Finance Act 2009

Introduction

Section 86 Schedule 40: Oil: Chargeable Gains

Summary

1.Section 86 and Schedule 40 amend the chargeable gains legislation as it applies to disposals of licences and assets used within a ring fence trade.

2.Where licences for developed areas in the (UKCS) are swapped between companies, these will be treated as disposals which give rise neither to a gain nor a loss, for chargeable gains purposes, to the extent that the value of one licence swapped is matched by another licence.

3.In addition, where a company disposes of business assets used in connection with a UKCS field, to the extent that the proceeds are reinvested in other UKCS field assets, any gain that arises shall not be a chargeable gain.

Details of the Section

4.Section 86 introduces Schedule 40 which provides for circumstances where oil licences are swapped and has effect for disposals made on or after 22 April 2009.

5.Schedule 40 also provides for circumstances where the consideration on the disposals of assets is reinvested and has effect in relation to disposals on or after 22 April 2009, whether or not the reinvestment takes place before, on or after that date.

Details of the Schedule

6.Paragraph 2 makes consequential amendments to the rebasing rules at section 35(3) of the Taxation of Chargeable Gains Act 1992 (TCGA).

7.Paragraph 3 inserts new subsection (5A) in section 55 of TCGA. Section 55 concerns assets owned on 31^st March or acquired on a no gain/no loss disposal.

8.New subsection (5A) provides that a disposal is also a no gain/no loss disposal if the effect of one of new sections 195B, 195C or 195E is that no gain or loss accrues to the person making the disposal. When one of the new sections has that effect, section 55(6)(b) of TCGA which relates to indexation allowance does not apply.

9.Paragraph 4 extends the application of section 175(2C) TCGA to the no gain/no loss provisions in new sections 195B, 195C and 195E. Section 175(2C) disapplies roll-over relief where the no/gain no loss provisions apply to an acquisition of new assets by a member of a group of companies. .

10.Paragraph 5 inserts new sections 195A, 195B, 195C, 195D and 195E.

11.New section 195A applies sections 195B to 195E of TCGA and defines terms used in those sections and section 196 of TCGA.

12.New section 195B applies to a licence-consideration swap. That is where the only consideration given by either party is the disposal of one or more licences.

13.New section 195C applies to a mixed-consideration swap.

14.New section 195D also applies to a mixed-consideration swap.

15.New section 195E applies to the giver of mixed consideration in a mixed consideration swap..

16.Paragraph 6 of the Schedule amends section 196 which is an interpretation provision.

17.Paragraph 7 inserts references to sections 195B, 195C and 195E in paragraph 1(2) of Schedule 3 to TCGA (assets held on 31^st March 1982).

18.Paragraph 8 provides that Part 1 of this Schedule applies to disposals made on or after 22 April 2009.

19.Paragraph 10 inserts in section 198 of TCGA a new subsection (3) which provides that where the roll-over relief provisions in sections 152 and 153 TCGA apply to a material disposal and the asset which constitutes the new assets for the purposes of a ring fence trade is a depreciating asset, then section 154(2)(b) (cessation of use of an asset) shall apply as if the reference to a trade was a reference solely to a ring fence trade.

20.Paragraph 11 inserts in section 198 of TCGA a new subsection (2A) which provides that subsection (1) is subject to section 198(3)(a) of TCGA.

21.Paragraph 12 inserts new sections 198A to 198F after section 198 of TCGA.

22.New section 198A provides that if a person makes a claim, roll-over relief does not apply to the consideration for the disposal and any gain arising to the claimant is not a chargeable gain.

23.Subsection (1) applies the section if a person makes a disposal and acquisition which is a “ring fence reinvestment” (the term is defined at new section 198E(2)) and qualifies for roll-over relief.

24.New section 198B provides for a claim to be made in respect of a ring fence reinvestment where only part of the consideration is reinvested.

25.New section 198C provides for the provisional application of sections 198A and 198B.

26.Subsection (1) provides that the section applies where a person carrying on a ring fence trade disposes of old assets or an interest in old assets and makes a declaration in that person’s return for the chargeable period in which the disposal takes place. Details of the subject matter of the declaration are at paragraphs (a) to (e).

27.Subsection (3) provides a day when the declaration shall cease to have effect. If the declaration is wholly or partly withdrawn before the relevant day or is wholly or partly superseded before the relevant day by a valid claim under either section 198A or 198B, the declaration will cease to have effect, to the extent it is withdrawn or superseded, on the day on which it is withdrawn or superseded. To the extent that it is not withdrawn or superseded, the declaration will cease to have effect on the relevant day.

28.Subsection (4) provides the machinery for unwinding the effect of the declaration.

29.Subsection (6) defines the “relevant day”.

30.New section 198D prevents companies from making double claims and lays down the circumstances in which a claim may be withdrawn and replaced by a new claim.

31.New section 198E defines “ring fence investments” for the purposes of sections 198A to 198G.

32.New section 198F lays down the conditions to be met if a disposal and acquisition are to qualify for roll-over relief.

33.New section 198G lays down the conditions to be met if a disposal and acquisition is to qualify for section 153 relief.

34.Paragraph 13 provides that Part 2 applies in relation to disposals made on or after 22 April 2009 (whether the acquisition in which the consideration is reinvested takes place before, on or after that date).

Background Note

35.The Government recognises the importance of reducing the distortionary impact of the North Sea fiscal regime on investment decisions and helping facilitate asset trades. Under the existing law, where companies swap pre-development oil licences, these swaps do not give rise to chargeable gains.

36.Under this Schedule, that approach will be extended to all UKCS licence swaps. Where development licence interests are disposed of, to the extent that the consideration for the disposal is another licence, the consideration will be deemed to be the allowable costs plus indexation, giving a no gain/no loss transfer. Where there is a swap and an additional amount is paid over as consideration that amount remains within the chargeable gains regime.

37.In addition, where there is a disposal of assets used in connection with a UKCS field and the proceeds are reinvested in other ring fence assets, either one year before or up to three years after the disposal then, subject to a claim, the gain shall be treated as not being a chargeable gain.

38.The effect of these changes is that a number of transactions will no longer give rise to chargeable gains, making it easier for licence interests and ring fence assets to get into the hands of those most likely to invest in them. But where the assets are sold and the proceeds are not reinvested in the UKCS, then the disposals will be taxed in the normal way.