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HMRC internal manual

Oil Taxation Manual

PRT: valuation of non-arm's length disposals and appropriations - gas - re-opening an election - practice

When an election is reviewed particular attention should be paid to the returned volumes and pattern of supply against the specification in the election. It must not be assumed however that any change merits consideration for a notice of termination. It should be initially presumed that an election will continue in force for the period specified and a notice of termination should not be contemplated unless the case falls clearly within the provisions described above. In particular an election cannot be re-opened solely because the market values determined by the formula are much lower or indeed much higher than current prices. Notices from companies under FA82\SCH18\PARA6 should be examined critically.


Where the legislation appears to apply then companies should be given an opportunity to make representations before a Board’s notice is given unless time limits prevent this. Any notice given under FA82\SCH18\PARA6 or PARA6A takes effect for the chargeable period beginning after the date of the notice. If the position appears to be clear then the Board’s notice should be issued in time for it to apply for the next chargeable period even if there is insufficient time for correspondence with the company. The company may appeal to keep matters open. After it has been agreed that an election must be re-opened, every effort should be made to agree with the company a new price formula.

Publication of an Index Ceasing

Changes to price indices should be the easiest to deal with and where an index is no longer published companies should be asked to suggest an alternative which approximates to the old index. Unless there are any delays, formal notices to give effect to FA82\SCH18\PARA5 can be exchanged when the matter is agreed; a Board’s notice under this paragraph can have effect from a date prior to the date of the notice.

Substantial and Lasting Change

The most difficult will be cases where there may have been a substantial and lasting change in relevant economic circumstances such that the market values determined by the price formula are no longer realistic.

It must first be established that there is a substantial and lasting change in relevant economic circumstances. Periodic changes in demand would not normally qualify but a substantial and lasting decline in the market might, as may a development of new markets leading to a supply shortage having substantial and lasting effects.

If a substantial and lasting change can be established it is not sufficient for the prices given by the formula to be different from current prices; the prices must be unrealistic which must mean that no reasonable seller would sell or no reasonable buyer would buy at those prices. It may also be noticed from FA82\SCH18\PARA6(4) that the Board must consider any notice from companies without reference to any new price formula proposed, which implies that it is not sufficient to show that a different price formula is more appropriate than the election formula. It is perhaps also significant that, in the case of an election involving gases other than ethane for petrochemical use, in the event of a notice being validly given, any new price formula must be judged at the same point in time as the original formula but taking into account the changed economic circumstances.


In general it appears that the legislation contemplates that the price formula will apply for the period specified in the election and that it would only be re-opened under FA82\SCH18\PARA6 in rare circumstances. Although each case obviously depends upon its own facts there is an initial presumption of permanence.

FA82\SCH18\PARA6A is in part a provision to prevent the avoidance of tax which might otherwise occur if an election were to be agreed on the basis of particular volumes and patterns of supply and later the seller were actually to supply its affiliate on more advantageous terms. During discussions of gas elections when the point has come up, companies have been told that the Board would not hesitate to issue a notice in such circumstances. This paragraph may also apply if the field can no longer meet the specification or if further investment may improve the gas flow. Companies should be encouraged to discuss such matters with the LB Oil & Gas if possible before changes come into effect.