687 Treatment of losses

Summary

This section contains ring-fence provisions restricting relief for losses and surplus capital allowances where profits or losses arising from petroleum activities are involved. It restricts relief under section 381 and section 396(2) so that a trading loss incurred in a petroleum trade will be relieved only against income or profits from petroleum activities, and any other loss (except a loss incurred in a mining trade) will not be relieved under those sections against such income or profits.

Similar restrictions apply in relation to income from petroleum activities (for example, royalties from an interest in a petroleum deposit) which may be taxable under Case IV of Schedule D, where losses arise from another Case IV source. Furthermore, surpluses of certain capital allowances over the relevant income against which they can be relieved are not to be set off against income or profits from petroleum activities.

Details

(1) A trading loss incurred in a petroleum trade cannot be relieved except, for the purposes of income tax, against income from petroleum activities or, for the purposes of corporation tax, against profits from petroleum activities. Any other loss cannot be relieved against income or profits from petroleum activities.

This effectively constitutes a 2 way ring-fence in respect of trading losses and any other loss that may be relieved under section 381 (trading losses for the purposes of section 381 can, under section 392, be supplemented by capital allowances).

(2) Income from petroleum activities chargeable under Case IV of Schedule D (for example royalties from an interest in a petroleum deposit) cannot be offset by losses arising under Case IV except such losses as arise from petroleum activities, and the latter cannot be set off against income chargeable under Case IV except such income arising from petroleum activities. This imposes a 2 way ring-fence with respect to Case IV income and losses arising from petroleum activities.

(3) Surpluses of certain capital allowances over the relevant income against which they can be relieved are not to be relieved against income or profits from petroleum activities. This is a one-way restriction since the type of capital allowances (wear and tear and industrial buildings allowances) will not, as such, be available in respect of petroleum activities.

Relevant Date: Finance Act 2021