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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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PRT: meaning of expenditure incurred and timing issues - time when expenditure is incurred


FA93\S191(1) provides that expenditure is to be treated as incurred on the date on which an obligation to pay becomes unconditional, irrespective of the date of payment. This may not necessarily be the date of a contract since the contract itself may contain conditional clauses. Under an incentive-based contract, for example, any amount payable that is conditional upon the contractor achieving the particular objectives contained in it will not be deductible until the contractor achieves them.

There is a further provision in FA93\S191(2) which applies to expenditure incurred under any contract

  1. for the acquisition of an asset, or an interest in one, or
  2. for the provision of services or businesses facilities of any kind, whether or not in connection with the use of an asset, or
  3. for the grant or the transfer of a right, licence or interest, other than an interest in an asset.

Expenditure payable under such contracts is available for relief only to the extent to which the contractor has performed its contractual obligations by the end of the claim period in question. So in the case of a contract where there has been a front-loaded payment, even if the payer can demonstrate that an unconditional obligation has been met in that payment, only partial relief at most is likely to be available. This is because relief can only be given to the extent that the work specified in that contract has been carried out.

The starting point for consideration of the date on which expenditure is incurred for PRT is how the expenditure has been or is being treated for the accounts, prepared according to generally accepting accounting principles (GAAP). If there is no conflict between these and the statutory provisions in FA93\S191 the expenditure can be allowed. Generally LB Oil & Gas accepts that the wording in FA93\S191(1)(2) is a close replication of accounting practice and GAAP and we do not expect there to be a conflict in many cases. LB Oil & Gas allows reasonably calculated accruals and stage payments under long term contracts where work relevant to the particular stage has been completed and the parties have fulfilled their obligations. But retentions made by a contracting participator pending fulfilment of obligations will not be allowable.

In testing whether the FA93\S191 tests have been met, LB Oil & Gas will need to check documentation available from asset managers etc. See OT14540 for further detail.