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HMRC internal manual

Oil Taxation Manual

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HM Revenue & Customs
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Capital Allowances: Exploration Expenditure Supplement: Ring fence losses and Qualifying E&A losses

ICTA88\Sch19B\para17 & ICTA88\Sch19B\para18

A company’s qualifying E&A loss for a post-commencement period for EES is calculated as follows.

  1. The starting point for a post-commencement period is the amount of the qualifying company’s trading losses of its ring fence trade for the period that can be carried forward under ICTA88\S393 and set against future trading profits.
  2. That loss is calculated assuming that the company has made every possible claim under ICTA88\S393A to set losses of the period against ring-fence profits of earlier post-commencement periods. This applies whether or not a claim under ICTA88\S393A is actually made. This amount is called the “ring fence loss”.
  3. The ring fence loss is then compared with the R&D allowances claimed in respect of qualifying E&A expenditure of the period.
  4. If the ring fence loss is greater than the R&D allowances claimed in respect of the qualifying E&A expenditure, the “qualifying E&A loss” of the period is the amount of the allowances.
  5. If the ring fence loss is less than the R&D allowances claimed in respect of the qualifying E&A expenditure, the “qualifying E&A loss” of the period is limited to the amount of the ring fence loss.

The qualifying E&A loss is then added to the pool of qualifying E&A losses on which EES may be claimed. The balance of the ring-fence loss of the period is added to the pool of non-qualifying losses (OT26098).

Transition to RFES

Where a company has an accounting period that straddles 1 January 2006 (the date from which RFES replaces EES), the straddling period is divided into two separate accounting periods. EES claims can be made in respect of the first deemed accounting period, which ends on 31 December 2005. There are special rules in ICTA88\Sch19B\para18A(1) to calculate the qualifying E&A losses and non-qualifying losses for that first deemed accounting period - see OT26100.