EXPLANATORY NOTE

1. This clause restricts the lease payments that can be set against North Sea ring fence profits for the purposes of corporation tax. It provides that, where a company raises finance through selling and then leasing back a North Sea asset, the interest element of the lease payments can only be set against ring fence profits to the extent that the finance raised is used for a North Sea purpose. This mirrors the treatment of interest, which can only be set against ring fence profits if the loan is used for North Sea expenditure. As with interest, any part of a lease payment which cannot be set against ring fence profits because the finance is not used for a North Sea purpose can be set off against non-ring fence profits. The clause will apply where the sale of the North Sea asset takes place on or after 9 March 1999, unless the sale takes place under an unconditional contract entered into before that date.

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2. Subsection (1) inserts a new section 494AA after section 494 of the Taxes Act 1988. Section 494 contains provisions on the allowability of interest and other finance charges against North Sea ring fence profits.

Subsection (1) of 494AA provides for 494AA to apply where a company disposes of an asset and then it, or a connected company, leases the asset for use in its ring fence trade within two years of the disposal.

Subsections (2) and (3) of 494AA provide that relief against ring fence profits shall not be available for the element of the lease payments that would, in accordance with normal UK accountancy practice, be treated as a finance charge.

Subsection (4) of 494AA qualifies the restrictions on relief against ring fence profits provided for by subsections (2) and (3). The elements of the lease payments that would otherwise be ineligible for relief against ring fence profits will be relievable to the extent that the disposal proceeds are used for a North Sea oil purpose.

Subsection (5) of 494AA provides that the elements of the lease payments disallowed against ring fence profits under subsections (2) and (3) are relievable against non-ring fence CT.

Subsection (6) of 494AA defines ‘lease’ for the purposes of 494AA.

3. Subsections (2) and (3) provide for the clause to apply to assets disposed of on or after Budget day. However, in the case of assets sold under contracts entered into before Budget day, the clause will not apply if the contract is unconditional or to conditional contracts where all the conditions have been satisfied before Budget day.

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4. All the standard corporation tax provisions apply to oil companies operating in the UK and on the UK Continental Shelf. 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. One such restriction is that loan interest cannot be set against ring fence profits unless the loan is used to meet North Sea expenditure.

5. Before Budget day, this restriction did not apply to the interest element of lease rental payments. Where a company raised finance by selling an asset - for example, a pipeline or a platform - and then leasing it back for use in its North Sea trade, it might have been able to set off the interest element of the lease payments against its ring fence profits, even if the finance was used for non-North Sea activities. This would have undermined the ring fence principle.

6. The clause closes this potential loophole. While it removes the potential for abuse in the current rules, it does not hinder sale and leaseback deals undertaken for commercial reasons.