IR33

9 March 1999

PETROLEUM REVENUE TAX AND NORTH SEA CORPORATION TAX: 
ANTI-AVOIDANCE MEASURES

Measures to protect the yield from petroleum revenue tax (PRT) and
North Sea corporation tax (CT) were announced by the Chancellor
today.

The Finance Bill will include legislation to ensure that companies
cannot minimise their PRT and North Sea CT liabilities by selling and
then leasing back North Sea assets. These provisions will apply where
the asset is sold on or after Budget day, unless sold under an
unconditional contract entered into before today.

DETAILS

Sale and leaseback

1. A company with an interest in a North Sea oil field may raise
finance by selling an asset which is used in the field and then
leasing it back.

Sale and leaseback - PRT

2. Where the oil field is subject to PRT, the sale proceeds are
liable to PRT and all of the lease rental payments qualify for PRT
relief. There are two loopholes in these rules which companies have
been able to exploit.

3. First, companies have been able to take advantage of the way in
which "safeguard" relief can ensure that, while the sale proceeds are
liable to PRT, no PRT is actually paid on those proceeds. After
safeguard relief has ended, companies can claim effective PRT relief
on the lease rental payments. PRT relief would thus have been given
twice on expenditure on the asset - when the asset was originally
acquired and on the rental payments - without an effective PRT charge
on the sales proceeds.

4. Second, due to the availability of PRT relief on the whole of the
lease rental payments, companies have been able to use sale and
leaseback deals as a means of raising finance and effectively
claiming PRT relief on the interest payments. This gets round the
general exclusion of interest from the definition of expenditure
which can be relieved against PRT. In addition, as the finance raised
through a sale and leaseback could be used for any purpose, companies
could claim PRT relief for the cost of financing an investment on
which the returns would be outside the scope of PRT: this is clearly
inconsistent with the general PRT regime.

5. The measures announced today will close these loopholes:

   -  where a company sells an asset in a period in which safeguard 
      relief applies and then it, or a connected company, leases it 
      back, PRT relief will not be available for rental payments that
      exceed the sale proceeds on which there was an effective PRT 
      charge

   -  for other sale and leaseback deals, relief will not be 
      available for rental payments that exceed the sale proceeds

Sale and leaseback: North Sea CT

6. The 'ring fence' around the profits of North Sea companies is
designed to prevent losses from non-North Sea activities from being
set against profits of North Sea activities. One of the ring fence
rules is that interest can only be deducted from North Sea profits if
the capital has been borrowed for a North Sea oil purpose. However,
until today, this rule did not apply specifically to the interest
element of lease rental payments. Where a company raised money
through a sale and leaseback of North Sea assets, it might have been
able to claim relief against North Sea profits for the interest
element, even if the finance raised was used for non- North Sea
activities. This would have undermined the ring fence principle.

7. The legislation to be brought forward in the Finance Bill will
close this potential loophole. Where the finance raised through the
sale and leaseback deal is not used for a North Sea purpose, it will
no longer be possible to set the interest element of lease rental
payments against ring fence CT, although it will be possible to set
it against non ring fence CT.

NOTES FOR EDITORS

1. PRT is a field-based tax, with each separate oil or gas field
being a separate tax unit. PRT is currently charged, for half-yearly
periods, at 50% on the value of oil and gas produced, tariffs
received and any receipts from selling assets less the costs of
developing and running the field. PRT was abolished on 16 March 1993
for fields given development consent on or after that date.

2. The PRT regime includes a number of reliefs and allowances which
are designed to ensure that the tax does not impact unfairly on
smaller or more marginal oil and gas fields. 'Safeguard' is one of
these reliefs. It allows fields to achieve a certain level of return
on investment before they incur any PRT liability. This relief
applies in all half-yearly chargeable periods from the first
production of oil or gas until payback and then for half as many
again. When safeguard applies, profits in the period are compared
with a threshold level which is 15% of cumulative capital expenditure
up to payback. If profits are below the threshold, no PRT is payable.
If profits are above the threshold, PRT payable is the lower of 80%
of the excess and the amount of PRT payable under normal rules.

3. All the standard CT provisions apply to oil companies operating in
the UK. However, there is in addition a ring fence around North Sea
profits. The basic purpose of the ring fence is to ensure that
corporation tax on these profits is not reduced by losses or other
reliefs arising from other activities. The ring fence imposes
restrictions to achieve this.

INLAND REVENUE PRESS OFFICE
Media enquiries to:           0171 438 6692/6706/7327
(Out of hours:0860 359544)

Non-media enquiries to:       0171 438 6420/6425
(Office hours only)

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling