Finance Act 2009

Introduction

Section 87 Schedule 41: Oil Production Assets Put to Certain Other Uses

Summary

1.Section 87 and Schedule 41 introduce amendments to existing legislation to facilitate the re-use of existing North Sea infrastructure. There are tax consequences when assets move out of the (RFCT) and petroleum revenue tax (PRT) regimes. These consequences include the impact on tax allowances that have already been given; the treatment of future income and expenditure; and the availability of relief for decommissioning costs.

Details of Schedule

Part 1: Petroleum Revenue Tax (Prt)

Allowance of decommissioning and restoration expenditure

2.Paragraph 1 amends sections 3(1C) and 3(1D) of the Oil Taxation Act (OTA) 1975. These sections provide that, where a qualifying asset has been used for a purpose other than in connection with the field in which the costs have been allowed, then any decommissioning costs in connection with that asset will be restricted by reference to the use made of the asset. This paragraph lifts this restriction if the non-field use is for a qualifying purpose which includes a use otherwise than in connection with that field, if the use occurs in the UK or (UKCS) and is not used wholly or partly for an oil purpose.

Amounts which are not chargeable tariff receipts

3.Paragraph 2 removes from the charge to PRT any income that arises from any other use of an asset, except use wholly or partly for an oil purpose.

No reduction of allowable expenditure

4.Paragraph 3 applies in respect of deemed disposals. Where a qualifying asset ceases to be used in connection with a taxable field and is used for another purpose, paragraph 8 of Schedule 1 to OTA 1983 deems a disposal giving rise to a disposal receipt. This disposal receipt is based on a time apportioned restriction of the allowable cost of the asset in respect of the use made of the asset. This paragraph prevents such a disposal receipt from arising where the other purpose is a qualifying purpose.

Part 2: Capital Allowances

General decommissioning expenditure

5.Paragraph 5 provides for an amendment to section 163 of the Capital Allowances Act 2001 (CAA), extending the meaning of “general decommissioning expenditure” to include expenditure incurred in decommissioning assets used in a change of use trade, where those assets had originally been brought into use for the purposes of a ring fence trade.

6.Sub-paragraph (3) amends subsection (4ZA) by replacing paragraphs (a) and (b) with new paragraphs, which determine the amount by which general decommissioning expenditure is to be reduced where the decommissioned plant and machinery was not brought into use wholly for a qualifying purpose or had, at any time since it was brought into use, not been used for qualifying purposes. .

7.Paragraph 6 amends section 165(4A) of CAA 2001 (general decommissioning expenditure after ceasing ring fence trade) by substituting “general decommissioning expenditure” for “abandonment expenditure”

Commencement

8.Paragraph 7 deals with the commencement dates of legislation within this Part.

Background Note

9.When oil and gas production ceases there are a number of ways in which North Sea oil and gas infrastructure can be re-used or modified to ensure it does not simply have to be decommissioned. Potential change of use projects include gas storage, carbon capture and storage and wind, or other power generation, which bring with them benefits such as improved energy security and low-carbon energy production.

10.However, it is apparent that there are significant tax barriers discouraging the use of assets for activities other than oil and gas production.

11.The issue that arises with a change of use project is that there may be a period prior to decommissioning where the infrastructure is not used for a PRT or ring fence trade purpose.

12.Within the PRT regime there are a number of possible effects. For example:

13.This section and Schedule remove the exit charge, take any change of use income out of the scope to PRT and allow the decommissioning costs in full as long as the change of use is otherwise than in connection with that field and carried out within the UK or UKCS, and is not used wholly or partly for an oil purpose.

14.Within the (RFCT) regime it may be that the ring fence trade is continuing at the same time as the change of use activity, or it could also be the case that the ring fence trade has already ceased. In those circumstances, decommissioning costs will fall outside RFCT, as the assets are being used for the purposes of a non-ring fence activity.

15.Under the current rules a non-ring fence change of use activity will normally deny companies access to previous periods’ ring fence profits, against which to offset their decommissioning costs. In those circumstances there is evidence to suggest that companies may be unable to consider change of use projects and thus extend the economic life of their assets and infrastructure, by employing them in some other economically viable activity.

16.Nearly all decommissioning expenditure is capital in nature and is therefore relieved, within the RFCT regime, under the capital allowances legislation.

17.Section 163 of CAA provides 100 per cent first year allowances (FYA) relief for general decommissioning expenditure in respect of all decommissioning expenditure which has been incurred on decommissioning plant or machinery which has been brought into use for the purposes of a ring fence trade. The main conditions are that the:

• expenditure is on decommissioning plant or machinery; and

• decommissioning is of plant or machinery which is, or forms part of, an offshore installation or a submarine pipeline, or when last in use for the purposes of a ring fence trade, was, or formed part of, such an installation or pipeline.

18.However, under current rules, the amount of general decommissioning expenditure that can qualify for 100 per cent relief is reduced where the decommissioned plant and machinery was brought into use for the purposes of another trade. The amount of relief is reduced where the decommissioned plant and machinery was brought into use:

• partly for the purposes of the ring fence trade and partly for the purposes of another trade; or

• wholly for the purposes of the ring fence trade, but has, at any time since, not been used wholly for those purposes.

19.The proposed changes within this section and Schedule extend the availability of 100 per cent FYA to all general decommissioning expenditure incurred for the purposes of any ring fence trade of any person, or for any other use within the UK or UKCS.