REV BN 12: Exploration Expenditure Supplement
Who is likely to be affected?1. Companies undertaking oil or gas exploration and appraisal (E&A) activities in the UK or on the UK continental shelf which are not yet trading, or do not have a tax liability sufficient to make use of current 100% capital allowances for E&A expenditure. These are likely to be new entrant companies but may include others who invest heavily in E&A. General description of the measure2. Companies cannot obtain tax relief for E&A expenditure until they have taxable profits against which such expenditure can be offset. This may be four or five years after the first E&A expenditure is incurred during which time the value of the allowances will have been eroded. The exploration expenditure supplement (EES) is being introduced to help overcome this problem. 3. The EES will provide an annual uplift of 6% in the value of unused capital allowances due to qualifying E&A expenditure that are carried forward each year for a maximum of 6 years. Operative date4. Applies to E&A expenditure incurred on or after 1 January 2004. Current law5. Profits and gains which a company derives from UK oil or gas production are chargeable to corporation tax subject to a special ring fence which prevents taxable profits being reduced by losses from other activities. These ring fence profits are also chargeable to a 10% supplementary charge. 6. E&A expenditure qualifies for 100% capital allowances under the Research and Development Code in Part 6 of Capital Allowances Act 2001. 7. When a trading company has insufficient revenue against which to set its allowances, it will incur a trading loss which may be carried forward and set against the company’s profits in the subsequent accounting period. Losses can continue to be carried forward where they cannot be used to offset profits in the subsequent year, and so on. This means that the economic value of the immediate 100% allowances for a company investing in UK oil and gas exploration with little other income from the UK can be diminished significantly as time goes on. Proposed Revisions8. Companies subject to the special ring fence corporation tax rules will be able to claim the EES on the amount of E&A expenditure that cannot be used in the accounting period it is incurred and is carried forward as (part of) a trading loss. 9. Where a company is part of a group with ring fence profits then the amount qualifying for the EES will be reduced by an amount equal to those profits. However, within that restriction, a company that has allowances for different types of expenditure will be able to choose how to use them in order to gain maximum advantage of the EES. 10. Where a company is only undertaking E&A this is normally treated as pre-trading activity. In such cases E&A allowances may be claimed for all pre-trading years once a decision to develop a field is made and trading commences. In order to maximise the value of the EES for such companies, each year of the pre-trading period will be treated separately and the EES awarded for each. 11. Each company will be able to claim the EES at 6% on a cumulative basis for a maximum of 6 accounting periods that need not be consecutive. Further advice 12. If you have any questions about this change, please contact Energy Group, Inland Revenue on 020 7438 7216.
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