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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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Capital Gains: Disposal of Field Interests

The approval, by the Secretary of State of a development plan (a Development Consent), originally known as Annexe B, at or following the determination of a field has important consequences for capital gains or losses arising from any farm-outs/disposals of UK and UKCS licence interests during the development or production phases.

The determination of a field by the Secretary of State involves setting its boundaries by co- ordinates of longitude and latitude (sometimes to a specified depth) on the basis of geological evidence of the oil-bearing structure, or structures. The date of field determination is also relevant for capital gains purposes as gains or losses on disposal after 12 March 1984 of licence interests and assets in a determined field are kept apart (i.e. ring fenced) from other gains (TCGA92\S197). This applies whether or not development consent has been obtained.

The consideration for farm-outs after the exploration phase will generally involve cash but may also include other elements e.g. the grant of a subordinated interest in future profits or production or a development carry which will need to be valued.

Where the farmer-out disposes of a bundle of assets, comprising the rights in the licence and related agreements (e.g. JOA and any unitisation agreement), plant and machinery and possibly industrial buildings, the sale agreement may analyse the consideration as between each asset. If however the terms of the agreement are artificial or no apportionment is provided TCGA92\S52(4) may be applied. TCGA92\S52(4) requires that any such apportionment shall be “just and reasonable”.