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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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Oil contractors ring fence: the effect of the ring fence

Part 8ZA provides for a contractors ring fence which works in a similar way to the existing production ring fence OT21000.

CTA2010\S356M provides that if oil contractor activities are carried on then they are treated as a separate trade. Where there is composite trade partly of contractor ring fence elements and partly of elements outside the contractor ring fence, then the contractor ring fence profits and profits arising from activity falling outside the contractor ring fence, must be calculated separately.

Oil contractor activities has a specified meaning provided by CTA2010\S356L, which essentially covers activities which include the use of a leased relevant asset to which the new hire cap would apply OT50005.

The effect of the contractors ring fence is to prevent expenses and reliefs which are not attributable to the oil contractor activities from reducing those profits. Where a company is the subject of both the contractors ring fence and the production ring fence, these restrictions apply independently and it is not possible to relieve losses made in one ring fence against profits made in the other.

Restriction on losses CTA2010\S356NE

CTA2010\356NE provides that losses made by a contractor on activities outside the Contractor ring fence (Contractor NRF losses) are not allowed against contractor ring fence profits (contractor RF profits) for the purposes of CTA2010\S37.

However, there is no restriction on the use of contractor ring fence losses (contractor RF losses). These can be carried back and allowed generally against profits including profits arising outside the contractor ring fence.

Contractor RF losses can also be carried forward and set against subsequent contractor RF profits.

If a loss arising outside the contractor ring fence is carried forward (contractor NRF loss), it can only be utilised against profits outside the contractor ring fence in a subsequent accounting period.

Subject to the rules which stream the losses inside and outside the contractor ring fence, Contractor NRF losses will be subject to the normal rules relating to trade cessation and succession.

Restriction on Management expenses CTA2010\S356ND

Expenses of management are not allowable against contractor ring fence profits.

Restriction on Group Relief CTA2010\S356NF

Under CTA2010\S356NF(1) group relief is to be allowed against the claimant company’s contractor ring fence profits only to the extent that the loss surrendered arises from contractor ring fence activities.

CTA2010\S356NF(2) ensures that where a company has a contractors ring fence profit and a loss arising outside the contractor ring fence, the company may surrender the contractor NRF loss to another company outside the contractor ring fence which is a member of the same group.

As with the production ring fence, it is not possible to reduce profits within the contractor ring fence completely by means of group relief, where there are charitable donations subject to CTA2010\S189

Restriction on Capital Allowances

Capital allowances under CAA2001\S259 or CAA2001\2S60 (special leasing, see CA20040) cannot be claimed inside the contractor ring fence.

Restriction on Loan relationship credits and debits CTA2010\S356NB

CTA2010\S356NB allows a deduction for interest against contractor ring fence profits only if the money borrowed is used to meet expenditure incurred in carrying on oil contractor activities or is appropriated to meet such expenditure. These restrictions apply whether the borrowing is from an associated person or not. The section applies only to a company with contractor ring fence profits.

CTA2010\S356NB(2) allows a deduction against contractor ring fence profits for loan relationship debits to the extent that the loan relationship is in respect of “money borrowed” that has been “used to meet” expenditure incurred by the company on oil contractor activities. The legislation parallels that in place for the production ring fence. The guidance at OT22000 applies to the terms used.

Exchange losses can be deducted from contractor ring fence profits only to the extent they arise on money debts on which interest payments would be allowed as contractors ring fence deductions.

Exchange gains arising in similar circumstances are treated as loan relationship credits and included in the contractor ring fence profits (CTA2010\S356NC).