CLAUSE 68 AND SCHEDULE 20: DECOMMISSIONING OF OFFSHORE OIL INFRASTRUCTURE

SUMMARY

1. This clause and Schedule extend the existing capital allowances for demolition of oil installations to the costs of preparation for reuse, and also the costs of removing and mothballing oil installations when their eventual fate has not been decided. 100 per cent capital allowances will be available where this takes place in connection with the closing down of a UK oilfield. Otherwise, they will be available on the 25 per cent reducing balance basis.

DETAILS OF THE CLAUSE

2. Clause 68 gives effect to Schedule 20.

3. The Schedule sets out, in Part I, the necessary amendments to the Capital Allowances Act 1990. Part II sets out similar amendments to the Capital Allowances Act 2001.

Part I: amendment of the Capital Allowances Act 1990

4. Paragraph 1 inserts three new sections after section 62 of the Capital Allowances Act 1990.

5. New section 62AA provides that expenditure on decommissioning expenditure is, subject to certain conditions, qualifying expenditure for the purposes of capital allowances.

6. New subsection 62AA(1) provides that the section will apply where a person carrying on a trade of oil extraction incurs decommissioning expenditure on offshore infrastructure used in that trade.

7. New subsection 62AA(2) indicates where terms used in the section are defined.

8. New subsection 62AA(3) provides that the person’s qualifying expenditure for capital allowance purposes is increased by the amount of the decommissioning expenditure.

9. New subsection 62AA(4) provides that the conditions in subsections 62AA(5) & (6) apply in deciding whether decommissioning expenditure qualifies.

10. New subsection 62AA(5) provides that expenditure on decommissioning of UK infrastructure is not qualifying expenditure unless it is incurred in connection with an abandonment programme under section 29 of the Petroleum Act 1998.

11. New subsection 62AA(6) prevents a double allowance being given by preventing relief under subsection (3) if an allowance or deduction could be given for the expenditure under any other provision for income tax or corporation tax.

12. New subsection 62AA(7) defines what is meant by UK infrastructure for subsection (5).

13. New section 62AB defines “decommissioning expenditure” for section 62AA.

14. New subsection 62AB(1) provides that in new section 62AA “decommissioning expenditure” means expenditure on preserving machinery and plant pending its reuse or demolition, preparing it for reuse, arranging for its reuse or demolishing it.

15. New subsection 62AB(2) provides that expenditure on preserving machinery or plant pending reuse or demolition is decommissioning expenditure irrespective of whether the machinery or plant is reused or demolished or partly reused and partly demolished.

16. New subsection 62AB(3) provides that expenditure on preparing or arranging for machinery or plant to be reused is decommissioning expenditure irrespective of whether the machinery or plant is in fact reused.

17. New section 62AC defines “offshore infrastructure” for new section 62AA.

18. New section 62AC(1) provides that “offshore infrastructure” means:

all or part of an offshore installation within the meaning of section 44 of the Petroleum Act 1998. Broadly this covers any installation maintained offshore for the purposes of the following activities:

the exploitation or exploration of the seabed

the storage of gas offshore and the recovery of such gas

the conveyance of things by a pipe offshore

the provision of accommodation for those who work offshore in connection with any of these activities.

all or part of an offshore installation that would be a UK installation if it were in UK waters

a pipeline within the meaning of section 26 of the Petroleum Act 1998 whether within UK or foreign waters. Broadly this is a pipe or system of pipes for the conveyance of any thing, together with any apparatus or works associated with such a pipe or system.

19. New section 62AC(2) defines terms used in new section 62AC(1).

20. Paragraph 2 amends section 62A of the Capital Allowances Act 1990, which provides an entitlement to elect for 100% capital allowances for expenditure on demolition of offshore infrastructure in connection with an approved abandonment programme for the closing down of a UK oilfield.

21. Subparagraph 2(1) is introductory.

22. Subparagraphs 2(2) and (3) make consequential amendments following the introduction of new section 62AA.

23. Subparagraph 2(4) extends the scope of section 62A, which provides 100% capital allowances for expenditure on demolition of oil installations, to cover expenditure on decommissioning them.

24. Subparagraph 2(5) inserts new subsection 3A & 3B into section 62A.

New subsection 62A(3A) defines decommissioning in section 62A to mean expenditure on preserving machinery and plant pending its reuse or demolition, preparing it for reuse, arranging for its reuse, as well as on demolishing it.

New subsection 62A(3B) provides that it is immaterial whether the machinery or plant is eventually reused or demolished or partly reused and partly demolished, so far as expenditure on preserving plant or machinery is concerned, and also that it is immaterial whether machinery or plant is reused or not, so far as expenditure on preparing or arranging for its reuse is concerned.

25. Subparagraph 2(6) replaces section 62A(4) and inserts new subsections 62A(4A) to (4C).

New subsection 62A(4) provides that the person incurring abandonment expenditure can elect to have it allowed in full in the period in which it is incurred.

New subsection 62A(4A) provides that if the person makes such an election for allowance of the expenditure, then that expenditure cannot also be allowed under section 62(1)(b) or new section 62AA(3).

New subsection 62A(4B) provides that where plant or machinery is demolished, any expenditure incurred on decommissioning it shall be reduced by the amount of any money received for its remains. This amendment is consequential on the broader application of section 62A to expenditure on decommissioning rather than just demolition, as a result of new subsection 62A(3A), and does not change the current position.

New subsection 62A(4C) sets out the order in which any amount received for the remains is to be set against the allowance given in respect of the expenditure.

26. Subparagraph 2(7) makes a consequential amendment to section 62A(5)(a).

27. Subparagraph 2(8) amends the sidenote to section 62A.

28. Paragraph 3 amends section 62B of the Capital Allowances Act 1990, which provides relief for abandonment expenditure incurred on offshore plant and machinery after the trade has ceased.

29. Paragraph 3(1) is introductory.

30. Paragraphs 3(2) and (3) extend the scope of section 62B to cover expenditure on any sort of decommissioning, not just demolition.

31. Paragraph 3(4) makes a consequential amendment to section 62B(2).

32. Paragraph 4 provides commencement provisions for Part I of the Schedule.

33. Subparagraph 4(1) provides the general rule that the amendments made by Part I apply to expenditure incurred on or after 7 August 2000.

34. Subparagraph 4(2) provides that the amendments made by paragraph 1 (reuse, etc. of offshore oil infrastructure) also apply to expenditure incurred before 7 August 2000 where either subparagraph 4(3) or 4(4) applies.

35. Subparagraph 4(3) applies if the decommissioning expenditure is on UK infrastructure and is incurred in connection with an abandonment programme approved on or after 7 August 2000.

36. Subparagraph 4(4) applies if the decommissioning expenditure is on non-UK infrastructure and is incurred in connection with a decommissioning activity that takes place on or after 7 August 2000.

37. Subparagraph 4(5) provides that the amendments made by paragraph 2 (ring fence trades: special allowance for pre-cessation abandonment expenditure) and paragraph 3 (ring fence trades: allowance for post-cessation expenditure) apply to expenditure incurred on UK infrastructure before 7 August 2000 if it is incurred in connection with an abandonment programme approved on or after 7 August 2000

38. Subparagraph 4(6) defines terms used in subparagraphs 4(3) and (4).

39. Subparagraph 4(7) defines the term “decommissioning activity” used in subparagraph 4(4)(c).

40. Subparagraph 4(8) provides that the amendments apply to chargeable periods ending before 6 April 2001 for income tax purposes and 1 April 2001 for corporation tax purposes. The provisions of Part II, which amends the Capital Allowances Act 2001, will apply to later chargeable periods.

Part II: amendment of the Capital Allowances Act 2001

41. Paragraph 5 inserts four new sections after section 161 of the Capital Allowances Act 2001.

42. New section 161A defines the term “offshore infrastructure” for new sections 161C and D.

43. New section 161A(1) provides that “offshore infrastructure” means:

· all or part of an offshore installation within the meaning of section 44 of the Petroleum Act 1998. Broadly this covers any installation maintained offshore for the purposes of the following activities:

the exploitation or exploration of the seabed

the storage of gas offshore and the recovery of such gas

the conveyance of things by a pipe offshore

the provision of accommodation for those who work offshore in connection with any of these activities.

all or part of an offshore installation that would be a UK installation if it were in UK waters

a pipeline within the meaning of section 26 of the Petroleum Act 1998. Broadly this is a pipe or system of pipes for the conveyance of any thing, together with any apparatus or works associated with such a pipe or system.

44. New section 161A(2) defines terms used in new section 161A(1).

45. New section 161B defines the term “decommissioning expenditure” for new sections 161C and D.

46. New section 161B(1) defines “decommissioning expenditure” to mean expenditure on preserving machinery and plant pending its reuse or demolition, preparing it for reuse or arranging for its reuse.

47. New section 161B(2) provides that it is immaterial so far as expenditure on preserving plant or machinery is concerned whether it is eventually reused or demolished or partly reused and partly demolished.

48. New section 161B(3) provides that it is immaterial so far as expenditure on preparing plant or machinery for reuse is concerned whether it is eventually reused or not.

49. New section 161C provides that expenditure on decommissioning offshore installations by a person carrying on a trade of oil extraction is eligible for writing down allowances.

50. New section 161C(1) provides that the section applies where a person carries on a trade of oil extraction incurs decommissioning expenditure on plant or machinery that is offshore infrastructure.

51. New section 161C(2) provides that the decommissioning expenditure is allocated to the appropriate pool for the chargeable period in which it is incurred.

52. New section 161C(3) provides that new section 161C(2) is subject to the exceptions in new section 161D and section 164(4).

53. New section 161C(4) defines “the appropriate pool” in new section 161C(2).

54. New section 161D provides exceptions to new section 161C(2) which provides for decommissioning expenditure to be allocated to the appropriate pool for the chargeable period in which it is incurred.

55. New section 161D(1) provides that new section 161C(2) does not apply to decommissioning expenditure on UK infrastructure unless it is incurred in connection with an abandonment programme under section 29 of the Petroleum Act 1998.

56. New section 161D(2) prevents a double allowance being given by preventing relief under new section 161C(2) if an allowance or deduction could be given for the expenditure under any other provision for income tax or corporation tax.

57. New section 161D(3) defines UK infrastructure for the purposes of new section 161D(1).

58. Paragraph 6 amends section 163 of the Capital Allowances Act 2001 which defines abandonment expenditure for the purpose of sections 164 and 165 of the Capital Allowances Act 2001.

59. Subparagraph 6(1) is introductory.

60. Subparagraph 6(2) extends the definition of abandonment for the purpose of entitlement to elect for 100% capital allowances under section 164, and to obtain relief for abandonment expenditure incurred after the trade has ceased under section 165, to cover decommissioning rather than just demolition by amending section 163(2)(b). Decommissioning is defined for this purpose in new subsection 163(4A) inserted by subparagraph 6(5) (see 65 below).

61. Subparagraph 6(3) provides that the term “abandonment expenditure” as defined in section 163(2) also applies to expenditure incurred in decommissioning plant or machinery which, although not currently in use in a ring-fence trade, was, when last in use for such a trade, was an offshore installation or submarine pipeline.

62. Subparagraph 6(4) makes a consequential change, following the change made by subparagraph 6(2), by substituting “decommissioning” for “demolition” in section 163(3).

63. Subparagraph 6(5) inserts three new subsections after subsection 163(4).

64. New subsection 163(4A) defines the term “decommissioning” used in section 163 as meaning demolishing plant or machinery, preserving it pending its reuse or demolition, preparing it for reuse or arranging for its reuse.

65. New subsection 163(4B) provides that it is immaterial whether the plant or machinery is reused or demolished or partly reused and partly demolished, so far as expenditure incurred on preserving plant or machinery is concerned.

66. New subsection 163(4C) provides it is immaterial whether the plant or machinery is reused or not, so far as expenditure incurred on preparing or arranging for its reuse is concerned.

67. Paragraph 7 amends section 164 of the Capital Allowances Act 2001, which provides an entitlement to elect for 100% capital allowances for expenditure on demolition of offshore infrastructure in connection with an approved abandonment programme for the closing down of a UK oilfield.

68. Subparagraph 7(1) is introductory.

69. Subparagraph 7(2) amends section 164(1) to make it a condition of entitlement to elect for 100% capital allowances that the plant or machinery must have been brought into use for the purposes of the ring fence trade.

70. Subparagraph 7(3) amends section 164(3)(b) so that only where the plant or machinery has been demolished need the election specify the amount received for the remains. This amendment is consequential on the broader definition of abandonment in the amended section 163 and does not change current practice.

71. Subparagraph 7(4) makes a consequential amendment following from the new section 164(5) introduced by subparagraph 7(6).

72. Subparagraph 7(5) extends section 164(4)(b), which provides that where an election is made the cost of preparing the plant or machinery for demolition is not added to the existing pool of expenditure, to the cost of decommissioning as defined in the new section 163(4A) inserted by subparagraph 6(5) of this Schedule.

73. Subparagraph 7(6) replaces section 164(5) and inserts new subsections 164(6) and (7).

New subsection 164(5) provides that the amount of the special allowance for a chargeable period is so much of the abandonment expenditure as is incurred in that period.

New subsection 164(6) provides that where plant or machinery is demolished the special allowance is reduced by the amount received for the remains. The current legislation has the same effect.

New subsection 164(7) provides that where plant or machinery is demolished the order in which amounts received for the remains are to be set against the special allowance shall be: firstly the current chargeable period; secondly, earlier chargeable periods (taking later periods first); and thirdly, later chargeable periods (taking earlier periods first).

74. Paragraph 8 amends section 165 of the Capital Allowances Act 2001 which provides relief for abandonment expenditure incurred on offshore plant and machinery after the trade has ceased.

75. Subparagraph 8(1) is introductory.

76. Subparagraph 8(2) ensures that section 165 applies to all, abandonment expenditure by removing from section 165(1)(b) the restriction of abandonment expenditure to that incurred on the demolition of plant or machinery after the trade had ceased.

77. Subparagraph 8(3) modifies section 165(3)(b), following the broadening of the definition of abandonment expenditure in section 163, so that amounts received within the post-cessation period do not constitute income of the former trade only where the abandonment expenditure was on demolition of the plant or machinery. This preserves the current treatment of such receipts.

78. Subparagraph 8(4) modifies section 165(4), following the broadening of the definition of abandonment expenditure in section 163, so that “the relevant abandonment cost” is only restricted by the amount received for the remains where the plant or machinery is demolished. This preserves the current treatment.

79. Paragraph 9 provides commencement provisions for Part II of the Schedule.

80. Subparagraph 9(1) provides the general rule that, subject to subparagraph 9(9), amendments made by part II of the Schedule apply to expenditure incurred on or after 7 August 2000.

81. Subparagraph 9(2) provides that the amendments made by paragraph 5 (expenditure connected with reuse etc. of offshore oil infrastructure) apply to expenditure incurred before 7 August 2000 if either subparagraph 9(3) or 9(4) applies.

82. Subparagraph 9(3) applies if the decommissioning expenditure is on UK infrastructure and is incurred in connection with an abandonment programme approved on or after 7 August 2000.

83. Subparagraph 9(4) applies if the decommissioning expenditure is on non-UK infrastructure and is incurred in connection with a decommissioning activity that takes place on or after 7 August 2000.

84. Subparagraph 9(5) provides that the amendments made by paragraphs 6 to 8 of the Schedule (Ring fence trades: meaning of abandonment expenditure and allowances for pre- and post-cessation expenditure) also apply to expenditure incurred on UK infrastructure before 7 August 2000 if the expenditure is incurred in connection with an abandonment programme approved on or after 7 August 2000.

85. Subparagraph 9(6) defines terms used in subparagraphs 9(3) and 9(4).

86. Subparagraph 9(7) defines the term “decommissioning activity” used in subparagraph 9(4)(c).

87. Subparagraph 9(8) provides that the amendments apply to chargeable periods ending on or after 6 April 2001 for income tax purposes and 1 April 2001 for corporation tax purposes. The provisions of Part I, which amends the Capital Allowances Act 1990, will apply to earlier chargeable periods.

88. Subparagraph 9(9) provides that the amendments made by subparagraphs 7(2) and 8(2) of the Schedule shall be deemed always to have had effect. These two amendments correct minor defects which occurred in the rewrite of the Capital Allowances Act.

BACKGROUND NOTE

89. Capital allowances are normally available for capital expenditure incurred on the provision of plant and machinery, on a 25 per cent per year reducing balance basis. A special provision, section 62 of the Capital Allowances Act 1990, extends capital allowances to the costs of demolition of plant and machinery, on the same basis.

90. A further special provision, section 62A of the Capital Allowances Act 1990, makes immediate 100 per cent capital allowances available for the demolition of oilrigs, pipelines and other installations in connection with the closing down of an oilfield under an abandonment programme approved by the Department of Trade and Industry. If such oil installations are demolished during the course of a field’s life, the normal 25 per cent per year reducing balance basis applies for capital allowances.

91. The Capital Allowances Act 1990 has been rewritten as part of the Tax Law Rewrite project. The rewritten legislation will take effect from April 2001 as the Capital Allowances Act 2001. The Tax Law Rewrite project’s aim is to rewrite UK tax legislation in clearer, simpler language and to use a simpler structure than previous tax legislation.

92. Relief for demolition is provided by section 26 of the Capital Allowances Act 2001 and the special 100% current year allowance is given by section 164 CAA 2001.

93. This clause and Schedule will extend the existing capital allowances for demolition of oil installations to the costs of preparation for reuse, and also the costs of removing and mothballing oil installations when their eventual fate has not been decided. 100 per cent capital allowances will be available where this takes place in connection with the closing down of a UK oilfield under an approved abandonment programme. Otherwise, they will be available on the 25 per cent reducing balance basis.

94. The extended relief will apply to expenditure incurred on or after 7 August 2000 and also to any expenditure incurred before 7 August 2000 where the abandonment programme is approved on or after that date.

95. Because the extension of relief will cover periods before and after April 2001 it is necessary to amend both the existing Capital Allowances Act 1990 and the Capital Allowances Act 2001.