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HMRC internal manual

Business Income Manual

Measuring the profits (particular trades): Mineral extraction: open cast mines: working and restoration expenditure

Part 5 Capital Allowances Act 2001

The tax treatment of expenditure on the opening, working and closing of an open cast mine will depend on the precise nature of the operations.

Before an open cast mine can be worked, the operator must win access to the minerals. They have to remove the soil overburden, and make a ‘first cut’ through any layers of rock to get at the target minerals. This process of winning access to the target minerals is capital expenditure. Capital allowances for this expenditure on opening up an open cast mine will usually be available through mineral extraction allowances at a writing down allowance of 25% a year (see CA50230).

The cost of archaeological work prior to extraction is capital expenditure, if required as a condition of granting planning permission. It will, like the associated planning permission costs, attract a writing down allowance at 10% (see CA50300).

Once the minerals have been reached, the mining operation consists of subsequent cuts to access the minerals. Waste material is dumped in the void created by the previous cut. The costs of these subsequent cuts and of dumping the waste material in the successive voids so created are part of the everyday working of the mine. These costs will normally be revenue expenditure.

When the mining operation comes to an end, the terms of the planning permission or, alternatively, the terms of the licence from the landowner, will normally require the mine operator to undertake a range of work to make the land fit for future use. This is the ‘restoration expenditure’. This type of work may include the replacement of preserved topsoil, planting of trees, and the reinstatement of walls and trackways. This restoration expenditure is capital expenditure, as it is required as part of the cost of acquiring the right to work the minerals. For further information on this point see the cases of Robert Addie and Sons’ Collieries Ltd v CIR [1924] 8TC671 and RTZ Oil and Gas Ltd v Elliss [1987] 61TC132 which are discussed at BIM62060 and BIM62065 respectively. Both of these cases concerned payments required under the terms of licences to restore assets following the cessation of mineral extraction operations.

The point at which working the mine ceases and restoration expenditure commences will depend upon the facts of the particular case.

We will generally accept that an open cast mine continues to be worked until the void created by the final cut is filled. This may include filling the void with material from the original opening up of the mine. Filling the void with material brought from elsewhere would be part of the restoration expenditure.

Generally speaking, restoration expenditure will include any work from the time when the loose debris filling the open cast mine is subjected to a process of compaction (be it active or passive) in preparation for rehabilitating the land for subsequent use. But compacting debris during the mining process, such as by the incidental effects of mining vehicles passing over the surface of the debris, is part of the everyday working of the mine and is not capital expenditure.

A mining business may also be required to maintain the land for a period after the initial restoration has been completed. The costs of this maintenance will normally be revenue but may be post-cessation expenditure.

The capital allowances consequences of restoration are explained in CA50280 and CA50460.

Many mining companies make provisions for restoration expenses. These restoration provisions may include amounts in respect both filling in the final void, which we accept as on revenue account, and the capital costs of compaction, top-soiling, landscaping etc. For further guidance on provisions, see BIM46510.

Where a particular case does not follow the pattern of mining set out above, then it will have to be looked at on its own particular facts to establish which expenditure should be regarded as the capital costs of either opening the mine or restoration, and which should be revenue costs of simply working the mine.

A deduction for expenditure on restoration costs against trading income will mean that a claim to Mineral Extraction Allowances cannot be made in respect of the same expenditure.