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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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Capital Allowances: Exploration Expenditure Supplement: Introduction


The following section on exploration expenditure supplement (EES) is relevant for the period 01 January 2004 to 31 December 2005. Finance Act 2006 extended the scope of EES and replaced it with Ring Fence Expenditure Supplement (RFES) for accounting periods beginning on or after 1 January 2006 - see OT26105 onwards.

Finance Act 2004 introduced EES to help companies exploring for oil or gas in the UK or on the UK Continental Shelf that did not yet have any taxable income against which to set their exploration and appraisal research and development (R&D) capital allowances. The EES increases the value of unused allowances carried forward from one period to the next, to enhance the economic value of the unused allowances.

The relevant legislation has been inserted into ICTA88 at S496A and Schedule 19B by FA04\S280 and FA04\Sch36.

EES can be claimed by qualifying companies (OT26083) which incur qualifying exploration and appraisal (E&A) expenditure (OT26083) on or after 1 January 2004 and before 31 January 2006. EES increases the value of unused R&D allowances on qualifying E&A expenditure carried forward from one period to another by a compound 6% a year. The supplement is also available on unused EES carried forwards. EES can be claimed in respect of not more than 6 accounting periods, but these need not be consecutive (OT26085).

EES cannot be claimed on qualifying E&A expenditure to the extent that there are ring fence profits arising to another company in the group or profits of an earlier period against which losses attributable to the expenditure could be set. The scheme is designed so that losses arising from expenditure that does not qualify for EES are set against profits before losses arising from qualifying E&A expenditure, to maximise the potential EES available.

There are separate rules depending on whether the E&A expenditure is incurred before (OT26090) or after the commencement of the ring fence trade to which the expenditure relates (OT26095). Pre-trading expenditure is pooled and cumulative EES can be claimed on the pooled expenditure in the first year of trading. These pre-commencement rules also contain special provisions to deal with the consequences of the disposal of a licence interest before trading begins. The post-commencement expenditure is also pooled and the supplement is carried forward as a trading loss. These rules have to accommodate losses, including losses attributable to qualifying E&A expenditure and EES that may be set against other profits.