Revenue Note for Guidance

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Revenue Note for Guidance

690 Interest and charges on income

Summary

This section provides, among other things, for certain restrictions on the allowance of interest as an expense of a petroleum trade. Provision is also made to restrict the extent to which charges may be deducted from petroleum profits.

Details

(1)(a) & (b) There is a prohibition on the deduction of certain interest as a trading expense of a petroleum trade for the purposes of both income tax and corporation tax.

Specifically —

  • allowable interest payable to a connected person is restricted to an amount which would be expected to be payable if the parties to the transaction were independent parties dealing at arm’s length;
  • interest on any money borrowed for the purpose of funding exploration expenditure is disallowed (Interest payable on such loans in periods before the commencement of a petroleum trade would rank as pre-trading expenditure and would not qualify as a trading expense. This provision serves to deny relief for interest on such loans payable after the commencement of a petroleum trade whether related to the exploration expenditure which led to the fields in production or to exploration in other areas.);
  • relief is denied for interest on money borrowed to finance the acquisition of petroleum rights (as defined in section 684) from a connected person (the denial of relief in the case of connected persons is intended to pre-empt abusive arrangements).

(2) Provision is made for a relaxation of the provisions of section 130(2)(d)(iv) which, by treating interest on a loan to a company from a foreign parent as a distribution, denies any deduction for such interest against profits. Specifically, those provisions will not apply to so much of such interest as —

  • apart from those provisions would be a trading expense of the petroleum trade,
  • would not be precluded by subsection (1) from being so treated because it —
    • exceeded an arm’s length rate,
    • was interest on money borrowed for exploration, or
    • was interest on money borrowed to acquire oil rights from a connected person,

    and
  • is payable to a resident of a “treaty country”.

(3)(a) No deduction will be allowed under section 243 against the petroleum profits of a company in respect of —

  • a charge on income (for example, a royalty) paid to a person connected with the company, or
  • any other charge, unless it is a payment made wholly and exclusively for the purposes of a petroleum trade carried on by the company.

(3)(b) Provision is also made to “ring-fence” charges on income paid wholly and exclusively for the purposes of a petroleum trade to set-off against petroleum profits only.

(4)(a) A person liable to income tax on income from petroleum activities cannot treat the income tax retained by that person on making the annual payments (for example, interest payable to a non-resident, royalties, etc) as having been accounted for to Revenue out of income tax charged on profits or gains from petroleum activities.

(4)(b) A person cannot treat the income tax retained by that person, on making annual payments wholly and exclusively for the purpose of a petroleum trade, as having been accounted for to Revenue out of income tax charged on profits or gains which are not profits or gains from petroleum activities.

(5) Non-arm’s length charges on income and annual payments, which are not to reduce petroleum profits, may not be carried forward as a loss to reduce the petroleum profits of a subsequent year.

(6) A consequential adjustment is made with regard to the application of the group relief provisions arising from the creation of the ring-fence around charges on income paid wholly and exclusively for the purposes of a petroleum trade. Under subsection (3) certain charges on income of a company with a “ring-fence” trade may not be deducted from its “ring-fence” profits and, accordingly, the company might have no (or insufficient) other profits to absorb the disallowed charges. The group relief rules in section 420(6) are accordingly modified in this subsection to allow any excess of such charges (that is, over and above the non-petroleum profits) to be offset by way of group relief. Without this provision section 420(6) would allow only the excess of charges over the total profits of the company to be surrendered.

Relevant Date: Finance Act 2020