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HMRC internal manual

Oil Taxation Manual

PRT: allowable field expenditure - insurance


The cost of insuring field production facilities and installations, pipelines and tankers, is allowable provided that one or more of the OTA75\S3(1) qualifying purposes can be demonstrated. It follows that relief can only be given where the policies are on normal commercial terms for the risks.

The costs of insuring against political change, abandonment, shipping risks (including deballasting, pollution, running aground etc.), loss of oil stocks and loss of profits or earnings are not allowable as they cannot be brought within one of the qualifying purposes. Where a policy insures against both loss of profits and ongoing operating costs during interruption of business, the cost attributable to the latter is allowable, and some basis of distinguishing the two will need to be established subject to the underlying facts.

Ordinarily, each participator in a field will make its own insurance arrangements, including its share of the platform, and claim the premiums under OTA75\SCH6.

See OT14740 to OT14780 for the application of OTA75\SCH4\PARA2 (insurance premiums paid to connected persons, commonly known as ‘captive’ insurers).

See OT09175 for transportation insurance.

Insurance recoveries - partial damage

OTA75\SCH3\PARA8(2) restricts allowable expenditure to the extent that it has been, or will be met, out of insurance recoveries (unless the recovery is payable in respect of the total loss or destruction of any asset in which case OTA83\SCH2\PARA7 applies, see below).

Under corporation tax rules for calculating profits, insurance recoveries in respect of partial damage are regarded as becoming payable when liability is admitted (not the date of the event giving rise to the claim) even though the amount finally recovered may not be determined until later. But for PRT, which deems expenditure not to have been incurred to the extent of an actual or expected recovery, the position is more complex. Either the participator can delay making a claim for its reinstatement costs until such time as the full amount of the insurance recovery is known; or it can make a claim for the reinstatement costs as soon as they are incurred, but include a deduction\provision in respect of the estimated recovery. Any excess or deficit can then be corrected at a later date when final amounts are known.

Corrections should be in the period for which the expenditure was claimed, although for administrative ease, where timing is immaterial, amounts may be corrected in a subsequent claim.

It is common in the production phase of a field development for the individual participators to make their own insurance arrangements. Consequently when an asset is damaged the Responsible Person will claim reinstatement costs under OTA75\SCH5 and individual participators may make restrictions in OTA75\SCH6 claims (on the grounds of trade secrecy) for their own insurance recoveries. This may mean they submit negative OTA75\SCH6 claims. Such an approach is entirely non-statutory however, and LB Oil & Gas will seek to ensure that the treatment overall of the reinstatement expenditure is tax-neutral. It may in certain circumstances be necessary to disallow the OTA75\SCH5 claim (either by decision or a notice of variation) if it proves impossible to achieve the proper tax effect by other means.

Insurance recoveries - total destruction

Under OTA83\SCH2\PARA7, insurance receipts or compensation payments for the loss or destruction of an asset, which in relation to a participator in an oilfield is a qualifying asset (OTA83\S8, see OT15350), are brought into account for PRT as disposal receipts at the time the payment is received or receivable.

This is the date when liability is admitted, not the date of the event giving rise to the claim or the final date of payment.

See OT15060 on disposal receipts generally.