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HMRC internal manual

Oil Taxation Manual

Capital Gains: Undeveloped Areas - Areas with more than one prospect

TCGA92\S194 applies only where the licence interest disposed of (and any licence received in exchange) relates to an undeveloped area at the time of that disposal.

It is sometimes the case that an undeveloped area has within it more than one prospect. Such prospects may have widely differing characteristics, and may be separated not just in location, but also in depth. Where that happens, the different prospects may have differing attractions for the companies which hold the licence interests. Where two companies have interests in the same licence in an undeveloped area, they may wish to enter into arrangements whereby one company undertakes to give up its future rights in one of the prospects in favour of the other company, and in return the other company makes a similar promise in respect of the other prospect.

Such an arrangement must be subject to the approval of the Secretary of State.

In general it will be the case that at the time the agreement is made there will be no right to carve out any interest from the licence, and although the agreement as to the future intentions of the parties may be legally enforceable, immediately after the agreement the interests of the two companies in the licence will be unchanged.

Where such an agreement is at arm’s length, and the value of the rights given up by each company is the same (in an arm’s length agreement this would be evidenced by there being no other consideration, and by the licence interests of the two companies being unchanged) HMRC’s view is that the arrangement is not within TCGA92\S194 and that no disposal has taken place for capital gains purposes. It is also considered that the agreement does not create mutual trusts, even where it purports to do so, as the parties are normally contracting to provide consideration which is not within their power to dispose.