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Finance Act 2014

Section 69 Schedule 14: Oil and Gas Fiscal Regime: Extended Ring Fence Expenditure Supplement for Onshore Activities

Summary

1.This section and Schedule will extend from 6 to 10 the number of accounting periods for which a company can claim ring fence expenditure supplement (RFES) in relation to qualifying expenditure or losses from onshore oil and gas activity.

Details of the Schedule

2.Paragraph 1 inserts a new chapter after Chapter 5 of Part 8 of Corporation Tax Act 2010 (CTA). New Chapter 5A contains new sections 329A to 329T.

3.New Section 329A provides an overview of the chapter.

4.Subsection (1) explains that the new provisions allow a company which has a ring fence trade to claim additional RFES for a) qualifying pre-trade onshore expenditure, b) onshore losses, c) supplement which they have received in relation to RFES claims made under Chapter 5 CTA 2010, and d) the additional supplement claimed under new Chapter 5A, in respect of onshore oil related activities.

5.Subsection (2) refers to the interpretative provisions at new sections 329B to 329H that apply for the purposes of Chapter 5A.

6.Subsections (3) and (4) explain that provisions about pre-trade expenditure are at new Sections 329I to 329M, and those related to losses are at new Sections 329N to 329T.

7.Subsection (5) explains that a company may only make 4 claims for additional supplement.

8.Subsection (6) sets out the adjustments which need to be made to the qualifying expenditure and losses before the claim for supplement is allowed.

9.New Section 329B defines a “qualifying company”.

10.New Section 329C provides definitions for “onshore oil-related activities” and “offshore oil-related activities”.

11.New Section 329D defines key terms relating to accounting periods, by reference to whether a company commenced its ring fence trade in that accounting period (“the commencement period”), and whether, or not, a company was carrying on a ring fence trade in an accounting period that ended on or after 5 December 2013 (a “post-commencement period” and a “pre-commencement period” respectively). It also introduces the concept of a “straddling period” as an accounting period straddling 5 December 2013.

12.New Section 329E sets the “relevant percentage” for an accounting period (that is, the rate at which supplement is payable on an amount specified under the Chapter) as 10 per cent and provides that the relevant percentage can be varied by order by the Treasury.

13.New Section 329F provides that a company may make no more than 4 claims for additional supplement, and the claims need not be consecutive, but can only be made after 6 claims allowed under Chapter 5.

14.New Section 329G subsections (1) to (5) define “qualifying pre-commencement onshore expenditure”. Subsections (6) to (9) define research and development expenditure that qualifies for RFES for SMEs and large companies.

15.New Section 329H provides the same definition for “unrelieved group ring fence profits” as is contained in the existing provisions in Chapter 5.

16.New Section 329I is concerned with the availability of additional supplement in respect of a pre-commencement accounting period.

17.Subsection (1) makes provision for a qualifying company to claim additional supplement for pre-commencement onshore expenditure relating to a ring fence trade.

18.Subsection (2) sets out that any additional supplement allowed on a claim made for a pre-commencement period is to be treated as expenditure incurred by the company in the commencement period and allowable as a deduction in calculating profits.

19.Subsection (3) states that the amount of the additional supplement is the relevant percentage (as set at 329E) of the reference amount (defined at 329M, in relation to the “mixed pool” as described by s329J) for that period.

20.Subsection (4) states that the reference amount for the pre-commencement period is calculated in accordance with new sections 329J to 329M.

21.Subsection (5) provides for proportional reduction of the amount of additional supplement where the pre-commencement period is shorter than 12 months.

22.Subsection (6) provides that any claim for pre-commencement supplement must be made as a claim for the commencement period.

23.Subsection (7) specifies that existing provisions on the time limit for claims for group relief apply for claims for pre-commencement additional supplement.

24.New Section 329J makes provision for, and determination of the amount of, a mixed pool of qualifying pre-commencement onshore expenditure and supplement.

25.Subsections (1) and (2) provide that during pre-commencement periods, a company is considered to have had a continuing mixed pool comprising qualifying pre-commencement onshore expenditure, and pre-commencement supplement under new Chapter 5A and Chapter 5, as further described by new subsections (3) to (8).

26.Subsection (3) gives instructions on how to calculate the amount of qualifying pre-commencement onshore expenditure to allocate to the mixed pool for any pre-commencement period.

27.Subsections (4) and (5) provide for any pre-commencement supplement, claimed under Chapter 5, to be allocated to the mixed pool to the extent that it relates to qualifying pre-commencement onshore expenditure, based on the proportion of that supplement attributable, on a just and reasonable basis, to the company’s qualifying pre-commencement onshore expenditure (‘the appropriate proportion”).

28.Subsection (6) concerns claims for pre-commencement supplement made under Chapter 5 in respect of pre-commencement expenditure incurred in a straddling period. In that case pre-commencement supplement claimed under Chapter 5 that is attributable to qualifying pre-commencement onshore expenditure on a just and reasonable basis is to be allocated to the mixed pool, according to the proportion of that expenditure incurred on or after 5 December 2013.

29.Subsection (7) provides that a company may elect to use an alternative apportionment method if the time basis in (6) is unjust or unreasonable.

30.Subsection (8) provides for any pre-commencement additional supplement, claimed under Chapter 5A, to be allocated to the mixed pool.

31.New Section 329K provides for reductions to the mixed pool in respect of disposal receipts for expenditure for which allowance would be given under the Capital Allowances Act 2001.

32.New Section 329L provides for reduction to the mixed pool in respect of unrelieved group ring fence profits.

33.Subsection (2) provides for reductions to be made firstly under Section 329K (disposal receipts) before reducing the net onshore expenditure by a sum equal to the unrelieved group ring fence profits.

34.Subsection (3) provides that, in a straddling period, the unrelieved group ring fence profits for that period are to be determined as if the period began on 5 December 2013.

35.Subsections (4) and (5) provide that, in the case where a company carries on both onshore and offshore oil related activities in the pre-commencement period, unrelieved group ring fence profits should be set against “net offshore expenditure” first.

36.Subsection (6) gives instructions for calculating the “net offshore expenditure” of the company for that period.

37.Subsection (7) defines “pre-commencement offshore expenditure”.

38.Subsections (8) and (9) provide that where there are disposal receipts relating to expenditure for which allowance would be given under the Capital Allowances Act 2001, representing pre-commencement expenditure used for offshore activities, the amount of pre-commencement offshore expenditure should be reduced by those disposal receipts. It should be set against expenditure incurred in the most recent periods first.

39.Subsections (10) and (11) provide for, in the case of a “mixed-activities asset”, only the proportion which is just and reasonable having regard to that expenditure is to be brought to account.

40.New Section 329M defines the reference amount (on which the rate of additional supplement will be calculated under s329I(3)) for a pre-commencement period.

41.New Section 329N is concerned with the availability of additional supplement in respect of a post-commencement period.

42.Subsection (1) provides for a qualifying company to claim additional supplement where it incurs a loss in respect of its onshore ring fence trade in a post-commencement period.

43.Subsection (2) provides that post-commencement additional supplement should be treated as a loss incurred in carrying out the ring fence trade.

44.Subsection (3) specifies that existing provisions on the time limit for claims for group relief apply for claims for post-commencement additional supplement.

45.New Section 329O makes provision for the calculation of the amount of post-commencement additional supplement for a post-commencement period.

46.Subsection (1) provides that the amount of the additional supplement is the relevant percentage (as set at 329E) of the reference amount (defined at 329T in relation to the “onshore ring fence pool” as described by s329Q) for that period.

47.Subsection (2) states that the reference amount for the post-commencement period is to be calculated in accordance with new sections 329P to 329T.

48.Subsection (3) provides for proportional reduction of the amount of additional supplement where the post-commencement period is a period of less than 12 months.

49.New Section 329P makes provision for the determination of onshore ring fence losses.

50.Subsection (1) provides that if in a post-commencement period, a company’s ring fence trade consists solely of onshore oil-related activities, then so much of the loss incurred as is available to be carried forward under section 45 is the “onshore ring fence loss” of the company.

51.Subsections (2) and (3) provide that where a company incurs a loss and carries on both onshore and offshore activities as part of a ring fence trade in a post-commencement period, only the proportion of that loss that is, on a just and reasonable basis, attributable to the company’s onshore oil-related activities in that trade (“the appropriate proportion”) is the “onshore ring fence loss” of that company.

52.Subsection (4) provides that in the case of a straddling period, a company’s onshore ring fence losses are the portion that, if the whole amount is apportioned according to the number of days falling before, and on and after, 5 December 2013, is apportioned to the later period.

53.Subsection (5) provides that a company may elect to use an alternative apportionment method if the time basis in (4) is unjust or unreasonable.

54.Subsections (6) to (9) set out the assumptions to be used in calculating how much of the loss falls to be used under section 45 CTA 2010 for the purposes of sub-section (1)(b) and (2)(b). That is, every claim that could be made under section 37 CTA10 is made, and that section 42 CTA10 applies.

55.New Section 329Q makes provision for, and determination of the amount of the onshore ring fence pool.

56.Subsections (1) to (3) makes provision that during post-commencement periods, a company is considered to have a continuing mixed pool comprising the company’s onshore ring fence losses, post-commencement supplement under Chapter 5 and post-commencement additional supplement under Chapter 5A, as further described by new subsections (4) to (9).

57.Subsection (4) sets out how allocations are to be made to the onshore ring fence pool in respect of a) onshore ring fence loss in the period of the loss, b) the “appropriate proportion” of post-commencement supplement allowed under a claim under Chapter 5, and c) any post commencement additional supplement claimed under Chapter 5A.

58.Subsection (5) provides that the “appropriate proportion” of Chapter 5 post-commencement supplement is either 100% of that amount, or, where the company has at any time carried on offshore oil related activities, the proportion attributable, on a just and reasonable basis, to the company’s onshore oil related activities in the period of Chapter 5 claim.

59.Subsection (6) concerns claims for post-commencement supplement made under Chapter 5 in respect of losses incurred in a straddling period. In that case the “appropriate proportion” of Chapter 5 post-commencement supplement under new subsections (4) and (5) is proportionately divided between the number of days falling before, and on and after, 5 December 2013, and only the amount apportioned to the later period is added to the onshore pool.

60.Subsection (7) provides that a company may elect to use an alternative apportionment method if the time basis in (6) is unjust or unreasonable.

61.Subsections (8) and (9) make provision for the order of making additions to the pool (as provided by section 329Q(4) to (7)) and reductions to it (as provided by sections 329R and 329S).

62.New Section 329R provides for reductions to the onshore ring fence pool to be made in respect of utilised onshore ring fence losses.

63.Subsection (1) provides that losses used under section 45, a reduction is to be made in that period.

64.Subsection (2) provides that the onshore ring fence pool is to be reduced by the amount of losses carried forward under s45 that are onshore ring fence losses.

65.Subsection (3) provides that, in the case where a company carries on both onshore and offshore oil related activities in the post-commencement period, the company’s offshore losses are to be used in priority to onshore ring fence losses.

66.Subsection (4) defines “relevant offshore loss”.

67.Subsection (5) provides that where the loss is incurred in a straddling period, the amount of the relevant offshore loss is proportionately apportioned to the period falling on or after 5 December 2013.

68.Subsection (6) provides that a company may elect to use an alternative apportionment method if the time basis in (5) is unjust or unreasonable.

69.New Section 329S Subsections (1) and (2) provide that the onshore ring fence pool is to be reduced by amounts of unrelieved group ring fence profits, after any reductions to be made for utilised onshore ring fence losses under section 329R.

70.Subsection (3) provides that, in a straddling period, the unrelieved group ring fence profits for that period are to be determined as if the period began on 5 December 2013 and ends on the date that the straddling period ends.

71.Subsection (4) provides that, in the case where a company has at any time carried on offshore oil related activities, the sum to be set against the onshore ring fence pool is to be first reduced by the “notional offshore loss pool”.

72.Subsection (5) defines the “notional offshore loss pool”.

73.New Section 329T defines the reference amount (on which the rate of additional supplement will be calculated under s329O(1)) for a post-commencement period.

74.Paragraph 2 inserts a new subsection after subsection (5) in section 270 of CTA 2010 to make provisions for the new Chapter 5A.

75.Paragraph 3 inserts defined expressions into Schedule 4 to CTA 2010.

76.Paragraph 4 states that the amendments made by the Schedules have effect in relation to accounting periods ending on or after 5 December 2013.

Background Note

77.In addition to corporation tax (CT), oil and gas companies are also subject to an additional tax, the supplementary charge (SC), on adjusted ring fence profits arising from oil-related activities. For the oil and gas industry, CT is set at 30 per cent for profits of more than £1.5m and 19 per cent (the small profits rate) for profits of more than £300k. The SC is set at 32 per cent.

78.Companies are allowed to set qualifying expenditure against profits for CT purposes. For companies engaged in a trade where it may take some years to show a profit, the value of the expenditure will be reduced by the time they come to be utilised.

79.The oil and gas trade is subject to high start-up costs and a relatively lengthy period of likely unprofitability. RFES currently allows companies inside the oil and gas ring fence to uplift their ring fence losses or, in the period before they are trading, their “qualifying pre-commencement expenditure”, by 10 per cent for up to 6 accounting periods to maintain their time value until they can be offset against future profits.

80.The early development of projects for shale gas and other onshore hydrocarbons is expected to have longer payback periods than offshore hydrocarbon projects and to be dominated by companies which do not have existing ring fence profits against which to set their expenditure. Extending the number of accounting periods for which these companies can claim RFES allows them to maintain the value of their expenditure for longer to recognise the extended period before they are able to utilise those amounts.

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