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Finance Act 2009

Section 88 Schedule 42: Former Licenses and Former Oil Fields

Summary

1.Section 88 and Schedule 42 provide that a company will continue to be a participator for the purposes of the petroleum revenue tax (PRT) legislation until the point when decommissioning has been completed, even though it has ceased to be a licensee (and thus within the scope of PRT) because of an event such as the expiry of a licence.

Details of the Schedule

Part 1: Persons Who Cease to Be Licensees Because of Cessation Events

2.Paragraph 2(2) amends the definition of “participator” in section 12(1) of the Oil Taxation Act (OTA) 1975 to include a person who was previously a licensee but has ceased to be a licensee as a result of a “cessation event”. This sub-paragraph also makes minor consequential amendments to subsection (1).

3.Sub-paragraph 2(3) inserts a new subsection (1A) after subsection (1).

4.New subsection (1A) defines the terms “cessation event”, “current participator”, “former participator” and “default payment”.

5.Paragraph 3 amends the definitions of “current participator” and “former participator” in paragraph 2C(2) of Schedule 5 to OTA 1975 to include the new definition of “participator” introduced by paragraph 2(2) of this Schedule).

6.Paragraph 4 provides that Part 1 of this Schedule has effect in relation to persons who cease to be licensees because of cessation events occurring in chargeable periods beginning after 30 June 2009.

Part 2: Areas Treated as Continuing to Be Oil Fields

7.Paragraph 6 inserts after the reference to Schedule 1 to OTA 1975 in the entry for “oil field” in section 12(1) of that Act words to the effect that Schedule 1 includes provision about areas that are to be treated as continuing to be oil fields.

8.New paragraph 6 provides that if an area has ceased to be an oil field (or part of one) by virtue of not being part of a licensed area then the said area is to be treated as continuing to be an oil field (or part of one). However this provision will cease if either the area is decommissioned or the area becomes part of a licensed area again.

9.New paragraph 7 provides for determining whether an area treated as being an oil field (or part of one) under paragraph 6 is decommissioned for the purposes of that paragraph. An area is decommissioned for those purposes if either an approved decommissioning programme has been carried out to the satisfaction of the Secretary of State (of the Department of Energy and Climate Change) or, where the area is not subject to a UK offshore decommissioning regime, HM Revenue & Customs (HMRC) are satisfied that decommissioning has been completed. In the latter case the new paragraph provides a right of appeal. Definitions are provided for “qualifying assets”, “relevant area” and “UK offshore decommissioning regime”.

10.Paragraph 8 provides that Part 2 of this Schedule has effect in relation to areas that cease to be oil fields, or parts of oil fields, in chargeable periods beginning after 30 June 2009.

Background Note

11.When an oil field comes to the end of its productive life, the companies that are licensed by the Department of Energy and Climate Change (DECC, previously the DTI/BERR) to extract oil from that field are responsible for the costs of decommissioning the field, i.e. removing all the pipelines, platforms etc and returning the sea bed to its natural state.

12.Although the licensee companies have to meet the decommissioning costs in full (there is no Government subsidy), the costs are fully relievable for petroleum revenue tax (PRT) purposes. However this assumes that the company is still a licensee and is thus still within the charge to PRT. Otherwise the decommissioning costs will not be available for relief.

13.However, the oldest licences (1st round) are due to expire in 2010 and if no action is taken, companies will no longer be able to extract oil from fields in that (expired) licence area. What DECC proposes to do is, on expiry of the licence, extend the term of the licence (but only in respect of the producing fields) for each field until such time as the company ceases production of oil from it. When the last such field on a licence ceases production, the licence itself will expire.

14.However, once the licence has expired companies will still be required to decommission the field infrastructure, and if they are no longer licensees then they will not get relief for PRT in respect of their decommissioning costs.

15.This section and Schedule deem a company still to be a licence holder for the purposes of the PRT legislation where is has ceased to be so by virtue of the expiry of a licence and, furthermore, for the relevant field to continue to exist. As a result the company will still be able to claim relief for its decommissioning costs. In addition, any income the company receives following cessation of production (e.g. tariff or disposal receipts) will be subject to PRT.

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