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HMRC internal manual

Oil Taxation Manual

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HM Revenue & Customs
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PRT: allowable field expenditure - transporting

OTA75\S3(1)(f)

OTA75\S3(1)(f) allows particular offshore costs of transporting oil but not the costs of transporting oil onshore, which must therefore be deemed to be sold on the field for valuation purposes.

Detail

Specifically, the provision allows the cost of transporting oil from the field

  • to the place in the UK where it is first landed, or
  • to the place in the UK (or in the case of oil first landed in another country, to the place in that other country) at which the seller in an arm’s length sale could reasonably be expected to deliver it.

Where under the second of these categories, there is more than one place at which delivery could reasonably be expected, the cost of transporting oil is allowable to the one nearest the place of extraction. Note that this qualification does not apply to the first category.

The legislation ensures that in a non-arm’s length sale the place of valuation corresponds with the delivery point adopted for expenditure relief purposes. Similarly, where there is an arm’s length sale on carriage, insurance, and freight (CIF) terms, the terms achieve correspondence between the full amount of the sale proceeds included in the gross profit and the relieved expenditure.

The provisions apply to both arm’s length and non-arm’s length sales. In the case of arm’s length sales there is an expectation that the place at which the seller could reasonably be expected to deliver the oil will be the actual place of delivery but there may be circumstances when this will not be the case. For non-arm’s length sales the company will need to demonstrate that the actual place of delivery is the nearest reasonable for an arm’s length comparison.

Transportation from offshore is either by tanker or pipeline. The allowable costs include the mooring and loading installations (SPAR or SPBM), and pumping-related equipment and its operation.

Pipelines

In the straightforward case of a field serviced by a pipeline from the field to a coastal terminal, the allowable costs will be the capital installation and operating costs of the pipeline including any necessary booster platform pumping or compression equipment.

Where a pipeline extends beyond its first landfall for a short distance before reaching the terminal, no objection should be made to an allowance for the landward section provided that it is small in relation to the whole and there are bona fide reasons for siting the terminal somewhere other than the first landfall.

Tankers

Where the transportation system for the field uses tankers, the allowable expenditure will normally include the capital installation and operating costs of tanker loading facilities on the field together with the costs of chartering or acquiring the tankers used to transport the oil, converting them as necessary and of operating them between the field and the relevant UK terminal. Deballasting costs however are not allowable.

Tankers may be owned by the participators, either directly in proportion to their field equity or through a transportation company in which each participator’s share in the equity matches its field equity. In such cases the total capital costs of the vessel (but see OT11100 and OT11150 regarding long-term assets), its annual operating costs and the voyage costs of transporting oil from the field are allowable, subject to the limitation described below.

Expenditure on transportation by tankers owned jointly by the participators in a field will be proper to a claim under OTA75\SCH5. Since liftings do not necessarily follow the equity interest, the contributions to costs vary between the participators according to their liftings and not to their equity. In these circumstances LB Oil & Gas accept that the expenditure need not be shed out in relation to equity interests.

Alternatively, tankers may be on charter (either bareboat or time) in which legal ownership is with a third party. A bareboat charter involves the person chartering the tanker meeting the operating and voyage costs and paying an annual charge to the owner for the period of lease. A time charter involves periodic payments to a third party plus operating and voyage costs. Tankers can also be on single voyage charter in which the participator will pay a single cost per tonne of cargo to include operating voyage costs and the return on capital. Occasionally a tanker, which is dedicated to a field, will be used on an outcharter elsewhere than in that field. The related receipts will be assessed in the field to which the tanker is dedicated and no tariff receipts allowance will be available, see OT15600.

Whenever in an arm’s length transaction the price paid for oil includes payment for transportation and the additional amount is thus brought into charge to PRT, the costs of transporting may be allowed wherever delivery takes place.

Tanker loading

The case of BPEOC v CIR, (SpC00254), found that the costs of installing vapour recovery plant at a tanker loading terminal enhanced an asset already used for transporting oil. The fact that the recovery plant operated at least in part downstream of the point of delivery was considered to be of no moment because the enhanced asset remained inter alia a qualifying transportation facility. Any case where expenditure is claimed on the basis of this decision should be referred to the SCS authorising officer.

Transportation-Insurance costs

The cost of insuring transportation including pipelines and tankers is allowable but insurance against deballasting risks, pollution, running aground etc. are shipping risks not within OTA75\S3(1)(f). It is arguable whether cargo insurance premiums are allowable under OTA75\S3(1)(f). LB Oil & Gas practice is to accept that relief is available under OTA75\S3(1)(f) provided that an assurance is given by the participator that any recovery under the relevant policy will be brought into charge to PRT. The cost of insuring against costs of operations during business interruption as distinct from insurance against loss of profits are allowable, see also OT09350.