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HMRC internal manual

Oil Taxation Manual

PRT: appendices - PRT/accounts reconciliations (modified version)

The following paper was issued to UKOITC (The United Kingdom Oil Industry Taxation Committee, formed in 1965) and BRINDEX on 29 July 1998.


  1. This paper updates the guidance material on reconciliations following the agreement with industry representatives in 1997.
  2. Because of the structure of PRT legislation, expenditure claims and returns of incomings are made, in most cases, long before the audited accounts are available. OTO’s claims examination methods involve some inspection of basic records and consideration of accounting systems. This cannot take the form of a full audit of each claim and return however. OTO needs further reassurance and this can only be achieved by a reconciliation of those claims and returns with the underlying records or accounts.
  3. Reconciliations are partly produced by companies for their own purposes, to give them confidence in claims and returns made and to help track unclaimed PRT expenditure. The way in which this is done may vary from company to company. OTO policy is to show a degree of flexibility so that reconciliations can be specifically tailored to each company’s circumstances, accounting systems and controls. When reconciliations are submitted it is very helpful to have a covering narrative explaining the methods used, and highlighting problems encountered and how these were resolved. This should reduce the time spent in subsequent negotiation.
  4. One particular purpose of the reconciliation is in relation to “miscellaneous” receipts such as compensation and insurance recoveries and which should be identified. Broadly these are receipts, the charge (or timing of charge) of which could be uncertain. For corporation tax the treatment should be fairly obvious on the face of the accounts or controlled by a supporting schedule. For PRT the treatment may only be disclosed when the reconciliation is examined.
  5. Another feature of the PRT rules is that there will be a residue of expenditure, in principle claimable for PRT purposes, which has not yet been claimed. There is a risk that this unclaimed “pot” could be claimed more than once, or not at all. So there has to be an ongoing memorandum of unclaimed amounts submitted each year, as part of the full reconciliation, updated by the deduction of claims made since the previous reconciliation and by the addition of further unclaimed amounts.
  6. As regards the main incomings, sales, tariff receipts and chargeable disposal receipts, these may each require a separate reconciliation. The Section 493 adjustments should already be reconciled between the CT accounts and the PRT returns but there may need to a separate reconciliation of the arm’s length sales. As regards tariffs, there are often timing differences between the entries in the PRT1 and the ledger entries which need to be explained.
  7. In the past a full reconciliation of all claims to statutory accounts (or other accounts used as a basis for corporation tax) were required from all participators. It is still open to them to prepare reconciliations by reference to the statutory accounts if they wish, but an important recent change is that the OTO may now be willing to agree a modified method of reconciliation of claims rather than by reference to the accounts used as a basis for corporation tax. The precise method to be agreed will depend on the individual circumstances of the company but broadly the approach is that all participators may be able to reconcile the claims they have made to ledger balances rather than statutory accounts etc. It follows that the key responsibility for Schedule 5 claims lies with the Responsible Person while co-participators should be able to rely on billings received from the Responsible Person. (In appropriate cases the OTO may ask a co-participator to demonstrate that its share of Schedule 5 claims reconciles to operator billings.) Every participator will of course still need to satisfy the OTO in respect of its own Schedule 6 and 7 claims.
  8. In the case of the Responsible Person the joint venture billings are taken from the ledger accounts. So the Schedule 5 claims can be reconciled direct to the ledger. It is possible that OTO may wish to make a periodic inspection at ledger level, in some cases in liaison with OGRO. Such a review might also be undertaken in conjunction with or as part of the first claim audit (see OT18650) or a continuous compliance review.
  9. Where there is not a full reconciliation to the statutory accounts it is essential that any differences picked up by the auditors when the statutory accounts are completed, which could have impact on the PRT claims and returns, are notified to OTO.
  10. The continuing requirements are therefore for:
* a full analysis of all claims made by the company (including claim numbers and the date of claims);
* a reconciliation of the claimed amounts to identifiable balances in either the statutory accounts or the ledger accounts;
* a memorandum of unclaimed costs updated every year;
* an auditable system for dealing with miscellaneous income;
* a reconciliation of the main sources of income;
* an explanation of discrepancies.
  1. It may be difficult to reconcile costs claimed under Schedules 6 and 7 if there has not been a full reconciliation of the Schedule 5 claims to the statutory accounts and when there is no system within the ledger of separate “self” billings. Total figures in the accounts will include amounts claimed and claimable Schedule 5, amounts relating to non-taxable fields, amounts not claimable for PRT, etc and to bring that figure down to the amounts properly claimable under Schedule 6 and Schedule 7 may be a very laborious exercise.
  2. As an alternative, and as envisaged by paragraph 3 above, companies may wish to discuss with OTO their particular systems and agree a method of reconciling Schedules 6 and 7 claims which is acceptable to both parties, or to demonstrate in the accompanying narrative how those aspects of the reconciliations have been arrived at. A further option is periodic audits by OTO of the invoices involved in the claims.
  3. Any double or over-claims found in the reconciliation process should be disclosed immediately. Normally (see OTO4720) there can be no netting off of over-claims and culpability will be considered as soon as possible after the disclosure of the error. OTO will wish to know whether errors reflect systems failures, and about remedial action taken.
  4. While there is some overlap with other sections of the office, particularly in relation to incomings, the PRT Expenditure Inspector will take overall responsibility for the examination of the reconciliation.
  5. It is envisaged that the reconciliations will be produced within 15 months of the year end and so, for example, for the calendar year 1997, reconciliations should be in by 31 March 1999. If delays occur OTO would wish to discuss the reasons. Continuing delays in the submission of reconciliations may affect the OTO’s ability to make decisions on claims. This is because the accuracy of claims and reliability of company systems has not been verified by the claimant company.
  6. It is important that when a field interest changes the purchaser gets access to all the information needed to prepare outstanding reconciliations and to analyse expenditure so far unclaimed.
  7. OTO would not expect reconciliations to be submitted showing large differences or major balancing items without explanation. At the same time, it is accepted that a totally balanced reconciliation will often prove difficult to achieve. As far as is reasonable having regard to the amount of the difference, the company should endeavour to establish the reason or likely reason for the difference. It will then be a matter for judgement at what point any unexplained difference should be accepted. Since the new methodology is more flexible than the one previously operating, and since the reconciliations are more closely attached to the day-to-day accounting records, it is likely that it will be easier to find explanations in most cases.