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Session 2002 - 03
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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
518

      (2)
After sub-paragraph (2) insert—
“(2A)
But where—
(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
5
(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 this
paragraph as expenditure incurred with a view to the subsequent
10
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
sub-paragraph (2B) below.
(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
15
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
participator”),
(b)
for references to the amount or value (apart from that section)
20
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
expenditure incurred by the relevant participator with a view
to the subsequent disposal of the asset or of an interest in it,
25
(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,
(d)
for references to the date of the disposal, of references to the
date on which the expenditure was incurred,
30

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
Act.”.
Brought-in assets
35
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
field)—
(a)
after “was used” insert “(i)”;
40
(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
gives rise to tax-exempt tariffing receipts,”.
Subsequent use of new asset otherwise than in connection with a taxable field
45
8     (1)
In Part 2 of Schedule 1, paragraph 8 is amended as follows.

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 2 — Transitional provision
519

      (2)
In sub-paragraph (3) (asset giving rise to tariff receipts attributable to taxable
field treated as used in connection with a taxable field)—
(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—
5
“(b)
tax-exempt tariffing receipts which, if they were tariff
receipts (and expenditure were or had been allowable
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
10
in respect of which asset last gave rise to tariff receipts of purchaser etc) at
the end of paragraph (b) insert “or
(c)
if it is later than paragraph (a) and (where otherwise
applicable) paragraph (b) above, in respect of which the asset
would have last given rise to tariff receipts of the purchaser
15
had tax-exempt tariffing receipts of the purchaser been tariff
receipts of his (and if expenditure were or had been allowable
accordingly);”.
Part 2
Transitional provision
20
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);
“relevant receipts” means each of the following—
25
(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—
(a)
beginning with 9th April 2003, and
30
(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
value of an asset,
35
(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
2003,
40
(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
(e)
that use (or expected use) is use in such a way as, in a chargeable
45
period ending on or after 30th June 2004, gives rise, or would have

Finance Bill
Schedule 35 — Oil taxation: tax-exempt tariffing receipts and assets producing them
Part 3 — Amendments of the Taxes Act 1988
520

given rise, to relevant receipts of the participator or, where sub-
paragraph (3) applies, of a successor.
      (3)
This sub-paragraph applies where—
(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
5
(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
“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
10
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
(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
15
participator or the successor himself),

shall not be tax-exempt tariffing receipts (and shall accordingly continue to
be tariff receipts).
      (5)
In this paragraph—
“the initial portion”, in relation to the aggregate of any relevant
20
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
date are to be attributed to the initial portion before amounts
received or receivable at a later date;
25
“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
question, and
(b)
falling within sub-paragraph (2),
30
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
consequential relevant receipts of any successor.
      (6)
Expressions used in this paragraph and in section 6A of the Oil Taxation Act
35
1983 (c. 56) have the same meaning in this paragraph as they have in that
section.
Part 3
Amendments of the Taxes Act 1988
Introductory
40
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
11    (1)
Section 496 (tariff receipts) is amended as follows.

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
521

      (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
be treated as oil extraction activities) after “tariff receipts” insert “or tax-
5
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
tariffing receipt”;
10
(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”.
Part 4
15
Amendments of other enactments
Finance Act 1999
Qualifying assets
12    (1)
Section 98 of the Finance Act 1999 (c. 16) is amended as follows.
      (2)
After the words “tariff receipts”, in each place where they occur, insert “, tax-
20
exempt tariffing receipts”.
      (3)
After subsection (6) insert—
“(6A)
In relation to tax-exempt tariffing receipts, any reference in this
section—
(a)
to being attributable to a field for a period, or
25
(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
Section 280

Schedule to be inserted as Schedule 19B to the Taxes Act 1988
30

The following is the Schedule to be inserted as Schedule 19B to the Taxes Act

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
522

1988—
“Schedule 19B
Section 496A

Petroleum extraction activities: exploration expenditure supplement
Part 1
Introductory
5
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
after 1st January 2004, to a supplement (initially of 6%, but
variable by Treasury order) in respect of—
10
(a)
qualifying capital expenditure incurred before the trade is
set up and commenced,
(b)
losses incurred in the trade, determined by reference to
allowances under Part 6 of the Capital Allowances Act
(expenditure on research and development) in respect of
15
qualifying capital expenditure, and
(c)
some or all of the supplement allowed in respect of earlier
periods.
      (2)
To qualify, the capital expenditure in question must be incurred
on or after 1st January 2004 in respect of oil and gas exploration
20
and appraisal (as well as satisfying other conditions).
      (3)
Part 2 makes provision about the application and interpretation of
this Schedule.
      (4)
Part 3 makes provision about supplement in relation to
expenditure incurred by the company—
25
(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.
      (5)
Part 4 makes provision about supplement in relation to losses
incurred in carrying on the ring fence trade.
30
      (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
fall to be made in respect of—
(a)
disposal receipts by virtue of section 555 of the Capital
35
Allowances Act (disposal of oil licence with exploitation
value),
(b)
ring fence losses that could be set off under section 393A
against ring fence profits of earlier periods,
(c)
ring fence losses incurred in earlier periods that fall to be
40
set off under section 393 against profits of succeeding
periods,
(d)
unrelieved group ring fence profits.

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
523

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
5
(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
10
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
15
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—
20
(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—
25
(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.
30
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) for such accounting periods as may
35
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
40
not be consecutive.

Finance Bill
Schedule 36 — Schedule to be inserted as Schedule 19B to the Taxes Act 1988
524

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.
      (2)
Condition 1 is that the expenditure is incurred on or after 1st
5
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
exploration and appraisal (see section 437(2)(b) of that Act).
10
      (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.
      (6)
Condition 5 is that—
15
(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
research and development.
20
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
25
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
30
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—
35
(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.
40
      (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
45
taxable ring fence profits for its accounting period that is
attributable, on an apportionment in accordance with