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HMRC internal manual

Oil Taxation Manual

Decommissioning and abandonment: general decommissioning expenditure: restrictions on allowances

CAA2001\S165A to S165E

These sections were introduced under FA2013\Sch32\Part 1 and relate to expenditure incurred on or after 17th July 2013. This is part of the measures introduced to provide companies with greater certainty regarding decommissioning tax relief and to allow them to adopt post-tax securitisation arrangements for the future costs of decommissioning.

S165A to S165E apply to restrict the amount of decommissioning relief available for decommissioning expenditure incurred in certain circumstances. The provisions are to ensure that payments made under the Decommissioning Relief Deed (DRD) are not excessive following the introduction of DRD’s.

Decommissioning services supplied by connected persons

S165A and S165B provide for the amount of relief available to be restricted by an amount “D” where a person provides services to a connected party all or part of which the consideration is decommissioning expenditure. This restriction applies irrespective of whether the payments are made directly between the connected parties or whether the connected parties are subject to the same contract. Subject to sections S165C & S165D the amount “D” is the cost to the provider of the decommissioning services.

S165C applies the provisions of sections S165A & S165B where the service is a planning or project management service and the cost plus method is an appropriate method of applying the arm’s length principle to the provision of it. In this case the allowance for decommissioning expenditure is restricted to the smaller of the appropriate mark-up under the cost-plus method or 10%.

S165D applies if the service is provided to all members of the field group, including parties not connected with recipient of the services (R). In these circumstance there is no restriction to R’s costs provided the decommissioning expenditure is incurred by the field partners in accordance with the cumulative production from the field or their equity shares in the field. However, if the amount of the consideration or its apportionment are part of an avoidance scheme then this section does not apply and the relief available is restricted to cost.

Transaction to obtain tax advantage

S165E applies where two persons (connected or unconnected) enter into a transaction that either has an avoidance purpose, or is part of, or occurs as a result of, a scheme or arrangement that has an avoidance purpose. In this situation any relief for decommissioning expenditure is reduced, to nil if necessary by the amount of that would cancel out any tax advantage obtained under the scheme.