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Corporation Tax Act 2010

Part 8: Oil activities

Overview

923.This Part contains rules relating to the corporation tax charge, including the supplementary charge, on profits from oil extraction and related activities. It rewrites Chapter 5 of Part 12 of, and Schedule 19C, to ICTA, sections 62 to 65 of FA 1991 and Schedule 44 to FA 2009. Section 496A of, and Schedule 19B to, ICTA (exploration expenditure supplement) are not rewritten. These particular rules apply only to expenditure incurred before 1 January 2006. They are therefore of limited future application.

924.Some of the source legislation relates to both income tax and corporation tax – the necessary rules for income tax are inserted into ITTOIA (after section 225) by TIOPA, which comes into effect at the same time as this Act.

925.A number of PRT definitions are used in the corporation tax and income tax rules, and some parts of the legislation depend on calculations made for PRT purposes. In particular the legislation uses the PRT term “participator” (see section 12(1) of OTA 1975). The legislation for PRT is not itself being rewritten.

926.The definitions of “exploration and exploitation activities”, “exploration and exploitation rights” and “designated area” are in section 1313 of CTA 2009. The equivalent income tax definitions are in section 874 of ITTOIA.

927.The extension of the United Kingdom to its territorial sea for the purposes of the scope of corporation tax, in section 830(1) of ICTA, is rewritten in section 1170 of this Act. The corresponding rule for income tax is section 1013 of ITA.

928.Oil is used as a shorthand throughout the commentary on these sections, but unless specifically mentioned the same rules and considerations apply to gas and other associated products.

929.The material is organised as follows:

  • Chapter 1: Introduction

  • Chapter 2: Basic definitions

  • Chapter 3: Deemed separate trade

  • Chapter 4: Calculation of profits

  • Chapter 5: Ring fence expenditure supplement

  • Chapter 6: Supplementary charge in respect of ring fence trades

  • Chapter 7: Reduction of supplementary charge for certain new oil fields

Chapter 1: Introduction
Section 270: Overview of Part

930.This section provides an overview of the legislation. It is new.

Chapter 2: Basic definitions
Section 271: “Associated companies”

931.This section sets out the definition of “associated companies” for the purposes of the Part. It is based on section 502(3), (3A) and (4) of ICTA.

932.Subsection (2) applies the consortium relief rules in Part 5 of this Act for the purposes of this Part with the following modification.

933.Section 153 provides the conditions by which a company is a member of a consortium. The additional circumstance in section 153(3) is not relevant for the purposes of the oil taxation provisions. Section 271 therefore operates by adopting a definition of “owned by a consortium” which encompasses the meaning of section 153(1) and (2) only.

Section 272: “Oil extraction activities”

934.This section sets out the definition of “oil extraction activities” for the purposes of this Part. It is based on section 502(1) and (2) of ICTA.

935.Certain definitions are taken from the PRT legislation in section 12 of OTA 1975.

936.The corresponding rule for income tax is section 225A of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 273: “Oil rights”

937.This section sets out the meaning of “oil rights” for the purposes of this Part. It is based on section 502(1) of ICTA.

938.The corresponding rule for income tax is section 225B of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 274: “Oil-related activities”

939.This section sets out a definition of “oil-related activities”. It is based on section 492(1) of ICTA.

940.This definition underpins the meaning of “ring fence trade” in section 277 and the deeming of a separate trade for corporation tax purposes in section 279. The corresponding rule for income tax is section 16 of ITTOIA.

Section 275: “Ring fence income”

941.This section sets out the meaning of “ring fence income” for the purposes of this Part. It is based on section 502(1) of ICTA and section 62 of FA 1991.

942.This term is then picked up in section 276 as part of the definition of a company’s “ring fence profits”.

943.The corresponding rule for income tax is section 225C of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 276: “Ring fence profits”

944.This section sets out the meaning of “ring fence profits” for the purposes of this Part. It is based on section 502(1) and (1A) of ICTA.

945.Although the definition is not explicitly limited to corporation tax in the source legislation, the term is only used in the legislation in relation to corporation tax. This term is therefore not included in the rewritten rules for income tax.

Section 277: “Ring fence trade”

946.This section sets out the meaning of “ring fence trade” for the purposes of this Part. It is based on section 502(1) of ICTA.

947.The corresponding rule for income tax is section 225D of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 278: Other definitions

948.This section sets out further definitions necessary for this Part. It is based on sections 493(1A), 500(10) and 502(1) and (2) of ICTA, and section 62(2) of FA 1991.

949.The corresponding rule for income tax is section 225E of ITTOIA (inserted by Schedule 1 to TIOPA).

Chapter 3: Deemed separate trade
Section 279: Oil–related activities treated as separate trade

950.This section deems a separate trade of oil-related activities to exist for corporation tax purposes where a company carries on those activities as part of its trade. It is based on section 492(1) of ICTA. The corresponding rule for income tax is section 16 of ITTOIA.

Chapter 4: Calculation of profits
Overview

951.This Chapter contains the rules that determine how income/profits from a ring fence trade are calculated, to the extent that they differ from the calculation for any other type of trade. The starting point is that all normal trading income rules apply unless they are modified by a provision of this Chapter. The calculation may also be affected by the ring fence expenditure supplement rules set out in Chapter 5.

952.The general rules for the calculation of trading income for corporation tax purposes are in Part 3 of CTA 2009.

Section 280: Disposal to be valued by reference to section 2(5A) of OTA 1975

953.This section modifies the calculation of profits for corporation tax purposes where certain expenses are incurred in connection with the transportation of oil. It is based on section 493(A1) to (A3) of ICTA. There is no equivalent for income tax.

954.The starting point is section 2(5A) of OTA 1975, which involves situations where the seller disposes of oil at arm’s length and is required to meet certain transportation costs – subsection (6).

955.Section 2(5A) OTA 1975 replaces:

  • actual sales proceeds from a sale at arm’s length under a contract which requires the seller to meet the transport costs,

with

  • deemed proceeds based on a hypothetical sale at arm’s length under which the seller does not have to meet the transport costs and has to transport the oil to the nearest landing point (or, in the case of onshore fields, to the place of extraction itself).

956.Subsection (9) adopts the price given by section 2(5A) of OTA 1975, for the seller only – it has no impact on the purchaser. Section 3(1)(f) of OTA 1975 allows transport costs for transportation to that point. If a company does not claim transportation costs for corporation tax then for practical purposes the price at that point is the actual sale price minus the transport costs to that point.

957.In order to prevent double counting, subsections (7)and (8) require that the company does not otherwise get a deduction for the transportation cost or “transportation allowance” against either its ring fence or non ring fence profits, as that allowance is in effect netted off to reach the price in subsection (9).

Section 281: Valuation where market value taken into account under section 2 of OTA 1975

958.This section specifies that where the market value of oil is included in the calculation of profits for PRT purposes by OTA 1975 in place of the actual sale price, the same price applies for corporation tax. It is based on section 493(1) of ICTA.

959.The market value applies to both the seller and the purchaser. The section therefore retains the term “person” rather than “company” as the other party may not necessarily be a company. The market value is derived by way of a comprehensive scheme put in place for PRT purposes – see in particular section 2 of and Schedule 3 to OTA 1975.

960.The corresponding rule for income tax is section 225F of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 282: Valuation where disposal not sale at arm’s length

961.This section applies a market value price where oil is disposed of otherwise than at arm’s length, but where the disposal is not covered by the PRT rules. It is based on section 493(3), (5) and (6) of ICTA.

962.A common application of this rule is where oil is extracted from an oil field that is not within the scope of PRT following the reforms in FA 1993, which took fields given development consent on or after 16 March 1993 out of the scope of PRT.

963.This section also retains the term “person” because the transactions may not necessarily involve only companies.

964.The corresponding rule for income tax is section 225G of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 283: Valuation where excess of nominated proceeds

965.This section ensures that where the “nomination scheme” adds an amount to the disposal value of oil for PRT purposes, that amount is also added for corporation tax purposes. It is based on section 493(1A) of ICTA.

966.The corresponding rule for income tax is section 225H of ITTOIA (inserted by Schedule 1 to TIOPA).

967.The “nomination scheme” is part of the mechanism to ensure that the full value of oil extracted from the UK sector is reflected in the profits calculated for PRT and for the ring fence trade. A full description of the scheme can be found in HMRC guidance at OTM 5199.

968.The addition to the price for corporation tax purposes is made even if the relevant oil field is not within the scope of PRT – see subsection (1)(b).

969.Subsection (3) provides for a deduction in computing the profits of a non-ring fence trade. The wording has been changed to clarify its meaning as the source legislation in section 493(1A)(b) of ICTA was unclear. See Change 29 in Annex 1.

Section 284: Valuation where relevant appropriation but no disposal

970.This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining. It is based on section 493(2) of ICTA.

971.The corresponding rule for income tax is section 225I of ITTOIA (inserted by Schedule 1 to TIOPA).

972.Where a market value is applied for PRT purposes by OTA 1975, that market value is used in the calculation of profits for corporation tax purposes – see subsections (4) and (5). The market value also applies to the non-ring fence trade.

Section 285: Valuation where appropriation to refining etc

973.This section imposes a market value in a case where an oil producer does not sell the oil to another party but takes it into use in another of its businesses, such as refining, and where the PRT rules do not apply. It is based on section 493(4), (5) and (6) of ICTA.

974.The corresponding rule for income tax is section 225J of ITTOIA (inserted by Schedule 1 to TIOPA).

975.In such a case the same calculation of market value is made using the PRT rules as if the PRT rules had applied to the appropriation.

Section 286: Restriction on debits to be brought into account

976.This section modifies the loan relationship rules in the case of a ring fence trade. It is based on section 494(2) and (2A) of ICTA.

977.The section ensures that non-trading debits from a company’s loan relationships cannot be set against the company’s ring fence profits, unless the loan relationship represents money borrowed to finance oil extraction activities or to acquire oil rights. The loan relationship rules are in Parts 5 and 6 of CTA 2009.

978.Subsection (5)provides that where a non-trading debit is restricted in this way the legislation allows the company to have relief for the debit against other profits.

Section 287: Restriction on credits to be brought into account

979.This section ensures that exchange gains in respect of loan relationships are not treated as part of the ring fence profits where the exchange gains do not arise from money borrowed to finance ring fence activities. It is based on section 494(2), (2ZA) and (2A) of ICTA.

980.The section operates in a similar way to section 286. Where a credit is excluded from the computation of ring fence profits it is brought into account by subsection (5).

Section 288: Sale and lease-back

981.This section ensures that where financing has been obtained by way of a sale and lease-back of assets, a deduction for the expenditure may not be made against ring fence profits unless certain conditions are met. It is based on section 494AA of ICTA.

982.Subsections (6) and (7)ensure thata deduction is only permitted against ring fence profits if the disposal proceeds are used in the ring fence trade.

983.Where the deduction is prevented from being given in full or in part against the ring fence profits, subsection (8) allows a deduction from other profits of the companyforany amount that has not been allowed because of this section.

984.This section has no income tax equivalent.

Section 289: Reduction of expenditure by reference to regional development grant

985.This section restricts a deduction for expenditure incurred to the extent that the expenditure has been met by a regional development grant. It is based on section 495(1), (2) and (7) of ICTA.

986.The corresponding rule for income tax is section 225K of ITTOIA (inserted by Schedule 1 to TIOPA).

987.The main restriction in respect of a grant is applied by section 534 of CAA. This section applies essentially the same restriction to the purchaser of an asset who buys the asset from a connected party, and where that connected party received a regional development grant on the original acquisition or construction of the asset.

988.The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for corporation tax purposes with respect to expenditure incurred on or after 1 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 2.

Section 290: Adjustment as a result of regional development grant

989.This section supplements section 289 and section 534 of CAA where the amount of expenditure involved is re-determined at a later date. It is based on section 495(3) to (7) of ICTA.

990.The corresponding rule for income tax is section 225L of ITTOIA (inserted by Schedule 1 to TIOPA).

991.The most likely application of regional development grants in the oil context is for onshore assets such as initial treatment plants to stabilise the crude oil arriving by pipeline. The eligibility of such assets for PRT relief, or the proportion that is eligible, can take some time to agree. As a result, the PRT position (which determines the amount eligible for capital allowances) may not be finalised for some time.

992.Accordingly, capital allowances could be given on the full amount in the “initial period”, disregarding the grant, as section 534(2) of CAA or its predecessors would not have applied at that stage. Subsection (5) ensures that the position can be adjusted in a later period if a change in circumstances occurs.

993.Section 137 of FA 1982, referred to in the source legislation, was rewritten in section 534 of CAA.

994.The source legislation applies to expenditure taken into account under Parts 2, 3 or 6 of CAA. Section 84 of FA 2008 repeals Part 3 of CAA for corporation tax purposes with respect to expenditure incurred on or after 1 April 2011. The section therefore applies to Parts 2 and 6 of CAA and the reference to Part 3 of CAA has been retained for the interim period by way of a transitional provision in Schedule 2.

Section 291: Tariff receipts etc

995.This section brings certain tariff receipts into the calculation of ring fence profits if those receipts would not otherwise be included. It is based on section 496 of ICTA.

996.The corresponding rule for income tax is section 225M of ITTOIA (inserted by Schedule 1 to TIOPA).

997.Tariff receipts arise where assets used in the ring fence trade are not used wholly for oil extraction by the owner but are used by other businesses in return for payment of a fee or “tariff”. Typical examples include the use of pipelines and treatment plants.

998.Tax-exempt tariffing receipts arise where the oil field to which the assets are attached for PRT purposes is not within the charge to PRT and therefore the tariffs are not chargeable to PRT.

999.Definitions of “tariff receipt” and “tax-exempt tariffing receipt” have been included to aid users of the legislation.

Section 292: Expenditure on and under abandonment guarantees

1000.This section provides relief against corporation tax where an oil field participator incurs expenditure in obtaining an abandonment guarantee. It is based on sections 62 and 63(8) of FA 1991.

1001.The corresponding rule for income tax is section 225N of ITTOIA (inserted by Schedule 1 to TIOPA).

1002.The cost of decommissioning oil fields is eligible for relief under the capital allowances code. But as the majority of oil fields are shared between two or more participators there is a risk that one or more of the participators may not meet their share of the cost when the time comes. As a result participators have taken out guarantees with financial institutions to cover their share. This section provides relief for the cost of obtaining the guarantee.

Section 293: Relief for reimbursement expenditure under abandonment guarantees

1003.This section provides relief for a participator against ring fence profits where some or all of a participator’s share of decommissioning costs is met by a guarantee and the participator subsequently reimburses the guarantor. It is based on section 63 of FA 1991.

1004.The corresponding rule for income tax is section 225O of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 294: Payment under abandonment guarantee not immediately applied

1005.This section applies where a guarantor makes payments into a fund and the assets of the fund are subsequently used to cover decommissioning costs. It is based on section 62(4) of FA 1991.

1006.The corresponding rule for income tax is section 225P of ITTOIA (inserted by Schedule 1 to TIOPA).

1007.In such a case the rules for relief under section 292 or 293 apply to the expenditure when it is eventually met out of the assets of the fund.

Section 295: Amounts excluded from section 293(1)

1008.This section restricts relief where amounts are repaid to a guarantor instead of being applied to meet decommissioning costs. It is based on section 63(2) of FA 1991.

1009.The corresponding rule for income tax is section 225Q of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 296: Introduction to sections 297 and 298

1010.This section sets out the circumstances in which sections 297 and 298 apply, and provides some related definitions. It is based on sections 64(1), (2) and (3) and 65(1) of FA 1991.

1011.The corresponding rule for income tax is section 225R of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 297: Relief for expenditure incurred by a participator in meeting defaulter’s abandonment expenditure

1012.This section provides for relief to a participator who meets the decommissioning expenditure that should have been met by another participator (the “defaulter”). It is based on section 64(4) and (5) of FA 1991.

1013.The corresponding rule for income tax is section 225S of ITTOIA (inserted by Schedule 1 to TIOPA).

Section 298: Reimbursement by defaulter in respect of certain abandonment expenditure

1014.This section applies where a defaulting participator reimburses another participator who has met the defaulter’s liability for decommissioning expenditure. It is based on section 65 of FA 1991.

1015.The corresponding rule for income tax is section 225T of ITTOIA (inserted by Schedule 1 to TIOPA).

1016.Relief against ring fence profits is given to the defaulter, and the other participator is treated as receiving additional ring fence income.

1017.The time limit in subsection (5) was amended from six years to four years by paragraph 27 of Schedule 39 to FA 2008. This change takes effect by Order from 1 April 2010 (see article 2(2) of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provisions and Savings) Order 2009 (SI 2009/403)).

Section 299: Deduction of PRT in calculating income for corporation tax purposes

1018.This section provides that a company may deduct PRT paid as an expense in calculating profits from the ring fence trade. It is based on section 500(1), (2), and (3) of ICTA.

1019.Sections 300 and 301 set out what happens when PRT is repaid and section 302 deals with interest on PRT repayments.

Section 300: Effect of repayment of PRT: general rule

1020.This section provides that when an amount of PRT is repaid the deduction under section 299 is reduced by the amount repaid. It is based on section 500(4) of ICTA.

1021.Subsection (2) provides thatthe repayment reduces or extinguishes the deduction for the original period for which the deduction was given, not the period when the repayment was received.

1022.The time limit in subsection (3) was amended from six years to four years by paragraph 23 of Schedule 39 to FA 2008. This change takes effect by Order from 1 April 2010 (see article 2(2) of the Finance Act 2008, Schedule 39 (Appointed Day, Transitional Provisions and Savings) Order 2009 (SI 2009/403)).

Section 301: Effect of repayment of PRT: special rule

1023.This section supplements section 300 in cases where the repayment derives from a carried back loss. It is based on section 500(5) to (10) of ICTA.

1024.In such a case the PRT repayment is treated as received, and hence the reduced deduction for corporation tax is applied, for the period in which the loss arose.

1025.The time limit in subsection (6) was amended from six years to four years by paragraph 23 of Schedule 39 to FA 2008. This change takes effect by Order from 1 April 2010 (see article 2(2) of SI 2009/403).

Section 302: Interest on repayment of PRT or APRT

1026.This section provides that interest paid to a participator on a repayment of PRT or advance PRT is disregarded in calculating profits for corporation tax purposes. It is based on section 501 of ICTA and paragraph 10 of Schedule 19 to FA 1982.

Section 303: Management expenses

1027.This section prohibits a deduction for expenses of management of an investment business against profits from a ring fence trade. It is based on section 492(3A) of ICTA.

Section 304: Losses

1028.This section prevents losses that arise in trades outside the ring fence from being set off against ring fence profits. It is based on section 492(3) and (4) of ICTA.

1029.Where a set-off is prevented in this way, subsection (5)allowsthe loss to be carried forward and set against future profits from “related activities”, that is activities which, taken together with the ring fence trade, would be regarded as a single trade but for the specific ring fence rule in section 279.

1030.The equivalent income tax rule, originally in section 492(2) of ICTA, is in section 80 of ITA.

1031.See section 40 for rules about the extension of the loss carry-back period in a ring fence trade where allowances for abandonment expenditure under section 164 of CAA are involved; and section 43, which extends the time limit for making a claim where allowances are made under section 165 (general decommissioning expenditure after ceasing ring fence trade) or 416 (site restoration expenditure) of CAA.

Section 305: Group relief

1032.This section prevents group relief arising from losses, allowances or expenditure outside the ring fence trade from being set against profits from the ring fence trade. It is based on sections 492(8) and 494A(1), (2) and (3) of ICTA.

1033.Subsections (2) and (3) provide that where a company cannot use certain amounts against its ring fence profits, those ring fence profits are disregarded in calculating how much the company can surrender as group relief.

Section 306: Capital allowances

1034.This section ensures that capital allowances arising from “special leasing” cannot be deducted from a company’s ring fence profits. It is based on section 492(6) and (7) of ICTA.

1035.The restriction does not apply to the extent that the leased asset is used in oil extraction activities by an associated company.

1036.Section 492(5) of ICTA is not rewritten as it is considered to be unnecessary. It prohibits the deduction of capital allowances given under section 258 of CAA against general profits. However, the deduction under section 258 of CAA can only be given against income from special leasing and not against other profits. Special leasing is defined in section 19 of CAA as leasing that is not part of any other qualifying activity. It is therefore not necessary to have a rule to protect ring fence income from this type of deduction.

Chapter 5: Ring fence expenditure supplement
Overview

1037.This Chapter rewrites the rules in Schedule 19C to ICTA, which provide a supplement for certain expenditure incurred on or after 1 January 2006. These rules superseded the exploration expenditure supplement in Schedule 19B to ICTA, which applies to expenditure incurred before 1 January 2006. Schedule 19B is therefore of limited future application and is not rewritten. This also means that certain terms used in this Chapter such as “the carried forward qualifying Schedule 19B amount” do not need to be altered.

Section 307: Overview of Chapter

1038.This section sets out an overview of the Chapter. It is based on paragraph 1 of Schedule 19C to ICTA.

Section 308: Qualifying companies

1039.This section sets out the definition of a qualifying company for the purposes of this Chapter. It is based on paragraph 2 of Schedule 19C to ICTA.

Section 309: Accounting periods

1040.This section sets out defined terms for accounting periods that lie either side of, or straddle, 1 January 2006. It is based on paragraph 3 of Schedule 19C to ICTA.

Section 310: The relevant percentage

1041.This section sets out the relevant percentage for the supplement and provides a power for the Treasury to vary the percentage by order. It is based on paragraph 4 of Schedule 19C to ICTA.

Section 311: Limit on number of accounting periods for which supplement may be claimed

1042.This section limits to six the number of accounting periods for which supplement may be claimed. It is based on paragraph 5 of Schedule 19C to ICTA.

1043.Subsection (3) directs that a claim for an accounting period under Schedule 19B to ICTA counts as part of the overall total of six accounting periods.

Section 312: Qualifying pre-commencement expenditure

1044.This section defines “qualifying pre-commencement expenditure” for the purposes of the Chapter. It is based on paragraph 6 of Schedule 19C to ICTA.

Section 313: Unrelieved group ring fence profits for accounting periods

1045.This section defines the term “unrelieved group ring fence profits” for an accounting period. It is based on paragraph 7 of Schedule 19C to ICTA.

1046.The broad scheme of the supplement is to increase the amount of certain expenditure and losses that cannot be relieved immediately to reflect the time value of the delay in obtaining effective tax relief. But where there are unrelieved profits from a ring fence trade elsewhere in the same group, some or all of the losses could have been used against those other ring fence profits in the same accounting period. Where this is the case supplement is restricted by section 318 or 328 as appropriate. The pool of expenditure eligible for supplement in a given period is reduced by the amount of any unrelieved group ring fence profits.

1047.This term applies for both pre-commencement and post-commencement supplement.

Section 314: Taxable ring fence profits for an accounting period

1048.This section defines the term “taxable ring fence profits” for the purposes of the Chapter. It is based on paragraph 8 of Schedule 19C to ICTA.

1049.This term is used in section 313 to determine the amount of unrelieved group ring fence profits.

Section 315: Supplement in respect of a pre-commencement accounting period

1050.This section sets out when a company may qualify for pre-commencement supplement, and how the supplement is given effect. It is based on paragraph 9 of Schedule 19C to ICTA.

1051.Supplement is given as a percentage of the “reference amount”, which is defined in section 319. “Pre-commencement period” is defined in section 309.

Section 316: The mixed pool of qualifying pre-commencement expenditure and supplement previously allowed

1052.This section sets out how the pool of expenditure that qualifies for pre-commencement supplement is determined. It is based on paragraph 10 of Schedule 19C to ICTA.

1053.The pool can include amounts carried forward from the exploration expenditure supplement in Schedule 19B to ICTA.

Section 317: Reduction in respect of disposal receipts under CAA 2001

1054.This section restricts the amount of expenditure eligible for supplement where there is a relevant disposal receipt taken into account under CAA. It is based on paragraph 11 of Schedule 19C to ICTA.

Section 318: Reduction in respect of unrelieved group ring fence profits

1055.This section restricts the amount eligible for supplement where some or all of the expenditure could have been surrendered as group relief. It is based on paragraph 12 of Schedule 19C to ICTA.

1056.The term “unrelieved group ring fence profits” is defined in section 313.

Section 319: The reference amount for a pre-commencement period

1057.This section defines the “reference amount” for the purposes of section 315. It is based on paragraph 13 of Schedule 19C to ICTA.

1058.The reference amount is the amount on which supplement can be claimed, that is the eligible expenditure reduced under either or both of sections 317 and 318 as appropriate.

Section 320: Claims for pre-commencement supplement

1059.This section sets out how a claim for pre-commencement supplement must be made and applies the time limit in paragraph 74 of Schedule 18 to FA 1998 to the claim. It is based on paragraph 14 of Schedule 19C to ICTA.

Section 321: Supplement in respect of a post-commencement period

1060.This section sets out when a company may qualify for post-commencement supplement, and how the claim is given effect. It is based on paragraph 15, 17 and 18 of Schedule 19C to ICTA.

1061.The calculation of post-commencement supplement is set out in sections 322 to 329. Under subsection (2 ) the supplement is treated as a loss carried forward to be set against future profits from the ring fence trade.

Section 322: Amount of post-commencement supplement for a post-commencement period.

1062.This section sets out how to calculate the amount of the post-commencement supplement. It is based on paragraph 16 of Schedule 19C to ICTA.

1063.The supplement is a percentage of the “reference amount”. The percentage is specified in section 310 and “reference amount” for post-commencement supplement is defined in section 329.

Section 323: Ring fence losses

1064.This section sets out how much of a trading loss from the ring fence trade is eligible for inclusion in the calculation of post-commencement supplement. It is based on paragraph 17 of Schedule 19C to ICTA.

1065.Subsection (3) provides thatlosses are not eligible for supplement if they could have been claimed against profits from an earlier accounting period.

Section 324: Special rule for straddling periods

1066.This section sets out the rules that apply where a company’s accounting period straddles 1 January 2006. It is based on paragraph 18 of Schedule 19C to ICTA.

Section 325: The pool of ring fence losses and the pool of non-qualifying Schedule 19B losses

1067.This section sets out how to determine the company’s pool of expenditure (the “ring fence pool”) for the purposes of post-commencement supplement. It is based on paragraph 19 of Schedule 19C to ICTA.

1068.The ring fence pool includes qualifying amounts carried forward from the pool determined under Schedule 19B to ICTA. The section also defines a non-qualifying pool which contains non-qualifying amounts carried forward under Schedule 19B to ICTA.

Section 326: The ring fence pool

1069.This section sets out how and when additions to and reductions of the ring fence pool are made. It is based on paragraph 20 of Schedule 19C to ICTA.

Section 327: Reductions in respect of utilised ring fence losses

1070.This section sets out how reductions in the two pools are to be made when a ring fence loss is utilised against profits. It is based on paragraph 21 of Schedule 19C to ICTA.

1071.The general rule is that when losses carried forward are set against profits in a later period, the non-qualifying pool is reduced first and the ring fence pool is then reduced by any balance of the loss after the non-qualifying pool has been reduced to nil.

Section 328: Reductions in respect of unrelieved group ring fence profits

1072.This section sets out how the expenditure eligible for supplement is to be reduced where there is an amount of unrelieved group ring fence profits. It is based on paragraph 22 of Schedule 19C to ICTA.

1073.The term “unrelieved group ring fence profits” is defined in section 313.

Section 329: The reference amount for a post-commencement period

1074.This section sets out how to determine the reference amount, the amount on which supplement is calculated, for the purposes of post-commencement supplement. It is based on paragraph 23 of Schedule 19C to ICTA.

Chapter 6: Supplementary charge in respect of ring fence trades
Section 330: Supplementary charge in respect of ring fence trades

1075.This section imposes an additional charge to tax on an adjusted measure of profits from the ring fence trade. It is based on section 501A(1), (2), (3) and (12) of ICTA.

1076.The adjustment to profits for this purpose is that financing costs, defined in section 331, are left out of account.

1077.Subsection (5) makes Chapter 6 subject to Chapter 7, which contains provisions that reduce the supplementary charge for certain new oil fields.

Section 331: Meaning of “financing costs” etc

1078.This section defines the term “financing costs” for the purposes of the supplementary charge. It is based on section 501A(4) to (11) of ICTA.

Section 332: Assessment, recovery and postponement of supplementary charge

1079.This section sets out the arrangements for the administration of the supplementary charge. It is based on section 501B of ICTA.

1080.The general rule is that the supplementary charge is treated for all administrative purposes as corporation tax, unless specific rules apply. In particular, this ensures that the relevant rules in TMA and in Schedule 18 to FA 1998 can apply.

Chapter 7: Reduction of supplementary charge for certain new oil fields
Overview

1081.This Chapter provides an allowance, a “field allowance”, which can reduce a company’s adjusted ring fence profits from oil and gas production in the UK and UKcontinental shelf (UKCS).

1082.The allowance is available to certain categories of new oil and gas fields in the UK/UKCS – small fields, ultra heavy oil fields and ultra high pressure/high temperature fields. Allowances from a company’s interests in all qualifying fields in an accounting period are then pooled and offset against adjusted ring fence profits. Any unused amounts in the pool are carried forward to the next accounting period.

Section 333: Reduction of adjusted ring fence profits

1083.This section provides that a company’s ring fence profits are to be reduced by the company’s pool of field allowances. It is based on paragraph 1 of Schedule 44 to FA 2009.

Section 334: Company’s pool of field allowances

1084.This section provides that a company’s pool of field allowances for an accounting period is the amount of the company’s pool of field allowances that is carried forward from the previous accounting period plus the aggregate of field allowances activated in the accounting period. It is based on paragraph 2 of Schedule 44 to FA 2009.

Section 335: Carrying part of pool of field allowances into following period

1085.This section provides the rules for determining the amount of field allowances that are carried forward into a future accounting period. It is based on paragraph 3 of Schedule 44 to FA 2009.

Section 336: Carrying whole of pool of field allowances into following period

1086.This section provides the rules for determining when the whole of the company’s pool of field allowances is carried forward into a future accounting period. It is based on paragraph 4 of Schedule 44 to FA 2009.

Section 337: Initial licensee to hold a field allowance

1087.This section provides that from the day a new oil field is licensed, a company that is an initial licensee holds a field allowance determined by the company’s equity share in the field. It is based on paragraph 5 of Schedule 44 to FA 2009.

Section 338: Holding a field allowance on acquisition of equity share

1088.This section provides a signpost to section 347(2) (acquisition of field allowance). It is based on paragraph 6 of Schedule 44 to FA 2009.

Section 339: Unactivated amount of field allowance

1089.This section provides the rules for determining the unactivated amount of field allowance when a company acquires a field allowance by virtue of section 337 (initial licensee) or section 347(2) (acquisition of field allowance). It is based on paragraph 7 of Schedule 44 to FA 2009.

Section 340: Introduction to section 341

1090.This section provides that four conditions need to be met in respect of a new oil field for the activation of field allowance where there is no change in equity share during the accounting period. It is based on paragraph 8 of Schedule 44 to FA 2009.

Section 341: Activation of field allowance

1091.This section provides the rules for determining the amount of field allowance to be activated in an accounting period when all conditions in section 340 are met. It is based on paragraph 9 of Schedule 44 to FA 2009.

Section 342: Introduction to sections 343 and 344

1092.This section deals with the situation where a company’s equity share in a new oil field changes during the accounting period and provides four conditions which need to be met for sections 343 and 344 to apply. It is based on paragraph 10 of Schedule 44 to FA 2009.

Section 343: Reference periods

1093.This section provides a definition of reference period for the purposes of section 344 where a company is not a licensee for a whole accounting period or where the equity share changes. It is based on paragraph 11 of Schedule 44 to FA 2009.

Section 344: Activation of field allowance

1094.This section provides the calculation of field allowance for each reference period. It is based on paragraph 12 of Schedule 44 to FA 2009.

Section 345: Introduction to sections 346 and 347

1095.This section deals with the treatment of transfers of field allowance and provides the conditions which need to be met for sections 346 and 347 to apply. It is based on paragraph 13 of Schedule 44 to FA 2009.

Section 346: Reduction of field allowance if equity disposed of

1096.This sectionprovides the calculation for the remaining field allowance which a company (“the transferor”) has, after it has disposed of some of the equity interest in a new oil field. It is based on paragraph 14 of Schedule 44 to FA 2009.

Section 347: Acquisition of field allowance if equity acquired

1097.This section provides the calculation of field allowance where a company (“the transferee”) acquires an equity interest in a new oil field. It is based on paragraph 15 of Schedule 44 to FA 2009.

Section 348: Adjustments

1098.This section provides that if there is any alteration in a company’s adjusted ring fence profits, necessary adjustments are made for the purposes of this Chapter. It is based on paragraph 16 of Schedule 44 to FA 2009.

Section 349: Orders

1099.This section provides that the Commissioners for HMRC can make provision about qualifying oil fields (section 352) and the amount of the total field allowance for a new oil field (section 356). It is based on paragraph 17 of Schedule 44 to FA 2009.

Section 350: “New oil field”

1100.This section provides the definition of “new oil field” for the purposes of this Chapter. It is based on paragraph 18 of Schedule 44 to FA 2009.

Section 351: “Authorisation of development of an oil field”

1101.This section provides the definition of “authorisation of development of an oil field” for the purposes of this Chapter. It is based on paragraph 19 of Schedule 44 to FA 2009.

Section 352: “Qualifying oil field”

1102.This section provides the definition of “qualifying oil field” for the purposes of this Chapter. It is based on paragraph 20 of Schedule 44 to FA 2009.

Section 353: “Small oil field”

1103.This section provides the definition of “small oil field” for the purposes of this Chapter. It is based on paragraph 21 of Schedule 44 to FA 2009.

Section 354: “Ultra heavy oil field”

1104.This section provides the definition of “ultra heavy oil field” for the purposes of this Chapter. It is based on paragraph 22 of Schedule 44 to FA 2009.

Section 355: “Ultra high pressure/high temperature oil field”

1105.This section provides the definition of “ultra high pressure/high temperature oil field” for the purposes of this Chapter. It is based on paragraph 23 of Schedule 44 to FA 2009.

Section 356: “Total field allowance for a new oil field”

1106.This section provides the definition of “total field allowance for a new oil field” for the purposes of this Chapter. It is based on paragraph 24 of Schedule 44 to FA 2009.

Section 357: Other definitions

1107.This section provides various other definitions for the purposes of this Chapter. It is based on paragraph 25 of Schedule 44 to FA 2009.

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