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HMRC internal manual

Oil Taxation Manual

PRT: valuation of crude oils and products - category 2 value calculation mechanism: overview

The list of Category 2 oils at OT05343 has a description of the methods, agreed with participators, for calculating the market value of each kind of oil.

When negotiating a new Category 2 method, you will have to bear two important points in mind; the requirements of OTA75\Sch3\para2(2AA) subsections (b) and (c).

Sub para (b); where there are two or more delivery periods used by the kind of oil in question, then use the shortest one. (A delivery period in a contract is taken to define the period over which the oil is priced. So, for example a contract specifying oil to be delivered over a five day period might reasonably be expected to sold on a 2-1-2 or 0-0-5 basis). Thus if there are a number of contracts, some having delivery periods of 10 days, and an equal proportion have a 5-day delivery period, the method must be based upon the 5-day period.

Sub-para (c); where contracts are negotiated in advance of delivery and there are two or more normal periods of time between negotiation and delivery, use the shortest of these. For example, a particular Category 2 oil normally has contracts negotiated between 30 days and 45 days in advance of delivery. The method should include either

  • Method 1; real contracts negotiated in this 30-45 day period before delivery, or
  • Method 2; use a differential based upon differentials seen in real contracts in this period, which would be added to the appropriate Category 1 daily value depending upon which one was being used as the reference price in the real contracts.