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HMRC internal manual

Oil Taxation Manual

PRT: tax-exempt tariffing receipts - cost allocation - application of the modified approach

The modified approach applies to the allocation of expenditure to tax-exempt tariffing use where the agreement between the recipient of the tariff for the use of the asset and the parties in the user field was made at arm’s length, or on a basis equivalent to at arm’s length and the expenditure is:

  • operating expenditure incurred in connection with the use of the asset or
  • long term asset expenditure incurred on the acquisition, bringing into existence or enhancement of an asset where the expenditure was not incurred for the purpose of the user field

The modified approach does not apply to expenditure allowable by virtue of OTA75\S3(1)(i) (Decommissioning - OT10050) or OTA75\S3(1)(j) (Restoration - OT10150).

Where the user field incurs long term expenditure, such as the cost of tying-in the user field to the host field platform or modifying the host’s assets for user field production, the expenditure does not qualify for relief in the host field. Where the host field incurs this expenditure and recovers the outlay through a tax-exempt tariff the modified approach will not apply and the expenditure will be disallowed in full. This is because the application of the modified approach would otherwise provide relief where none is due. The modified approach does however apply to long term asset expenditure incurred on shared assets where the cost would normally be allocated to all expected user fields.

For further details on the cost allocation calculation and the operation of the modified approach see:

  • Participators in Common and Connected Persons (see OT15930).
  • Cost Allocation Calculation (see OT15940).