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HMRC internal manual

Oil Taxation Manual

Capital Allowances: Production Sharing Contracts - Disposals and Part Disposals of the Contractor's Interest

CAA01\S170

CAA01\S170(1) applies where a person, the relevant participator, acquires an interest in a PSC from the contractor or another person who has acquired the interest from the contractor. It ensures that where some of the expenditure on the interest acquired is attributable to plant & machinery that is deemed as owned by the contractor under CAA01\S168 or the other person (the other participator) under CAA01\S169 then the plant and machinery can be treated as owned by the person acquiring the interest.

The vendor is treated as having made a disposal of the plant and machinery. This brings into account a disposal value notwithstanding the general rule that the deemed ownership is not ended until either the government or their representative ceases to own it, or it ceases to be used or held for use under the contract.

The disposal value is fixed by CAA01\S170(3) as the amount equal to the acquirer’s expenditure attributable to the plant and machinery.

CAA01\S170(5) limits this disposal value, in line with the rules applying to North Sea licences (CAA01\S410), to the amount of the relevant participator’s expenditure attributable to plant and machinery or, if less, the disposal value to be brought into account by the contractor or the other participator as a result of subsection (3).

This reference to a lesser amount, and the disposal value being brought into account by the vendor, means that where the disposal value is limited, for example to cost, by the operation of capital allowances rules, it is this lesser amount that is used instead of the amount attributable to the plant and machinery in the sale and purchase of the interest.

If, on the transfer of an interest in a PSC, the agreement does not specify how much of the consideration is to be attributed to the plant and machinery, then CAA01\S170(6) provides for a “just and reasonable” attribution.

Overall this means that companies “farming-in” to a PSC step into the shoes of the original contractor. They qualify for relief both in relation to expenditure for qualifying purposes under the contract that is incurred after the “farm-in” and in relation to any consideration which may pass on the farm-in which is directly attributable to the plant and machinery, subject to the statutory limits placed on that amount.