693 Exploration expenditure: allowances and charges

Summary

This section provides for a 100 per cent allowance against the profits of a petroleum trade in respect of exploration expenditure (as defined in section 684) and for recovery of such an allowance by way of a balancing charge where an asset representing such expenditure is realised.

Relief is given for successful and abortive expenditure subject to the abortive expenditure having been incurred not more than 25 years before the commencement of the petroleum trade against the profits of which the allowance is claimed.

Details

Allowance for exploration expenditure

(1) A person who has incurred exploration expenditure for the purposes of a petroleum trade carried on by that person will be granted an allowance for “the chargeable period related to” the expenditure against the profits of the petroleum trade for the same period. No allowance will, however, be made to the extent that (for example, on a farm-in) the exploration expenditure is reimbursed to the claimant.

Balancing charge

(2)(a) Provision is made for a clawback, by way of a balancing charge, of an allowance made under subsection (1) where (for example, on a subsequent farm-in or arising out of a rearrangement of licence interests in a unitisation) there is a disposal or part disposal of “an asset representing” the amount of expenditure in respect of which the allowance was made. The expression “an asset representing exploration expenditure” is defined in section 684.

(2)(b) The maximum balancing charge is limited to the amount of the allowances made under subsection (1) or the appropriate part of that amount in the case of a part disposal.

(3) A balancing charge is to be made under subsection (2) where compensation is received on the destruction of an asset representing exploration expenditure for which an allowance has been given under subsection (1). The compensation can be reduced by any amount spent on demolition of the asset.

Purchase of assets representing exploration expenditure

(4) A person who buys assets representing exploration expenditure connected with a relevant field (as defined in section 684) or part of a relevant field may claim an allowance under subsection (1), if that person carries on a petroleum trade which consists of or includes the working of that or part of that field. The allowance cannot exceed the exploration expenditure actually incurred or, if less, the price paid for the assets representing that expenditure.

Pre-trading exploration expenditure

(5)(a) Relief will be given under subsection (1) for pre-trading exploration expenditure by treating the expenditure as having been incurred on the first day on which the trade is being carried on. Accordingly, such expenditure is allowed in the first chargeable period for which the trade is carried on.

Abortive exploration expenditure

(5)(b) There is a 25 year limitation on the allowance of abortive exploration expenditure There is no such limit in respect of expenditure in an area which becomes a relevant field or part of such a field, that is, an area in respect of which a petroleum lease is granted by the Minister for Communications, Energy and Natural Resources. The 25 year limit also applies where the company claiming the relief incurred unsuccessful expenditure in an area which was later developed by another company (unless section 694 applies because the 2 companies are under common control).

Pre-trading sales

(6) The allowance for exploration expenditure due to the claimant is to be reduced by the proceeds of any sale or transfer, before trading commences, of assets representing exploration expenditure.

When is expenditure incurred?

(7) This is a standard provision related to capital allowances given by reference to the date on which expenditure is incurred. It defines that date as the date on which the money is payable.

Allowances and charges to be made in taxing the petroleum trade

(8) Allowances for exploration expenditure and related balancing charges are to be made in taxing a person’s petroleum trade, that is, in the case of income tax, in charging trading profits and, in the case of corporation tax, in computing trading income.

(9) By applying to an exploration allowance the provisions of section 304(4), a petroleum trader liable to income tax is permitted to carry forward allowances to the extent to which they cannot be offset against profits of the particular chargeable period to which the allowable expenditure relates.

Application of specific provisions relating to capital allowances

(10) Section 307(2)(a) is applied so as to treat, for corporation tax purposes, an exploration allowance as a trading expense and a balancing charge as a trading receipt.

Section 321 is applied for the interpretation of this section. That section defines, for example, “chargeable period”, “chargeable period related to expenditure” and “chargeable period related to” another event, that is, a disposal on the discontinuance of a trade.

(11) The provisions of subsections (2) and (3) of section 306 are applied so as to identify the basis period for a year of assessment for the purposes of income tax.

Bar on double relief

(12) Provision is made to prevent relief being given under any of the capital allowances provisions for expenditure which is exploration expenditure. In effect a double allowance is prevented and abortive exploration expenditure which may not be relieved under this section cannot be the subject of a claim under any other provision of the Tax Acts. The provision also prevents exploration expenditure qualifying for relief as expenditure on “know-how” under section 768.

(13) Despite the above rule, the following capital allowance provisions are applied, with any necessary modifications, for the purposes of this section —

• section 312, which deals with sales of property between connected persons and sales the sole or main propose of which is to obtain a tax allowance,
• section 316, which provides for the interpretation of “capital expenditure” for the purposes of capital allowances,
• section 317(2), which relates to the treatment of grants,
• section 318, which provides a definition of “sale, insurance, salvage or compensation moneys” for the purposes of subsection (3) which provides for balancing charges, and
• subsections (4) and (5) of section 320 which pertain to the date of a sale and the dates of commencement or permanent discontinuance of a petroleum trade.

Adaptation of capital gains tax provisions

(14) Necessary adjustments are made to certain provisions of Part 19 (Taxation of Chargeable Gains).

A balancing charge under this section is to be treated in the same way as a normal balancing charge is under section 551(3). Normally, an amount charged to tax as income is not included in the consideration taken into account for capital gains tax purposes but this rule does not apply to sums taxed as balancing charges.

Exploration allowances and balancing charges under this section are treated in the same way as normal capital allowances and balancing charges for the purposes of section 555.

Value-added tax

(15) Provision is made for the deduction from the expenditure incurred on an asset of any VAT included in that expenditure which is creditable or refundable to the person incurring the expenditure.

When will relief be given?

(16) Relief will not be given for exploration expenditure until a petroleum lease has been granted in respect of the area being worked by the claimant or from which the claimant is transporting petroleum to land or from which the claimant obtains petroleum which the claimant is treating or storing.

A petroleum lease will normally only be granted where subsequent production of petroleum is assured.

Part disposals

(17) Provision is made for part disposals of assets representing exploration expenditure for the purposes of subsections (2), (4) and (6).

Relevant Date: Finance Act 2019