IR33 29 November 1994 NORTH SEA OIL TAXATION: TRANSFER OF PETROLEUM REVENUE TAX LOSSES The Chancellor proposes in his Budget to make two changes to Petroleum Revenue Tax (PRT): - losses transferable from one company to another when an interest in a North Sea oil or gas field changes hands shall not in future include any losses attributable to reliefs claimed by the seller for expenditure incurred outside that field. This change will apply to transfers of interests in fields made on or after today, but not where the claim to relief was made before today. - an unrelievable field loss arising at the end of the productive life of an oil or gas field may not be increased by reliefs, claimed on or after today, that arise outside the field. The Chancellor's intention is to protect the yield of PRT, which is a field-based tax, by limiting the extent to which PRT reliefs and losses can be brought in from outside a field. These measures will protect revenues and yield about #25 million a year. DETAILS Disposal of an interest in an oil or gas field 1. PRT is charged on a field by field basis, on the profits arising during the full lifetime of the field. Reliefs are generally restricted to those arising in the field itself. There are, however, exceptions enabling some reliefs to be brought in from outside the field. Once placed into a field these reliefs become indistinguishable for all future PRT purposes from expenditure reliefs and losses generated in the field itself. 2. Legislation introduced in Finance Act 1980 ensures that, when transfers of interests in North Sea oil and gas fields take place, the new owner inherits the PRT position of the old owner, including all unused reliefs and losses. These can then be set against the new owner's PRT liability in respect of that field, thereby maintaining the "field lifetime" basis of the tax. 3. The original purpose of extending reliefs beyond the strict in-field basis was to encourage expenditure on exploration and development. The company incurring the expenditure could obtain early PRT relief against a producing field, rather than having to wait for first revenues from new finds and developments, but it was never the intention to allow the transfer of these reliefs to another company. 4. The new legislation will accordingly restrict in future the reliefs transferable on the disposal of a field interest to those arising in the field itself. Claims to relief made before today are not affected. Inclusion of reliefs from outside the field in unrelievable field losses 5. An unrelievable field loss (UFL) arises at the end of the productive life of an oil or gas field, where total reliefs over the life-time of the field exceed total receipts. A UFL can be surrendered to any other field in the ownership of the same company (or an associate) and relieved there. 6. Legislation introduced in Finance Act 1984 prevented the use in a field of reliefs arising to a company before it owned its interest in the field. However, a UFL can include reliefs that were brought in from outside the field. Once included in a UFL, those reliefs are not distinguished by time. Consequently, a UFL transferred to and relieved in a newly acquired field can include reliefs that arose before the field interest was in the company's ownership. 7. For example, a company has incurred exploration expenditure after acquiring an interest in field A but before acquiring an interest in field B. The 1984 legislation prevents direct relief for that expenditure in field B. Field A eventually generates a UFL, which is increased by a claim for the exploration expenditure. This UFL, including the exploration expenditure, can then be surrendered to field B. 8. The new legislation will remove from the calculation of a UFL any reliefs, claimed on or after today, that are brought in from outside the field itself. As a result these reliefs will not be capable of use in a field acquired after the reliefs arose. NOTES FOR EDITORS 1. Reliefs that can be brought into a field include relief for abortive exploration expenditure (incurred pre March 1983); exploration and appraisal expenditure (incurred March 1983 to March 1993) and its transitional counterpart introduced in Finance Act 1993; research expenditure (from 17 March 1987); Cross Field Allowance of up to 10 per cent of field development expenditure (from 17 March 1987) and unrelievable field losses. 2. Legislation in S113 Finance Act 1984 stops the use in a field of reliefs arising to the company at a time before the field was acquired. This restriction was extended to Cross Field Allowance at the time of its introduction in S65 Finance Act 1987.