Finance Bill

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Session 2003 - 04
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Finance Bill

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 1 — Amendments of the Oil Taxation Act 1983 relating to allowable expenditure and disposal receipts
488

Schedule 35
Section 271

Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 1
Amendments of the Oil Taxation Act 1983 relating to allowable expenditure
and disposal receipts
5
Introductory
1
The Oil Taxation Act 1983 (c. 56) is amended in accordance with the
following provisions of this Part.
Expenditure incurred on long-term assets other than non-dedicated mobile assets
2     (1)
Section 3 (expenditure incurred on long-term assets other than non-
10
dedicated mobile assets) is amended as follows.
      (2)
In subsection (4) (whole of expenditure to be allowable, except as provided
by the provisions there specified) for “section 4” substitute “sections 3A and
4”.
Exclusion from s.3(4) of expenditure on assets giving rise to tax-exempt tariffing receipts
15
3
After section 3 insert—
“3A
Exclusion from section 3(4) of expenditure on assets giving rise to tax-
exempt tariffing receipts
(1)
This section applies where—
(a)
expenditure incurred on or after 1st January 2004 falls within
20
section 3(1) above, but
(b)
some of the use (or expected use) of the asset in relation to
which the expenditure was incurred is use in a way that gives
rise to tax-exempt tariffing receipts (see section 6A(2) below).
(2)
In any such case, such part of the expenditure as it is just and
25
reasonable to apportion to the use mentioned in subsection (1)(b)
above shall be excluded from the expenditure which is allowable as
mentioned in section 3(4) above.”.
Expenditure related to exempt gas: asset use giving rise to tax-exempt tariffing receipts
4     (1)
Section 4 (expenditure related to exempt gas and deballasting) is amended
30
as follows.
      (2)
After subsection (5) insert—
“(6)
But where—
(a)
expenditure would (apart from this subsection) fall within
paragraph (a) of subsection (5) above, and
35
(b)
the asset has, at any time in the period of 6 years ending with
the date on which the expenditure was incurred, been used in
a way that gives rise to tax-exempt tariffing receipts,

the expenditure shall not be regarded for the purposes of that
subsection as expenditure incurred in enhancing the value of the
40

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 1 — Amendments of the Oil Taxation Act 1983 relating to allowable expenditure and disposal receipts
489

asset with a view to the subsequent disposal of the asset, or of an
interest in it, to the extent that the amount of the expenditure falls to
be reduced in accordance with subsection (7) below.
(7)
The reduction is to be made by applying section 7A below in relation
to the expenditure as it applies in relation to disposal receipts in
5
respect of a disposal, but with the substitution—
(a)
for references to the disponor, of references to the person
incurring the expenditure (“the relevant participator”),
(b)
for references to the amount or value (apart from that section)
of any disposal receipts of the disponor in respect of the
10
disposal, of references to the amount which would, apart
from subsection (6) above, be the amount of the expenditure
incurred by the relevant participator with a view to the
subsequent disposal of the asset or of an interest in it,
(c)
for references to the interest disposed of, of references to the
15
asset or interest whose subsequent disposal gives or is
expected to give rise to disposal receipts,
(d)
for references to the date of the disposal, of references to the
date on which the expenditure was incurred,

and taking the reference in subsection (6)(b) of that section to a
20
reduction made by virtue of that section as a reference to a reduction
made by virtue of that section for the purposes of section 7(9) of this
Act.”.
Disposal receipts from assets used in a way that gives rise to tax-exempt tariffing receipts
5     (1)
Section 7 (chargeable receipts from disposals) is amended as follows.
25
      (2)
In subsection (4) (no account to be taken of disposal more than 2 years after
cessation of use in connection with any oil field whatsoever or to give rise to
tariff receipts)—
(a)
at the end of paragraph (b) insert “or
(c)
ceases to give rise to tax-exempt tariffing receipts of
30
that participator,”; and
(b)
in the closing words, for “later” substitute “latest”.
      (3)
After subsection (8) insert—
“(9)
In determining the amount or value of the disposal receipts of the
participator in question in a case where the qualifying asset has been
35
used in a way that gives rise to tax-exempt tariffing receipts, the
amount or value (apart from this subsection) of any disposal receipts
of his in respect of the disposal shall be reduced in accordance with
section 7A below.”.
      (4)
After section 7 insert—
40
“7A
Reduction of disposal receipts: use giving rise to tax-exempt tariffing
receipts
(1)
Where this section applies, the amount or value (apart from this
section) of any disposal receipts of the participator (“the disponor”)
in respect of the disposal shall be reduced in accordance with the
45
following provisions of this section.

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 1 — Amendments of the Oil Taxation Act 1983 relating to allowable expenditure and disposal receipts
490

(2)
The reduction is to be made by multiplying that amount or value by
the fraction that is equal to—
(3)
In that formula—

T is the aggregate of the tax-exempt tariffing use of the asset in
the reference period by—
5
(a)
the disponor, so far as referable to the interest
disposed of, and
(b)
each of the previous owners, so far as referable to that
previous owner’s represented interest, and

A is the aggregate of all use of the asset in the reference period
10
by—
(a)
the disponor, so far as referable to the interest
disposed of, and
(b)
each of the previous owners, so far as referable to that
previous owner’s represented interest,
15

but only taking into account for this purpose use of the asset by a
person at a time when he is or was a participator in a taxable field.
(4)
For the purposes of this section—

“the interest disposed of” means the asset, or the interest in an
asset, the disposal of which gives rise to the disposal receipts
20
mentioned in sub-paragraph (1) above;

“previous owner” means any person from whom the disponor
directly or indirectly derives his title to the whole or any part
of the interest disposed of;

“the reference period” means the shortest of the following
25
periods ending with the date of the disposal—
(a)
the period of 6 years; or
(b)
the period beginning with the bringing into existence
of the asset;

“represented interest”, in the case of a previous owner, means
30
so much of the interest which that previous owner had in the
asset as is represented in the interest disposed of;

“tax-exempt tariffing use”, in relation to an asset, means use of
the asset in a way that gives rise to tax-exempt tariffing
receipts.
35
(5)
Any apportionment that falls to be made for the purpose of
determining a previous owner’s represented interest shall be made
using a method which is just and reasonable, having regard to—
(a)
the proportion of any person’s interest that was acquired
from any particular person, and
40
(b)
the proportion of any person’s interest that was transferred
to any particular person.
(6)
Where—

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 1 — Amendments of the Oil Taxation Act 1983 relating to allowable expenditure and disposal receipts
491

(a)
the disponor or any previous owner acquired the asset or an
interest in the asset from another person, and
(b)
on that other person’s corresponding disposal of the asset or
interest a reduction was made by virtue of this section,

use of the asset shall not be brought into account in determining T or
5
A in the formula in subsection (2) above to the extent that it was so
brought into account in relation to that corresponding disposal.
(7)
Where paragraph 9 of Schedule 2 to this Act (reduction of disposal
receipts in respect of brought-in assets) applies in relation to an asset,
no account shall be taken for the purposes of this section of any use
10
of the asset during the initial period.

In this subsection “the initial period”, in relation to an asset, has the
same meaning as it has in relation to that asset in paragraph 7 of
Schedule 1 to this Act (restriction on allowable expenditure on
brought-in asset).
15
(8)
For the purposes of this section, the amount of use of an asset—
(a)
where the use is in relation to oil, is to be determined by
reference to the volume of oil in relation to which the asset is
used, and
(b)
where the use is otherwise than in relation to oil, is to be
20
determined on a just and reasonable basis.
(9)
For the purposes of this section, the extent to which use of an asset is
referable to—
(a)
the interest disposed of, or
(b)
the represented interest of a previous owner,
25

shall be determined on a just and reasonable basis, having regard to
the size of the interest in question and the size from time to time of
the whole interest in the asset of the disponor or, as the case may be,
that previous owner.”.
Assets no longer in use for the principal field
30
6     (1)
In Schedule 1 (allowable expenditure) in Part 1 (extensions of allowable
expenditure for assets generating receipts) paragraph 3 is amended as
follows.
      (2)
After sub-paragraph (2) insert—
“(2A)
But where—
35
(a)
the expenditure would (apart from this sub-paragraph) be
regarded as incurred with a view to the subsequent disposal
of the asset or of an interest in it, and
(b)
the asset has, at any time in the period of 6 years ending with
the date on which the expenditure was incurred, been used in
40
a way that gives rise to tax-exempt tariffing receipts,

the expenditure shall not be regarded for the purposes of this
paragraph as expenditure incurred with a view to the subsequent
disposal of the asset or of an interest in it, to the extent that the
amount of the expenditure falls to be reduced in accordance with
45
sub-paragraph (2B) below.

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 1 — Amendments of the Oil Taxation Act 1983 relating to allowable expenditure and disposal receipts
492

(2B)
The reduction is to be made by applying section 7A of this Act in
relation to the expenditure as it applies in relation to disposal
receipts in respect of a disposal, but with the substitution—
(a)
for references to the disponor, of references to the
participator incurring the expenditure (“the relevant
5
participator”),
(b)
for references to the amount or value (apart from that section)
of any disposal receipts of the disponor in respect of the
disposal, of references to the amount which would, apart
from sub-paragraph (2A) above, be the amount of the
10
expenditure incurred by the relevant participator with a view
to the subsequent disposal of the asset or of an interest in it,
(c)
for references to the interest disposed of, of references to the
asset or interest whose subsequent disposal gives or is
expected to give rise to disposal receipts,
15
(d)
for references to the date of the disposal, of references to the
date on which the expenditure was incurred,

and taking the reference in subsection (6)(b) of that section to a
reduction made by virtue of that section as a reference to a reduction
made by virtue of that section for the purposes of section 7(9) of this
20
Act.”.
Brought-in assets
7     (1)
In Part 2 of Schedule 1, paragraph 7 is amended as follows.
      (2)
In sub-paragraph (1)(c) (use of asset otherwise than in connection with a
taxable field between acquisition etc and first use in connection with oil
25
field)—
(a)
after “was used” insert “(i)”;
(b)
after “otherwise than in connection with a taxable field,” insert “or”;
(c)
after the word “or” so inserted, insert the following sub-paragraph—
“(ii)
in connection with a taxable field in a way that
30
gives rise to tax-exempt tariffing receipts,”.
Subsequent use of new asset otherwise than in connection with a taxable field
8     (1)
In Part 2 of Schedule 1, paragraph 8 is amended as follows.
      (2)
In sub-paragraph (3) (asset giving rise to tariff receipts attributable to taxable
field treated as used in connection with a taxable field)—
35
(a)
after “gives rise to” insert “(a)”;
(b)
after “attributable to a taxable field,” insert “or”;
(c)
after the word “or” so inserted, insert the following paragraph—
“(b)
tax-exempt tariffing receipts which, if they were tariff
receipts (and expenditure were or had been allowable
40
accordingly), would be tariff receipts of the purchaser
attributable to a taxable field,”.
      (3)
In sub-paragraph (5) (chargeable period to be determined in relation to field
in respect of which asset last gave rise to tariff receipts of purchaser etc) at
the end of paragraph (b) insert “or
45
(c)
if it is later than paragraph (a) and (where otherwise
applicable) paragraph (b) above, in respect of which the asset

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 2 — Transitional provision
493

would have last given rise to tariff receipts of the purchaser
had tax-exempt tariffing receipts of the purchaser been tariff
receipts of his (and if expenditure were or had been allowable
accordingly);”.
Part 2
5
Transitional provision
Expenditure incurred in transitional period: restriction of tax-exempt tariffing receipts
9     (1)
In this paragraph—
“claim period” has the same meaning as in Part 1 of the Oil Taxation
Act 1975 (c. 22);
10
“relevant receipts” means each of the following—
(a)
tax-exempt tariffing receipts;
(b)
amounts that would be tax-exempt tariffing receipts apart
from sub-paragraph (4);
“the transitional period” means the period—
15
(a)
beginning with 9th April 2003, and
(b)
ending with 31st December 2003.
      (2)
This paragraph applies where—
(a)
expenditure was incurred in the transitional period by a participator
in an oil field in acquiring, bringing into existence or enhancing the
20
value of an asset,
(b)
the asset is one whose useful life continues, or is expected to
continue, after the end of the claim period in which the expenditure
was incurred,
(c)
the expenditure is allowable for a claim period ending after 9th April
25
2003,
(d)
at the time the expenditure was incurred, the asset was being, or was
expected to be, used to any extent in relation to—
(i)
an oil field or foreign field (a “user field”), or
(ii)
oil won from such a field, and
30
(e)
that use (or expected use) is use in such a way as, in a chargeable
period ending on or after 30th June 2004, gives rise, or would have
given rise, to relevant receipts of the participator or, where sub-
paragraph (3) applies, of a successor.
      (3)
This sub-paragraph applies where—
35
(a)
after the incurring of the expenditure, there is or has been a transfer
of an interest of the participator’s in the asset, and
(b)
as a result of that transfer (or of any subsequent transfer of the whole
or any part of that interest), relevant receipts (“consequential
relevant receipts”) arise, or are expected to arise, to a person (a
40
“successor”) who is a participator in an oil field.
      (4)
In the case of each user field, the initial portion of the aggregate of the
relevant receipts of the participator, and the consequential relevant receipts
of each successor, that are referable to—
(a)
use of the asset in relation to that field or oil won from it, or
45

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 3 — Amendments of the Taxes Act 1988
494

(b)
the provision of services or other business facilities of whatever kind
in connection with any such use of the asset (otherwise than by the
participator or the successor himself),

shall not be tax-exempt tariffing receipts (and shall accordingly continue to
be tariff receipts).
5
      (5)
In this paragraph—
“the initial portion”, in relation to the aggregate of any relevant
receipts, means so much of that aggregate as does not exceed the
qualifying threshold for the user field in question;
and for this purpose amounts received or receivable at an earlier
10
date are to be attributed to the initial portion before amounts
received or receivable at a later date;
“the qualifying threshold”, in relation to a user field, means an
amount equal to such part of the aggregate of the expenditure—
(a)
incurred by the participator in relation to the asset in
15
question, and
(b)
falling within sub-paragraph (2),
as it is just and reasonable to apportion to the use (or expected use)
of the asset, in relation to that user field or oil won from it, in a way
that gives rise to relevant receipts of the participator or
20
consequential relevant receipts of any successor.
      (6)
Expressions used in this paragraph and in section 6A of the Oil Taxation Act
1983 (c. 56) have the same meaning in this paragraph as they have in that
section.
Part 3
25
Amendments of the Taxes Act 1988
Introductory
10
The Taxes Act 1988 is amended in accordance with the following provisions
of this Part.
Section 496: treatment of tax-exempt tariffing receipts for income and corporation tax
30
11    (1)
Section 496 (tariff receipts) is amended as follows.
      (2)
In subsection (1)(a) (tariff receipts to be treated as receipts of the separate
trade referred to in section 492(1)) after “tariff receipt” insert “or tax-exempt
tariffing receipt”.
      (3)
In subsection (2) (activities of participator etc giving rise to tariff receipts to
35
be treated as oil extraction activities) after “tariff receipts” insert “or tax-
exempt tariffing receipts”.
      (4)
In subsection (3) (disregard of certain sums in fact received or receivable by
person connected with participator)—
(a)
in the opening words, after “tariff receipt” insert “or tax-exempt
40
tariffing receipt”;
(b)
in paragraph (b), after “tariff receipt” insert “or tax-exempt tariffing
receipt”.
      (5)
In consequence of the amendments made by this paragraph, the sidenote to
the section becomes “Tariff receipts and tax-exempt tariffing receipts”.
45