EXPLANATORY NOTE

1. This measure remedies an anomaly in the existing petroleum revenue tax (PRT) rules for pipelines subject to an election under section 231 Finance Act 1994. Where an election has been made, PRT relief is not generally available for any expenditure on the pipeline, and tariffs received for transporting oil and gas from new UK fields are exempt from PRT. The clause extends the PRT exemption to tariffs received by the owners of these pipelines for transporting non-UK oil or gas. This measure will enable these North Sea pipelines to compete fairly tofor the transportation of non-UK oil and gas to the UK. The measure will apply to tariffs received in chargeable periods ending on or after 31 December 1999.

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2. Subsection (1) amends subsection (1)(b) of section 233 Finance Act 1994, which currently covers tariffs received for use of the pipeline by a non-taxable field (a UK field which is not liable to PRT since it was given development consent on or after 16 March 1993). The amendments extend the subsection to cover tariffs from all fields which are not liable to PRT, including non-UK fields. The result is that, where a participator has made an election, which has been accepted, with reference to a pipeline, tariffs received for transporting non-UK oil or gas through that pipeline to the UK will not be chargeable to PRT.

3. Subsection (2) applies subsection (1) to tariffs received or receivable in chargeable periods ending on or after 31 December 1999.

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4. The Finance Act 1994 included legislation which allowed owners of certain North Sea oil or gas pipelines to elect for the pipeline to be partly excluded from the scope of PRT. Elections could be made for pipelines over 25 kilometres long where the host field and pipeline had not recovered their costs and where at least half of the design capacity of the pipeline was unfilled or uncommitted at the time of the March 1993 Budget. The purpose of this legislation was to help remove possible distortions to competition arising from the abolition of PRT for new fields from 16 March 1993. No new elections can be made since section 231 Finance Act 1994 set a deadline of 1 January 1996 for pipeline elections.

5. A valid election had three effects. First, only a proportion of expenditure already incurred on the pipeline was allowable for PRT purposes. The allowable proportion reflected the extent to which capacity in the pipeline was committed as at 16 March 1993. Second, subject to transitional rules, no future expenditure qualified for PRT relief. Third, all tariffs received from non-taxable fields (i.e. UK fields given development consent on or after 16 March 1993) were excluded from the charge to PRT - use of the pipelines by these fields would not have been committed as at 16 March 1993.

6. These rules work as intended for tariffs received for transporting oil and gas from UK fields. But the rules as they stand do not give a sensible result if a pipeline, for which an election has been made, is used to transport oil or gas from a non-UK field. Tariffs received for transporting non-UK oil or gas would be liable to PRT, but any expenditure which the pipeline owner incurs in order to earn these tariffs would not be eligible for PRT relief. This mismatch of the PRT treatment of tariffs and expenditure reliefs prevents these pipelines from competing fairly for the transportation of non-UK oil and gas to the UK.

7. This defect in the legislation will be removed by taxing tariffs received by these pipelines from transporting non-UK oil and gas in the same way as tariffs received from transporting oil and gas from non-taxable fields in the UK. As a result, these tariffs will be excluded from the charge to PRT. This change will apply to tariffs received in chargeable periods ending on or after 31 December 1999 and will allow pipelines for which an election has been made to compete fairly for the business of transporting non-UK oil or gas.

8. Without this change, it is unlikely that these pipelines would be used to transport any non-UK oil or gas. This measure is therefore expected to lead to no change in PRT receipts. In the longer term, additional transportation of oil or gas could lead to a small increase in corporation tax receipts.