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HMRC internal manual

Oil Taxation Manual

Oil contractors ring fence: calculating the hire cap: total expenditure - original cost

The original cost consists of the consideration given when the asset was first acquired by an associated person plus any costs in connection with that acquisition other than financing. This cost represents the amount first paid for the asset and in most cases this will be the construction cost. Associated person is defined at CTA2010\S356LB OT50020.

If the asset was acquired as part of a composite transaction, including the value of transferred contracts utilising the asset then the asset value will need to be determined in isolation from the contracts acquired as the latter do not constitute part of the relevant asset.

In some cases it may be that the asset was never acquired by an associated person (for instance it was originally leased and may still be leased). In these circumstances, the figure for original cost will be an estimate of what would have been the acquisition cost, if the asset had been acquired at the time it was first leased (CTA2010/S356N(10) and (11)).

If there is uncertainty as to the likely acquisition costs (e.g. no original records remain when the decision to lease rather than buy was taken), companies should make their best estimate using available third party information OT50044.

The original cost does not include any expenditure originally incurred on (or to lease) part of a relevant asset but which has since been removed from the asset (CTA2010\S356N(12)). This does not apply to any reduction in value simply because of wear and tear. In many instances it will be possible to identify large pieces of kit which have been removed and make an estimate of original acquisition cost. However, if part of the asset has been replaced (perhaps more than once) as a result of a succession of maintenance and overhauls/upgrades, specific records may not easily identify replaced components. In these circumstances HMRC accepts the need to make an estimate.

Where an asset was first acquired or leased after the commencement of an accounting period, the amount of original cost recognised is reduced by reference to the number of days in the period before the asset was acquired (CTA2010\S356N(13)).