration for the disposal on the one hand (call that amount or value A), and

(b)the aggregate referred to in subsection (5) of section 62 of the Finance Act 1988 on the other hand (call that aggregate C),

and the fraction of the said sums allowable as a deduction in computing the amount of the gain (if any) accruing on the disposal shall be—

and the remainder shall be attributed to the part of the property which remains undisposed of.”

(7)In the case of a material disposal—

(a)which falls within subsection (5) above, and

(b)in respect of which a claim is made under section 68(5)(b) of the [1985 c. 54.] Finance Act 1985,

the claim shall be treated also as having effect for the purpose of determining the indexation allowance referred to in sub-paragraph (ii) of subsection (5) above on the notional material disposal of the whole of the licence referred to in that subsection.

63Allowance of certain drilling expenditure etc. in determining chargeable gains

(1)On the disposal of a licence, whether occurring before or after the passing of this Act, relevant qualifying expenditure incurred by the person making the disposal—

(a)in searching for oil anywhere in the licensed area, or

(b)in ascertaining the extent or characteristics of any oil-bearing area the whole or part of which lies in the licensed area or what the reserves of oil of any such oil-bearing area are,

shall be treated as expenditure falling within section 32(1)(b) of the [1979 c. 14.] Capital Gains Tax Act 1979 (enhancement expenditure reflected in the state or nature of the asset at the time of disposal).

(2)Expenditure incurred as mentioned in subsection (1) above is relevant expenditure if, and only if,—

(a)it is expenditure of a capital nature on scientific research; and

(b)either it was allowed or allowable under section 91 of the [1968 c. 3.] Capital Allowances Act 1968 (capital expenditure on scientific research) for a chargeable period which, or the basis year for which, began before the date of the disposal or it would have been so allowable if the trading condition had been fulfilled; and

(c)the disposal is an occasion by virtue of which section 92 of that Act (termination of user of assets representing scientific research expenditure of a capital nature) applies in relation to the expenditure or would apply if the trading condition had been fulfilled and the expenditure had been allowed accordingly.

(3)In subsection (2) above and subsection (4) below, the expression “if the trading condition had been fulfilled” means, in relation to expenditure of a capital nature on scientific research, if, after the expenditure was incurred but before the disposal concerned was made, the person incurring the expenditure had set up and commenced a trade connected with that research; and in subsection (2)(b) above—

(a)“chargeable period” has the same meaning as in section 91 of the [1968 c. 3.] Capital Allowances Act 1968; and

(b)“basis year” has the same meaning as in subsection (3)(c) of that section.

(4)Relevant expenditure is qualifying expenditure only to the extent that it does not exceed the trading receipt which, by reason of the disposal,—

(a)is treated as accruing under section 92(2) of the Capital Allowances Act 1968; or

(b)would be treated as so accruing if the trading condition had been fulfilled and the expenditure had been allowed accordingly.

(5)On the disposal of a licence, sections 31 and 34 of the [1979 c. 14.] Capital Gains Tax Act 1979 (which include provisions under which set off is given for balancing charges) shall apply in relation to any such trading receipt as is mentioned in subsection (4)(a) above as if it were a balancing charge falling to be made by reference to the disposal.

(6)Where, on the disposal of a licence, subsection (1) above has effect in relation to any relevant qualifying expenditure which had not in fact been allowed or become allowable as mentioned in subsection (2)(b) above,—

(a)no allowance shall be made in respect of that expenditure under section 91 of the Capital Allowances Act 1968; and

(b)no deduction shall be allowed in respect of it under section 92(3) of that Act.

(7)Where, on the disposal of a licence which is a part disposal, subsection (1) above has effect in relation to any relevant qualifying expenditure, then, for the purposes of section 35 of the Capital Gains Tax Act 1979 (part disposals), that expenditure shall be treated as wholly attributable to what is disposed of (and, accordingly, shall not be apportioned as mentioned in that section).

64Interpretation of sections 62 and 63

(1)For the purposes of section 62 above, a licence relates to an undeveloped area at any time if—

(a)for no part of the licensed area has consent for development been granted to the licensee by the Secretary of State on or before that time; and

(b)for no part of the licensed area has a programme of development been served on the licensee or approved by the Secretary of State on or before that time.

(2)Subsections (4) and (5) of section 36 of the [1983 c. 28.] Finance Act 1983 (meaning of “development”) shall have effect in relation to subsection (1) above as they have effect in relation to subsection (2) of that section.

(3)In relation to a licence under the [1964 c. 28 (N.I.).] Petroleum (Production) Act (Northern Ireland) 1964 any reference in subsection (1) above to the Secretary of State shall be construed as a reference to the Department of Economic Development.

(4)In relation to a material disposal, within the meaning of section 62 above, of a licence under which the buyer acquires an interest in the licence only so far as it relates to part of the licensed area, any reference in subsection (1) or subsection (3) of that section or subsection (1) above to the licensed area shall be construed as a reference only to that part of the licensed area to which the buyer’s acquisition relates.

(5)In sections 62 and 63 above and the preceding provisions of this section “oil”, “licence”, “licensee” and, subject to subsection (4) above, “licensed area” have the meaning assigned by section 12(1) of the [1975 c. 22.] Oil Taxation Act 1975.

(6)In section 62 above—

(a)“exploration work”, in relation to any area, means work carried out for the purpose of searching for oil anywhere in that area;

(b)“appraisal work”, in relation to any area, means work carried out for the purpose of ascertaining the extent or characteristics of any oil-bearing area the whole or part of which lies in the area concerned or what the reserves of oil of any such oil-bearing area are;

(c)“the appropriate legislation relating to capital allowances” means—

(i)Chapter III of Part I and Part II of the [1968 c. 3.] Capital Allowances Act 1968; and

(ii)section 55 of and Schedules 13 and 14 to the [1986 c. 41.] Finance Act 1986 (new code of allowances for capital expenditure on mineral extraction); and

(d)any reference to section 68(5)(b) of the [1985 c. 54.] Finance Act 1985 is a reference to that section as it had effect before the amendment made by Schedule 8 to this Act.