PRT appendices - elections for oil fields to become non-taxable
Due to mainly the availability of oil allowance there are a significant number of oil fields that, for the rest of their productive life, will never pay PRT. For such fields the option is available to indefinitely defer the making of a PRT return to HMRC on the basis that the completion of a “nil” return is an unnecessary administrative burden. Conditions for fields to indefinitely defer the making of returns are set out in OT19200 and OT19225.
However it is the case that for these non paying fields the mere fact that they are taxable fields (and therefore potentially liable to PRT, however remote the possibility) is acting as a deterrent for companies wishing to buy or sell an interest in a field. Companies may be unwilling to acquire field interests if there is a risk of a future PRT liability, or at the least may require a reduction in the sale price, effectively as a risk premium for such an event happening.
Following discussions with industry, Section 107 and Schedule 33 of FA 2008 introduces legislation allowing field participators for a field that is never likely to pay PRT to elect to become non taxable. The election is, subject to exceptional circumstances, irrevocable.
How the legislation works
Section 107 of FA 2008 introduces a new category of non taxable field OT03515 at Section 185(IZA) of FA 1993 whereby an election has been made and accepted by HMRC in accordance with a new Schedule 20B to FA 1993 (introduced by Schedule 33 to FA 2008).
The following paragraphs outline how the new legislation works - paragraph references are to those of Schedule 20B.
Paragraph 1: The responsible person OT04030 may elect on behalf of (and with the agreement of) the other current field participators that the field is to be non taxable.
Paragraph 2: On receipt of an election, HMRC will decide whether the field is non taxable. The conditions for a field to be non taxable for the purposes of this Schedule are that for any subsequent chargeable period either no assessable profit will accrue to any participator in the fields or, if an assessable profit does accrue, then this will be fully covered by oil allowance OT17000. In order for HMRC to properly consider whether or not a field is non taxable the responsible person must provide sufficient information that HMRC might reasonably require in order to reach a decision. Guidance on what information might be required is provided below.
Paragraph 3: Having considered the information provided and any other information available (for example information from other government departments such as DECC). HMRC will inform the responsible person of their decision as to whether the field is to become non taxable. Within one month of being given notice of the decision, the responsible person must provide a copy of the notice to all current and former participators of the field. However the responsible person is not obliged to give a copy of a notice to a participator where this would be impractical to do so - for example a former participator which has since gone into liquidation or been wound up.
Paragraph 4: The election, if successful, will have effect from the beginning of the first chargeable period following the giving of a notice by HMRC in paragraph 3 above. The election will continue to have effect for all subsequent chargeable periods. The only exception to this is if HMRC cancels the election under circumstances in paragraph 6 below.
Paragraph 5: As long as the election has effect no unrelievable field losses OT16250 will be available to any participator past or present from losses accrued during the lifetime of the field. This includes losses accruing prior to the election being made or having effect. This is reinforced by Part 2 of Schedule 33 to FA 2008 (paragraphs 2 and 3) which amends OTA75\S6(1A) and inserts a new sub-paragraph 9A in FA80\Sch17/Para 15 both making reference to this paragraph.
Paragraph 6: HMRC may cancel the election within 3 years of giving notice under paragraph 3, if any information provided in support of the election should prove to be inaccurate or incomplete to the extent that HMRC would not have made the decision they did under paragraph 2. Further details and examples on what circumstances HMRC will cancel an election are given below.
Paragraph 7: If HMRC cancels an election then notice must be given of the cancellation to the person who made the election who in turn must within one month provide a copy of such a notice to all participators of the field both past and present. If it should prove impracticable for HMRC to give notice to the person who made the election then it must give notice to a participator at the time the notice was cancelled and, failing that, to a former participator.
Paragraph 8: The effect of cancelling an election is to treat it as if it had never had effect. This in turn raises the possibility that participators and the responsible person will become liable to penalties for having failed to make returns during the period that the election had had effect (the “relevant chargeable periods”). This paragraph provides for HMRC to extend the period for which returns (and also expenditure claims) must be made by virtue of OTA75\Sch2\Para12A and OTA75\Sch5\2(7)&(8).
Paragraph 9: The responsible person may appeal against the decision of HMRC under paragraph 2 within 3 months of the giving of the notice under paragraph 3.
Paragraph 10: Any participator or former participator at the time HMRC cancel an election under paragraph 6 may, within 3 months of the notice of cancellation, appeal against the cancellation. This is irrespective of whom the notice of cancellation was given to.
Paragraph 11: Any appeal under paragraphs 9 or 10 is to be made to the First Tier Tribunal.
Paragraph 12: Contains definitions relevant to the Schedule.
Information to be provided in support of an election
The election for a field to be non taxable is a natural extension of allowing for the deferral of making returns for a specified or, in particular, an indefinite period. As such HMRC would expect companies to provide, as a minimum, similar information to that already provided in support of an application to indefinitely defer returns.
Therefore HMRC would expect the responsible person (likely to be the field operator) to provide production profiles across a range of probabilities including P10 or proven, probable and possible. Also, where appropriate, details of contracts in place and the consequences for PRT if these changed. In some cases it might be appropriate for a meeting to be held in order for HMRC to be assured that the field is not going to pay PRT in the future.
The reason for HMRC seeking such certainty is that the election is an irrevocable one and, unlike the deferral of returns, there is no recourse for HMRC to revisit the case and to cancel the election except under the circumstances set out in paragraph 6 of Schedule 20B to OTA75.
It should also be noted that for some fields it will be more straightforward than others to establish with certainty whether or not they will pay PRT in the future and the amount of information requested will reflect this.
Cancellation of an election
Paragraph 6 of Sch20B allows HMRC to cancel an election within 3 years of giving notice if any information provided in support of the election proves to be inaccurate or incomplete. This is only to the extent that HMRC would not have agreed to the field being non taxable had they been in possession of the complete or correct information at the time of making the decision.
It should be emphasised that this provision does not allow HMRC to change its mind over a decision made previously if new facts, not in the company’s possession at the time the election was made, come to light. The following examples may help here.
Two years following HMRC’s agreement that a field is to be non taxable a new seismic survey reveals substantial and hitherto unknown reserves. Revised economic forecasts for future field production indicate that the field will pay PRT over a number of periods.
In this case HMRC would not cancel the election since the information provided at the time in support of the election was complete and accurate. The new information was as a result of the seismic survey which occurred after HMRC agreed the election.
Two years following HMRC’s agreement that a field is to be non taxable it is discovered that a previously forgotten seismic survey reveals substantial reserves. As in example 2 revised economic forecasts for future field production based on this survey indicate that the field will pay PRT over a number of periods.
In this case HMRC would cancel the election since the information provided at the time in support of the election was incomplete and inaccurate. The new information was as a result of a seismic survey which occurred prior to HMRC agreeing the election.
The facts are as in example 2 except that revised economic forecasts for future field production based on the survey indicate that the field will still never pay PRT to the remaining life of the field.
In this case HMRC would not cancel the election since, even if the new information had been provided at the time the election was made, it is likely that HMRC would still have agreed the election.
At the time the election is made it is anticipated that future investment plans for the field will not increase production levels to the extent that there will be any liability to PRT. Two years later the oil price has risen to such an extent that two new production wells are planned with the result that the field is likely to pay PRT in the future.
This case is not so clear cut. The additional investment is as a result of an increase in the oil price which occurred some time after the election was made. However it is arguable that the information provided in support of the election should have taken into account a range of oil prices and the likely effect this would have on future investment. The answer here would depend on the particular facts of the case but would take into account whether the increase in oil price was such that it could reasonably have been expected to have been factored into future production profiles.
Whilst making a “never paying field” a non taxable field will have no tax consequences for the field itself there would be implications on the assessment of tariff receipts in the hands of an asset owner on tariffs paid by such a non taxable field.
Therefore paragraph 4 in Part 2 of Schedule 33 to FA 2008 amends OTA75\S9(5)(a) so that a field that has become non taxable by virtue of an election made under Schedule 20B remains a user field for the purposes of the tariff receipts allowance legislation.
As a result tariff receipts received from an elected non taxable field under FA93\S185(IZA) will still be eligible for tariff receipts allowance OT15625 in exactly the same way as before the election was made.