Structure of Part 4
Part 5: Mineral extraction allowances
Overview
1349.This Part provides for mineral extraction allowances. These can be writing-down allowances or balancing allowances. It also provides for balancing charges.
1350.Chapter 1:
provides that allowances are available to mineral extraction traders who incur qualifying expenditure;
defines “qualifying expenditure” and the other main terms that are used in Part 5; and
signposts the detail on qualifying expenditure in the next four Chapters and sets out general exclusions from qualifying expenditure.
1351.Chapter 2 deals with qualifying expenditure on mineral exploration and access. It also deals with rules that apply if expenditure is incurred on mineral exploration and access before the mineral extraction trade starts.
1352.Chapter 3 deals with qualifying expenditure on acquiring a mineral asset. It contains special rules if an interest in land is involved. These prevent the non-mineral value of land from being qualifying expenditure. They also prevent double relief through capital allowances and the lease premium rules in section 87 of ICTA.
1353.Chapter 4 deals with second hand assets. It includes cases in which expenditure on acquiring a mineral asset is treated as if it was qualifying expenditure on mineral exploration and access. And it also includes cases in which qualifying expenditure is limited by reference to the circumstances of someone who previously sold the asset concerned.
1354.Chapter 5 deals with other sorts of qualifying expenditure. These relate to certain works, contributions and post-cessation restoration expenditure.
1355.Chapter 6 provides for the calculation of allowances and charges. Expenditure is not pooled. Allowances and disposal receipts reduce qualifying expenditure. Writing-down allowances are given at 10% a year on mineral asset expenditure or 25% on other expenditure on a reducing-balance basis. Disposal receipts may trigger balancing charges to recover allowances previously given. Balancing allowances are available when certain events occur.
1356.Chapter 7 provides for giving effect to allowances and charges and other matters.
History
1357.The Income Tax Act 1945 introduced mines, oil wells, etc. allowances (MOWA) for capital expenditure incurred by a person working a mine, oil well or other source of mineral deposits of a wasting nature. MOWA were limited to capital expenditure on mineral exploration and access or the construction of works likely to be of little value when the mineral source was no longer worked or a foreign concession came to an end. There was no relief for capital expenditure on acquiring the site of mineral deposits or the deposits themselves. In later years relief was extended to:
overseas mineral rights (including land to the extent that its value was attributable to mineral deposits);
abortive exploration connected with a mineral extraction trade;
machinery and plant used for mineral exploration;
certain land overseas;
contributions to certain overseas buildings or works; and
sources of mineral deposits in the UK.
1358.MOWA were output-related. No relief was given until a source of mineral deposits was worked or abandoned. This was out of line with other capital allowances.
1359.In contrast mineral extraction allowances, introduced, following consultation, by FA 1986, are similar to other capital allowances. But they are not identical to other allowances:
annual allowances are a percentage of the balance of qualifying expenditure – known as the reducing-balance basis – like plant and machinery (and patents and know-how); but
there is no pooling so – like industrial buildings and agricultural buildings – items of expenditure are dealt with separately.
1360.There were provisions in FA 1986 dealing with the transition from MOWA so that the MOWA provisions could be repealed instead of running on indefinitely. The main significance of these transitional provisions now is that they allow a recapture of excessive allowances to be made under this Part in respect of expenditure which originally qualified for MOWA. These provisions are dealt with in paragraph 88 of Schedule 3 (transitionals and savings).
1361.Since FA 1986 the main changes were in:
FA 1996 which inserted section 118(2) of CAA 1990 dealing with purchases of an oil licence from a person who has not carried on a mineral extraction trade; and
FA 1997 which inserted section 115(2A) of CAA 1990 dealing with purchases of mineral assets if the previous trader had incurred deductible expenditure on mineral exploration and access and that expenditure was reflected in the value of the purchased mineral asset.
Structure of this Part
1362.This Part:
uses more Chapters for qualifying expenditure than are used in Part IV of CAA 1990 in order to make that material more accessible; and
follows the same broad structure of other Parts.
Chapter 1: Introduction
Overview
1363.This Chapter introduces mineral extraction allowances. They are given on qualifying expenditure and are only available to mineral extraction traders.
1364.Section 394 sets out the basic conditions for entitlement to mineral extraction allowances and some definitions for this Part.
1365.Section 395 gives the meaning of qualifying expenditure and points to more detailed definitions and exceptions regarding qualifying expenditure.
1366.Sections 396 and 397 give the meaning of the key terms “mineral exploration and access” and “mineral asset”.
1367.Section 398 is a tie-breaker rule if expenditure might otherwise be on both mineral exploration and access and on a mineral asset.
1368.Section 399 sets out expenditure that cannot be qualifying expenditure.
Section 394: Mineral extraction allowances
1369.This section is based on section 98(1) and parts of sections 105(1), 109(1), 121(1) and (2) and section 161(2) of CAA 1990. It provides that allowances are available to mineral extraction traders who have incurred qualifying expenditure and defines “mineral extraction trade”. This term is used in place of the slightly longer term “trade of mineral extraction” in CAA 1990. The part of section 121(2) of CAA 1990 that is not rewritten in this section is at paragraph 87 of Schedule 3 because that part of section 121(2) relates only to that provision.
1370.Subsection (3) omits the examples of geothermal energy presently in section 161(2) of CAA 1990. They are not needed. See Note 46 in Annex 2.
Section 395: Qualifying expenditure
1371.This section is based on part of section 105(1) and (3) of CAA 1990. It defines “qualifying expenditure” and indicates that there are two main classes of qualifying expenditure (on mineral exploration and access and on acquiring mineral assets).
1372.Subsection (1)(c) refers to amounts treated as qualifying expenditure on mineral exploration and access. In CAA 1990 these amounts are treated as expenditure on mineral exploration and access leaving to be inferred the fact that they are qualifying expenditure. See Note 50 in Annex 2.
Sections 396 and 397: Meaning of “mineral exploration and access” and “mineral asset”
1373.These sections are based on section 121(1) and 105(6) of CAA 1990.
Section 398: Relationship between main types of qualifying expenditure
1374.This section is based on section 105(7) of CAA 1990.
Section 399: Expenditure excluded from being qualifying expenditure
1375.This section is based on section 105(4) and part of section 105(5) of CAA 1990. It sets out expenditure which does not qualify for allowances under this Part so as to give in this Chapter an early indication of items that will not get allowances under this Part. For example, most expenditure on plant or machinery cannot be qualifying expenditure.
Chapter 2: Qualifying expenditure on mineral exploration and access
Overview
1376.This Chapter defines what expenditure on mineral exploration and access is qualifying expenditure. The expenditure must be capital and it must be incurred for the purposes of the trade. This Chapter is subject to the rules in Chapter 4.
1377.Section 400 gives conditions for the expenditure to be qualifying expenditure. It has rules if the expenditure is connected with the trade and also if the expenditure is incurred before the trade starts.
1378.Section 401 gives rules for expenditure on mineral exploration and access incurred before the trade starts.
1379.Section 402 gives rules for expenditure on plant or machinery for mineral exploration and access if the plant or machinery is disposed of before the trade starts.
Section 400: Qualifying expenditure on mineral exploration and access
1380.This section is based on section 102 and parts of sections 98(1), 105, 106, 107 and 120(2) of CAA 1990. It gives the conditions for expenditure on mineral exploration and access to be qualifying expenditure.
1381.There is a minor change. Subsection (1) requires that qualifying expenditure must be capital expenditure incurred for the purposes of the mineral extraction trade. The purpose test in subsection (1)(b) is not in section 105(1) of CAA 1990. But this does not affect allowances. This is because allowances are only available under section 98(1) of CAA 1990 if the purpose test is met. See Change 47 in Annex 1.
1382.Subsection (2) treats expenditure incurred on mineral exploration and access in connection with a mineral extraction trade as being incurred for the purposes of the mineral extraction trade. This could, for instance, allow capital expenditure incurred on mineral exploration and access to be qualifying expenditure if the start of a mineral extraction trade depended on the mineral exploration and access being successful. In such a case the expenditure is connected with the new trade but it might be difficult to say that all of the expenditure was incurred for the purposes of the trade.
1383.The rest of the section deals with limitations on subsection (1) if “pre-trading expenditure” on mineral exploration and access is involved. Section 395 signposts limitations in other Chapters.
1384.Subsection (4) avoids some duplication that exists in CAA 1990 as to the time at which the qualifying expenditure is treated as incurred. See Note 51 in Annex 2.
Section 401: Pre-trading exploration expenditure
1385.This section is based on section 107 of CAA 1990. It deals with mineral exploration and access expenditure, other than on plant or machinery, incurred before a person starts a mineral extraction trade.
1386.The section limits the qualifying expenditure if there are relevant receipts before the trade starts. It also limits qualifying expenditure if mineral exploration and access ceases at the source concerned before the trade starts.
Section 402: Pre-trading expenditure on plant or machinery
1387.This section is based on section 106 and part of section 156 of CAA 1990. It provides the only instance in which expenditure on plant or machinery can be qualifying expenditure under this Part. Such plant or machinery must have been sold, demolished, destroyed or abandoned before the person starts a mineral extraction trade. Where the plant or machinery is still owned when the trade starts relief is given under Part 2. See section 161.
1388.The section limits the qualifying expenditure if there are any receipts from the sale, demolition, destruction or abandonment of the plant or machinery before the trade starts. It also limits qualifying expenditure if mineral exploration and access ceases at the source concerned before the trade starts.
1389.There is a minor change. Subsection (5)(c) provides for a “relevant receipt” in relation to the abandonment of certain plant or machinery. Section 156 of CAA 1990 does not give an amount in respect of the abandonment of plant or machinery. This follows the change made in relation to section 61(2) and provides for the “relevant receipt” in such a case to be the insurance money or other compensation received. See Change 10 in Annex 1.
Chapter 3: Qualifying expenditure on acquiring a mineral asset
Overview
1390.This Chapter defines when expenditure on acquiring a mineral asset is qualifying expenditure. The expenditure must be capital expenditure and it must be for the purposes of the trade. This Chapter is subject to the rules in Chapter 4.
1391.Section 403 gives conditions for the expenditure to be qualifying expenditure. It points to exceptions and defines a term for use in this Chapter.
1392.Section 404 prevents the value of land from being qualifying expenditure so far as it is not attributable to the value of mineral deposits.
1393.Section 405 permits, in limited circumstances, some or all of the value excluded from qualifying expenditure under the previous section to become qualifying expenditure.
1394.Section 406 prevents expenditure from getting relief twice under both the lease premium rules in section 87 of ICTA and as a result of this Chapter.
Section 403: Qualifying expenditure on acquiring a mineral asset
1395.This section is based on parts of sections 98(1) and 105(1) and (3) of CAA 1990. It gives the conditions for expenditure on acquiring a mineral asset to be qualifying expenditure. It must be capital expenditure and incurred for the purposes of the mineral extraction trade.
1396.There is a minor change in subsection (1)(b) as in section 400(1)(b). See paragraph 1381 above and Change 47 in Annex 1.
1397.Subsection (2) signposts two limitations on subsection (1) later in this Chapter. Section 395 signposts limitations in other Chapters.
Section 404: Exclusion of undeveloped market value of land
1398.This section is based on part of section 110 of CAA 1990. It prevents the underlying value of land from being qualifying expenditure.
