Finance (No.2) Bill

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Session 2005 - 06
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Finance (No.2) Bill

Finance (No.2) Bill
Schedule 18 — Oil taxation: market value of oil
Part 2 — Amendments of other enactments
361

      (2)
Omit paragraph 5 (which contains amendments making provision for
certain amounts to be multiplied by a fraction greater than unity, and has not
been brought into force).
      (3)
The amendment made by this paragraph has effect for chargeable periods
beginning on or after 1st July 2006.
5
Income and Corporation Taxes Act 1988
Valuation of oil disposed of or appropriated in certain circumstances.
12    (1)
Section 493 of ICTA (valuation of oil disposed of or appropriated in certain
circumstances) is amended as follows.
      (2)
Before subsection (1) insert—
10
“(A1)
Where a person disposes of any oil in a sale at arm’s length, as
defined in paragraph 1 of Schedule 3 to the Oil Taxation Act 1975
(“the 1975 Act”), and does so in circumstances such that the price
received or receivable—
(a)
falls to be taken into account under section 2(5)(a) of that Act
15
in computing for the purposes of petroleum revenue tax the
assessable profit or allowable loss accruing to him in any
chargeable period from an oil field, or
(b)
would fall to be so taken into account, had the oil field from
which the oil was won been a taxable field, as defined in
20
section 185 of the Finance Act 1993,

section 2(5A) of the 1975 Act is to apply in determining the amount
which that person is to bring into account for all purposes of income
tax, and for the purposes of the charge of corporation tax on income,
in respect of that disposal as it applies (or would apply) for the
25
purposes of petroleum revenue tax.”.
      (3)
In subsection (1)—
(a)
omit “in a particular month”, and
(b)
for “the Oil Taxation Act 1975 (“the 1975 Act”)” substitute “the 1975
Act”.
30
      (4)
In subsection (2), omit “in a particular month”.
      (5)
In subsection (3), omit “in the calendar month in which the disposal was
made”.
      (6)
In subsection (4), omit “in the calendar month in which it was appropriated”.
      (7)
For subsection (5) substitute—
35
“(5)
For the purposes of subsections (3) and (4) above, paragraph 2 of
Schedule 3 to the 1975 Act shall apply as it applies for the purposes
of Part 1 of that Act, but with the following modifications—
(a)
sub-paragraph (4) shall be treated as omitted;
(b)
any reference in paragraphs 2 and 2A to oil being relevantly
40
appropriated shall be construed as a reference to its being
appropriated as mentioned in section 493(4) of the Taxes Act;
and
(c)
any reference in paragraph 2 to the notional delivery day for
the actual oil shall be construed as a reference to the day on
45

Finance (No.2) Bill
Schedule 19 — Schedule to be inserted as Schedule 19C to ICTA
362

which the oil is disposed of or appropriated as mentioned in
subsection (3) or (4) above.”.
Schedule 19
Section 155

Schedule to be inserted as Schedule 19C to ICTA

The following is the Schedule to be inserted as Schedule 19C to ICTA—
5
“Schedule 19C
Section 496B

Petroleum extraction activities: ring fence expenditure supplement
Part 1
Introductory
About this Schedule
10
1     (1)
This Schedule entitles a company carrying on a ring fence trade,
on making a claim in respect of an accounting period beginning on
or after 1st January 2006, to a supplement (initially of 6%, but
variable by Treasury order) in respect of—
(a)
qualifying pre-commencement expenditure incurred
15
before the trade is set up and commenced,
(b)
losses incurred in the trade, and
(c)
some or all of the supplement allowed in respect of earlier
periods.
      (2)
Part 2 makes provision about the application and interpretation of
20
this Schedule.
      (3)
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
25
commences that trade.
      (4)
Part 4 makes provision about supplement in relation to losses
incurred in carrying on the ring fence trade.
      (5)
There is a limit on the number of accounting periods (6) in respect
of which a company may claim supplement.
30
      (6)
In determining the amount of supplement allowable, reductions
fall to be made in respect of—
(a)
disposal receipts in respect of any asset representing
qualifying pre-commencement expenditure,
(b)
ring fence losses that could be set off under section 393A
35
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.
40

Finance (No.2) Bill
Schedule 19 — Schedule to be inserted as Schedule 19C to ICTA
363

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 any activities 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 period
15
beginning on or after 1st January 2006—
(a)
which is the commencement period, or
(b)
which ends after the commencement period;
“pre-commencement period” means any accounting
period—
20
(a)
beginning on or after 1st January 2006, and
(b)
ending before the commencement period.
      (2)
For the purposes of this Schedule a company not within the charge
to corporation tax which incurs any 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 activities in the course of which the expenditure is
incurred.
30
      (3)
In the case of an accounting period (a “straddling period”) of any
qualifying company beginning before 1st January 2006 and ending
on or after that date—
(a)
so much of the straddling period as falls before 1st January
2006, and
35
(b)
so much of the straddling period as falls on or after that
date,

are treated as separate accounting periods for the purposes of this
Schedule.
      (4)
But special provision is made elsewhere in this Schedule in
40
relation to straddling periods (see paragraphs 5, 18 and 21(4) to
(6)).

Finance (No.2) Bill
Schedule 19 — Schedule to be inserted as Schedule 19C to ICTA
364

The relevant percentage
4     (1)
For the purposes of this Schedule, the relevant percentage for any
accounting period beginning on or after 1st January 2006 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
5
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
10
not be consecutive.
      (3)
A claim for supplement by the company under Schedule 19B
(exploration expenditure supplement) in respect of an accounting
period is to count for the purposes of this paragraph as a claim for
supplement under this Schedule in respect of that accounting
15
period.
      (4)
But, if the company makes a claim for supplement under this
Schedule in respect of the deemed accounting period, any claim
for supplement by the company under Schedule 19B in respect of
the Schedule 19B deemed accounting period is to be ignored for
20
the purposes of this paragraph.
      (5)
For this purpose—
“the deemed accounting period” means the deemed
accounting period under paragraph 3(3) beginning on 1st
January 2006, and
25
“the Schedule 19B deemed accounting period” means the
deemed accounting period under paragraph 3(3) of
Schedule 19B ending before 1st January 2006.
Qualifying pre-commencement expenditure
6     (1)
For the purposes of this Schedule, expenditure is “qualifying pre-
30
commencement expenditure” if it meets conditions A to D.
      (2)
Condition A is that the expenditure is incurred on or after 1st
January 2006.
      (3)
Condition B is that the expenditure is incurred in the course of oil
extraction activities.
35
      (4)
Condition C is that the expenditure is incurred by a person with a
view to carrying on a ring fence trade but before the person sets up
and commences the ring fence trade.
      (5)
Condition D is that the expenditure—
(a)
is subsequently allowable as a deduction in calculating the
40
profits of the ring fence trade for the commencement
period (whether or not any part of it is so allowable for any
post-commencement period), or

Finance (No.2) Bill
Schedule 19 — Schedule to be inserted as Schedule 19C to ICTA
365

(b)
is relevant R&D expenditure incurred by an SME.
      (6)
For the purposes of this paragraph, expenditure incurred by a
company is “relevant R&D expenditure incurred by an SME” if—
(a)
the company makes an election under paragraph 14 of
Schedule 20 to the Finance Act 2000 (R&D tax relief for
5
SMEs: alternative treatment of pre-trading expenditure) in
respect of that expenditure, but
(b)
the company does not make a claim for an R&D tax credit
under that Schedule in respect of that expenditure.
      (7)
In the case of any qualifying pre-commencement expenditure
10
which is relevant R&D expenditure incurred by an SME, the
amount of that expenditure is treated for the purposes of this
Schedule as being equal to 150% of its actual amount.
      (8)
In the case of any qualifying pre-commencement expenditure
which is relevant R&D expenditure incurred by a large company,
15
the amount of that expenditure is treated for the purposes of this
Schedule as being equal to 125% of its actual amount.
      (9)
For this purpose “relevant R&D expenditure incurred by a large
company” means qualifying expenditure within the meaning
given by paragraph 11(3) of Schedule 12 to the Finance Act 2002
20
(R&D tax relief for large companies).
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”) if—
(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)
If 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)
If 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

Finance (No.2) Bill
Schedule 19 — Schedule to be inserted as Schedule 19C to ICTA
366

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.
Taxable ring fence profits of an accounting period
8
For the purposes of this Schedule, a company has taxable ring
5
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
of Part 10.
Part 3
10
Pre-commencement supplement
Supplement in respect of a pre-commencement accounting period
9     (1)
If—
(a)
a qualifying company incurs qualifying pre-
commencement expenditure in respect of a ring fence
15
trade, and
(b)
the expenditure is incurred before the commencement
period,

the company may claim supplement under this Part of this
Schedule (“pre-commencement supplement”) in respect of one or
20
more pre-commencement periods.
      (2)
Any pre-commencement supplement allowed on a claim in
respect of a pre-commencement period is to be treated as
expenditure—
(a)
which is incurred by the company in the commencement
25
period, and
(b)
which is allowable as a deduction in calculating the profits
of the ring fence trade for that period.
      (3)
The amount of the supplement for any pre-commencement period
in respect of which a claim under this paragraph is made is the
30
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
months, the amount of the supplement for the period (apart from
this sub-paragraph) is to be reduced proportionally.
35
      (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 pre-commencement expenditure and supplement
previously allowed
10    (1)
For the purpose of determining the amount of any pre-
40
commencement supplement, a qualifying company is to be taken
to have had, at all times in the pre-commencement periods of the
company, a continuing mixed pool of—

Finance (No.2) Bill
Schedule 19 — Schedule to be inserted as Schedule 19C to ICTA
367

(a)
the relevant amount (if any) which the company carries
forward under Schedule 19B,
(b)
qualifying pre-commencement expenditure, and
(c)
pre-commencement supplement.
      (2)
The pool is to be taken to have consisted of—
5
(a)
the relevant amount (if any) which the company carries
forward under Schedule 19B,
(b)
the company’s qualifying pre-commencement
expenditure, allocated to the pool for each pre-
commencement period in accordance with sub-paragraph
10
(3), and
(c)
the company’s pre-commencement supplement, allocated
to the pool for each pre-commencement period in
accordance with sub-paragraph (4).
      (3)
To allocate qualifying pre-commencement expenditure to the pool
15
for any pre-commencement period, take the following steps—
(a)
Step 1: count as eligible expenditure for that period so
much of the qualifying pre-commencement expenditure
mentioned in paragraph 9(1) as was incurred in that
period,
20
(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
accordance with that paragraph,
(d)
Step 4: if paragraph 12 applies, reduce (or, as the case may
25
be, further reduce) amount E in accordance with that
paragraph,

and so much of amount E as remains after making those
reductions is to be taken to have been added to the pool in that
period.
30
      (4)
If any pre-commencement supplement is allowed on a claim in
respect of a pre-commencement period, the amount of that
supplement is to be taken to have been added to the pool in that
period.
      (5)
In this paragraph references to the relevant amount (if any) which
35
the company carries forward under Schedule 19B are to the
amount in its mixed pool for the purposes of Part 3 of Schedule
19B immediately before 1st January 2006.
Reduction in respect of disposal receipts under the Capital Allowances Act
11    (1)
This paragraph applies in the case of the qualifying company if—
40
(a)
it incurs qualifying pre-commencement expenditure in
respect of a ring fence trade in any pre-commencement
period,
(b)
it would, on the relevant assumption, be entitled to an
allowance under any provision of the Capital Allowances
45
Act in respect of that expenditure,
(c)
an event occurs in relation to any asset representing the
expenditure in any pre-commencement period, and