Finance Bill

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Session 2003 - 04
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Finance Bill

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
495

Part 4
Amendments of other enactments
Finance Act 1999
Qualifying assets
12    (1)
Section 98 of the Finance Act 1999 (c. 16) is amended as follows.
5
      (2)
After the words “tariff receipts”, in each place where they occur, insert “, tax-
exempt tariffing receipts”.
      (3)
After subsection (6) insert—
“(6A)
In relation to tax-exempt tariffing receipts, any reference in this
section—
10
(a)
to being attributable to a field for a period, or
(b)
to being referable to an asset,

shall be construed as if tax-exempt tariffing receipts were tariff
receipts (and expenditure were or had been allowable accordingly).”.
Schedule 36
15
Section 272

Schedule to be inserted as Schedule 19B to the Taxes Act 1988

The following is the Schedule to be inserted as Schedule 19B to the Taxes Act
1988—
“Schedule 19B
Petroleum extraction activities: exploration expenditure supplement
20
Part 1
Introductory
About this Schedule
1     (1)
This Schedule entitles a company carrying on a ring fence trade,
on making a claim in respect of an accounting period ending on or
25
after 1st January 2004, to a supplement (initially of 6%, but
variable by Treasury order) in respect of—
(a)
qualifying capital expenditure incurred before the trade is
set up and commenced,
(b)
losses incurred in the trade, determined by reference to
30
allowances under Part 6 of the Capital Allowances Act
(expenditure on research and development) in respect of
qualifying capital expenditure, and
(c)
some or all of the supplement allowed in respect of earlier
periods.
35

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
496

      (2)
To qualify, the capital expenditure in question must be incurred
on or after 1st January 2004 in respect of oil and gas exploration
and appraisal (as well as satisfying other conditions).
      (3)
Part 2 makes provision about the application and interpretation of
this Schedule.
5
      (4)
Part 3 makes provision about supplement in relation to
expenditure incurred by the company—
(a)
with a view to carrying on a ring fence trade, but
(b)
in an accounting period before the company sets up and
commences that trade.
10
      (5)
Part 4 makes provision about supplement in relation to losses
incurred in carrying on the ring fence trade.
      (6)
There is a limit on the number of accounting periods (6) in respect
of which a company may claim supplement.
      (7)
In determining the amount of supplement allowable, reductions
15
fall to be made in respect of—
(a)
disposal receipts by virtue of section 555 of the Capital
Allowances Act (disposal of oil licence with exploitation
value),
(b)
ring fence losses that could be set off under section 393A
20
against ring fence profits of earlier periods,
(c)
ring fence losses incurred in earlier periods that fall to be
set off under section 393 against profits of succeeding
periods,
(d)
unrelieved group ring fence profits.
25
Part 2
Application and interpretation
Qualifying companies
2
This Schedule applies in relation to any company which—
(a)
carries on a ring fence trade, or
30
(b)
is engaged in oil and gas exploration and appraisal (see
section 837B) with a view to carrying on a ring fence trade,

and in this Schedule any such company is referred to as a
“qualifying company”.
Accounting periods
35
3     (1)
In this Schedule, in the case of any qualifying company,—
“the commencement period” means the accounting period
in which the company sets up and commences its ring
fence trade;
“post-commencement period” means any accounting
40
period ending on or after 1st January 2004—
(a)
which is the commencement period, or
(b)
which ends after the commencement period;
“pre-commencement period” means any accounting period
ending—
45

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
497

(a)
on or after 1st January 2004, and
(b)
before the commencement period.
      (2)
For the purposes of this Schedule a company not within the charge
to corporation tax which incurs qualifying E&A expenditure is to
be treated as having such accounting periods as it would have if—
5
(a)
it carried on a trade consisting of the activities in respect of
which the expenditure is incurred, and
(b)
it had started to carry on that trade when it started to carry
on the research and development on which the
expenditure is incurred.
10
The relevant percentage
4     (1)
For the purposes of this Schedule, the relevant percentage for any
accounting period ending on or after 1st January 2004 is 6%.
      (2)
The Treasury may by order vary the percentage for the time being
specified in sub-paragraph (1) above for such accounting periods
15
as may be specified in the order.
Limit on number of accounting periods for which supplement may be claimed
5     (1)
A company may claim supplement under this Schedule in respect
of no more than 6 accounting periods.
      (2)
The accounting periods in respect of which claims are made need
20
not be consecutive.
Qualifying E&A expenditure
6     (1)
For the purposes of this Schedule “qualifying E&A expenditure” is
any expenditure as respects which the following conditions are
satisfied.
25
      (2)
Condition 1 is that the expenditure is incurred on or after 1st
January 2004.
      (3)
Condition 2 is that, for the purposes of Part 6 of the Capital
Allowances Act, the expenditure is qualifying expenditure
incurred on research and development consisting of oil and gas
30
exploration and appraisal (see section 437(2)(b) of that Act).
      (4)
Condition 3 is that an allowance under section 441 of that Act is
claimed in respect of the expenditure.
      (5)
Condition 4 is that the expenditure is incurred in the course of oil
extraction activities.
35
      (6)
Condition 5 is that—
(a)
those oil extraction activities are comprised in a ring fence
trade, or
(b)
after incurring the expenditure, the person incurring it sets
up and commences a ring fence trade connected with the
40
research and development.

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
498

Unrelieved group ring fence profits for accounting periods
7     (1)
There is an amount of unrelieved group ring fence profits for an
accounting period of a qualifying company (“company Q”) in any
case where—
(a)
the company and any other company (“company X”) are
5
members of the same group of companies, within the
meaning given by section 413(3)(a), and
(b)
company X has an amount of taxable ring fence profits (see
paragraph 8) for a corresponding accounting period.
      (2)
An accounting period of company X corresponds to an accounting
10
period of company Q if—
(a)
it coincides with, or falls wholly within, the accounting
period of company Q, or
(b)
it falls partly within the accounting period of company Q.
      (3)
Where an accounting period of company X—
15
(a)
coincides with an accounting period of company Q, or
(b)
falls wholly within an accounting period of company Q,

there is, for the accounting period of company Q, an amount of
unrelieved group ring fence profits equal to the whole of company
X’s taxable ring fence profits for its accounting period.
20
      (4)
Where an accounting period of company X falls partly within an
accounting period of company Q—
(a)
there is an amount of unrelieved group ring fence profits
for the accounting period of company Q, and
(b)
that amount is an amount equal to the part of company X’s
25
taxable ring fence profits for its accounting period that is
attributable, on an apportionment in accordance with
section 834(4), to the part of that period which falls within
the accounting period of company Q.
      (5)
This paragraph applies for the purposes of this Schedule.
30
Taxable ring fence profits of an accounting period
8
For the purposes of this Schedule, a company has taxable ring
fence profits for an accounting period if it has an amount of ring
fence profits which is chargeable to corporation tax for that
accounting period after any group relief claimed under Chapter 4
35
of Part 10.
Part 3
Pre-commencement supplement
Supplement in respect of a pre-commencement accounting period
9     (1)
Where—
40
(a)
a qualifying company claims an allowance under section
441 of the Capital Allowances Act (research and
development allowances) for the commencement period,
and

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
499

(b)
the claim is for an allowance in respect of qualifying E&A
expenditure incurred before that period,

the company may also claim supplement under this Part of this
Schedule (“pre-commencement supplement”) in respect of one or
more pre-commencement periods.
5
      (2)
Any pre-commencement supplement allowed on a claim in
respect of a pre-commencement period shall be treated as an
allowance under Part 6 of the Capital Allowances Act for the
commencement period in respect of qualifying E&A expenditure
incurred by the company.
10
      (3)
The amount of the supplement for any pre-commencement period
in respect of which a claim under this paragraph is made is the
relevant percentage for that period of the reference amount for
that period.
      (4)
If the pre-commencement period is a period of less than twelve
15
months, the amount of the supplement for the period (apart from
this sub-paragraph) shall be reduced proportionally.
      (5)
Paragraphs 10 to 13 have effect for the purpose of determining the
reference amount for a pre-commencement period.
The mixed pool of qualifying E&A expenditure and supplement previously allowed
20
10    (1)
For the purpose of determining the amount of any pre-
commencement supplement, a qualifying company shall be taken
to have had, at all times in the pre-commencement periods of the
company, a continuing mixed pool of qualifying E&A expenditure
and pre-commencement supplement.
25
      (2)
The pool shall be taken to have consisted of—
(a)
the company’s qualifying E&A expenditure, allocated to
the pool for each pre-commencement period in accordance
with sub-paragraph (3), and
(b)
the company’s pre-commencement supplement, allocated
30
to the pool for each pre-commencement period in
accordance with sub-paragraph (4).
      (3)
To allocate qualifying E&A expenditure to the pool for any pre-
commencement period, take the following steps—
(a)
Step 1: count as eligible expenditure for that period so
35
much of the qualifying E&A expenditure mentioned in
paragraph 9(1)(b) as was incurred in that period,
(b)
Step 2: find the total of all the eligible expenditure for that
period (amount E),
(c)
Step 3: if paragraph 11 applies, reduce amount E in
40
accordance with that paragraph,
(d)
Step 4: if paragraph 12 applies, reduce (or, as the case may
be, further reduce) amount E in accordance with that
paragraph,

and so much of amount E as remains after making those
45
reductions shall be taken to have been added to the pool in that
period.
      (4)
If any pre-commencement supplement is allowed on a claim in
respect of a pre-commencement period, the amount of that

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
500

supplement shall be taken to have been added to the pool in that
period.
Treatment of disposal value on disposal of oil licence with exploitation value
11    (1)
This paragraph applies in any case where—
(a)
the qualifying company disposes of an interest in an oil
5
licence in a pre-commencement period,
(b)
part of the value of the interest (the “deductible amount”)
is attributable to qualifying E&A expenditure incurred by
the company, and
(c)
section 555 of the Capital Allowances Act (disposal of oil
10
licence with exploitation value) has effect in relation to the
disposal.
      (2)
For the purpose of allocating qualifying E&A expenditure to the
pool for each pre-commencement period—
(a)
find the total of the deductible amounts in the case of all
15
such disposals made by the company (amount D), and
(b)
taking later periods before earlier periods, reduce (but not
below nil) amount E for any pre-commencement period by
setting against it so much of amount D as does not fall to
be set against amount E for a later pre-commencement
20
period.
      (3)
In this paragraph “oil licence” has the same meaning as in section
555 of the Capital Allowances Act (see section 552(1) of that Act).
Reduction in respect of unrelieved group ring fence profits
12    (1)
This paragraph applies if there is an amount of unrelieved group
25
ring fence profits for a pre-commencement period.
      (2)
For the purpose of allocating qualifying E&A expenditure to the
pool for that period—
(a)
find so much (if any) of amount E for that period as
remains after any reduction falling to be made under
30
paragraph 11, and
(b)
reduce that amount (but not below nil) by setting against it
a sum equal to the aggregate of the amounts of unrelieved
group ring fence profits for the period.
The reference amount for a pre-commencement period
35
13
For the purposes of this Part of this Schedule, the reference
amount for a pre-commencement period is the amount in the pool
at the end of the period—
(a)
after the addition to the pool of any qualifying E&A
expenditure allocated to the pool for that period in
40
accordance with paragraph 10(3), but
(b)
before determining, and adding to the pool, the amount of
any pre-commencement supplement claimed in respect of
the period.

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
501

Claims for pre-commencement supplement
14    (1)
Any claim for pre-commencement supplement in respect of a pre-
commencement period must be made at the same time as, and as
if it were part of, the claim under section 441 of the Capital
Allowances Act mentioned in paragraph 9(1)(a).
5
      (2)
Subsection (3) of that section (claim for reduced amount) applies
in relation to any such claim.
Part 4
Post-commencement supplement
Supplement in respect of a post-commencement period
10
15    (1)
A qualifying company which incurs a qualifying E&A loss (see
paragraph 17) in a post-commencement period may claim
supplement under this Part of this Schedule (“post-
commencement supplement”) in respect of—
(a)
that period, or
15
(b)
any subsequent accounting period in which it carries on its
ring fence trade.
      (2)
Any post-commencement supplement allowed on a claim in
respect of a post-commencement period shall be treated for the
purposes of the Corporation Tax Acts (other than this Part of this
20
Schedule) as if it were a loss—
(a)
incurred in carrying on the ring fence trade in that period,
(b)
which falls in whole to be set off under section 393 against
trading income from the ring fence trade in succeeding
accounting periods.
25
      (3)
Paragraph 74 of Schedule 18 to the Finance Act 1998 (company tax
returns etc: time limit for claims for group relief) shall apply in
relation to a claim for post-commencement supplement as it
applies in relation to a claim for group relief.
Amount of post-commencement supplement for a post-commencement period
30
16    (1)
The amount of the post-commencement supplement for any post-
commencement period in respect of which a claim under
paragraph 15 is made is the relevant percentage for that period of
the reference amount for that period.
      (2)
If the post-commencement period is a period of less than twelve
35
months, the amount of the supplement for the period (apart from
this sub-paragraph) shall be reduced proportionally.
      (3)
Paragraphs 19 to 24 have effect for the purpose of determining the
reference amount for a post-commencement period.
Ring fence losses and qualifying E&A losses
40
17    (1)
Where—