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HMRC internal manual

Oil Taxation Manual

Oil contractors ring fence: calculating the hire cap: the relevant percentage

The legislation acts to cap the amount that can be deducted inside the contractor ring fence. It does this by applying a fixed percentage, the relevant percentage, to an identified amount of expenditure, being the amount paid out for the asset and its enhancement.

The relevant percentage

The amount of the cap is calculated as 7.5 per cent of the total recognised cost. This percentage, called the relevant percentage, represents a proxy for the average costs met by the asset holders. It has initially been computed by reference to:

  • An average 25 year depreciation rate (4 per cent).
  • An average amount of debt financing, estimated at an interest rate of 5 per cent on a debt equity ratio of 1:1 (2.5 per cent).
  • An additional 1 per cent to recognise additional administration/revenue costs and the possibility of some fluctuation around the average.

The Treasury has the power to make regulations amending the relevant percentage (CTA2010\S356NA(1)) or which make other provisions (CTA2010\S356NA (2)). As at 31 October 2014 no regulations have been made.