Policy paper

Oil and Gas companies: tax relief for decommissioning expenditure

Published 16 March 2016

1. The purpose of this technical note is to clarify certain aspects of HM Revenue and Customs (HMRC’s) view of the legislation that provides tax relief for decommissioning expenditure incurred by oil and gas companies.

2. This should provide companies with greater certainty over the tax treatment of expenditure incurred following the transfer of a licence in an oil field.

3. The relevant legislation can be found in Chapter 13 of Part 2 of the Capital Allowances Act (CAA) 2001, in particular, sections 162 to 165. All statutory references are to CAA 2001 unless stated otherwise.

4. Broadly, tax relief is available under section 164 where:

• a person who is carrying on a ring fence trade
• incurs ‘general decommissioning expenditure’ and
• the plant and machinery concerned has been brought into use for the purpose of that ring fence trade

5.Section 165 provides relief for decommissioning expenditure after a person has ceased to carry on a ring fence trade.

6.’General decommissioning expenditure’ is defined in section 163 as:

• expenditure incurred on decommissioning plant and machinery which
• has been brought into use wholly or partly for the purpose of a ring fence trade
• forms (or did form when last in use) part of an offshore installation or a submarine pipeline and
• has not been replaced, and
• expenditure which has been incurred wholly or substantially in complying with:
  • an approved abandonment programme
  • a condition to which the approval of an abandonment programme is subject, or
  • a condition imposed by the Secretary of State, or an agreement made with the Secretary of State
    • I. before the approval of an abandonment programme, and
    • II. in relation to the decommissioning of the plant or machinery

7.There may be circumstances where a person disposes of the licence interest in a particular field or area, but under the terms of a commercial agreement, agrees to retain some or all of the decommissioning liability for any plant and machinery transferred.

8.Relief will be due where the above conditions are met and the claimant directly incurs the decommissioning costs. It is not sufficient for the claimant to have contributed to costs incurred by others; the claimant must directly incur the decommissioning costs. HMRC will normally accept that the expenditure has been incurred where the claimant is directly liable for the costs charged by those carrying out the decommissioning work, such that legal action could be taken against the claimant in the event that those costs are not met. Further guidance on contributions can be found at in the Capital Allowances Manual CA 14100.

9.HMRC’s view is that it is not necessary for the claimant to retain a licence interest in the field on which assets are later decommissioned in order to claim relief for the decommissioning expenditure incurred under sections 164 (where a ring fence trade is carried on) or 165 (where the ring fence trade has ceased).

10.HMRC’s view is that it is not necessary for the claimant to have been either served with, or to remain a holder of, a notice under section 29 of the Petroleum Act 1998 (‘section 29 notice’), for relief for decommissioning expenditure to be allowed, although it will usually be the case that the claimant will be a section 29 notice holder in these circumstances. In order for relief to be allowed, the claimant must demonstrate that the expenditure has been incurred in complying with an approved abandonment programme (whether or not named on the programme) and the other conditions imposed by section 163 (see paragraph 6 above.)

11.If you have any questions on this note, please contact Nicola Garrod on email nicola.garrod@hmrc.gsi.gov.uk.