Finance Act 2009

Introduction

Section 84 and Schedule 38: Capital Allowances for Oil Decommissioning Expenditure

Summary

1.Section 84 and Schedule 38 amend the rules providing for tax relief for decommissioning costs to ensure that companies can claim relief for decommissioning costs only for the accounting period in which the work is actually carried out. The Government has become aware of arrangements that have been entered into which seek to establish a claim for tax relief for decommissioning costs several years in advance of any decommissioning work being carried out. These arrangements are an attempt to undermine the integrity of the North Sea ring fence. The change will have effect in relation to decommissioning costs incurred on or after 22 April 2009.

Details of Schedule

2.Paragraph 2 amends section 163 of the Capital Allowances Act 2001 (CAA) to provide that general decommissioning expenditure must be incurred wholly or substantially to comply with an approved abandonment programme, or conditions associated with the approval of an abandonment programme. Sub-paragraph (3) inserts new subsection (3A) to this effect.

3.Paragraph 3 extends and amends section 164 of CAA to provide that the costs allowable for relief will be those costs of the accounting period that relate to the decommissioning work that is actually carried out in the accounting period.

4.New subsection 164 (1A) provides that Condition A applies in one or more of the situations where R incurs general decommissioning expenditure in the relevant chargeable period in respect of decommissioning:

5.Sub-paragraph (4) inserts new subsections (3)(aa), (ab) and (ac) into section 164 of CAA which provide what an election to have a special allowance must also specify.

6.Sub-paragraph (7) inserts new subsections (5A), (5B), (5C) and (5D) into section 164 of CAA.

7.New subsection (5B) provides that if the general decommissioning expenditure is not proportionate to the decommissioning work carried out in the chargeable period, then only the expenditure that is proportionate will be allowable.

8.New subsection (5D) provides, for subsections (5B) and (5C), definitions of “allowable expenditure”, “non-allowable expenditure”, “relevant decommissioning”, “specified decommissioning period” and “specified expenditure period”.

9.Paragraph 4 amends section 165 of CAA to provide for notional accounting periods within the post-cessation period.

10.Sub-paragraph (3) inserts new subsections (1A), (1B) and (1C) into section 165 of CAA.

11.New subsection (1A) provides that the decommissioning provision is met in relation to a notional accounting period if the former trader incurs general decommissioning expenditure in the relevant period in respect of decommissioning carried out in certain periods.

12.New subsection (1B) provides the meaning of “notional accounting period” for periods within the post-cessation period.

13.New subsection (1C) provides the meaning of “termination event” in relation to a notional accounting period.

14.Sub-paragraph (5) substitutes in section 165(4) of CAA a revised definition of “relevant decommissioning cost”

15.Sub-paragraph (6) inserts new subsections (4B), (4C), and (4D) into section 165 of CAA.

16.New subsection (4B) provides that if the general decommissioning expenditure is not proportionate to the decommissioning work carried out in the decommissioning period, then only the expenditure that is proportionate will be allowable.

17.New subsection (4D) provides, for subsections (4B) and (4C), definitions of “allowable expenditure”, “decommissioning period”, “expenditure period”, “non-allowable expenditure” and “relevant decommissioning”.

18.Sub-paragraph (7) inserts new subsections (6A) and (6B) into section 165 of CAA.

Background Note

19.Companies that are party to North Sea licences for the production of oil and gas have a legal obligation to decommission installations and structures within those licensed areas at the end of the field’s productive life.

20.Companies have to meet fully the costs of decommissioning but do obtain tax relief for all of those costs, which they can set against their ring fence corporation tax and supplementary charge profits.

21.Relief for decommissioning costs is given through the capital allowances legislation which provides that where a person is carrying on a ring fence trade and incurs general decommissioning expenditure, a special capital allowance is available, equal to the whole amount of decommissioning expenditure that is incurred in the period in question.

22.The Government has become aware of arrangements that have been entered into which seek to establish a claim for tax relief for decommissioning costs several years in advance of any decommissioning work actually being carried out. This undermines a fundamental general principle that relief is given in the accounting period, for costs incurred in respect of the work actually carried out in that accounting period.

23.The proposed change addresses this situation by ensuring that tax relief for decommissioning costs will only be given in respect of those costs that relate to the work actually carried out in the accounting period.