Revenue Note for Guidance

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Revenue Note for Guidance

695 Abandonment expenditure: allowances and loss relief

Summary

This section provides for —

  • a 100 per cent deduction for tax purposes in respect of abandonment expenditure,
  • a 3 year carrying back of losses for tax purposes attributable to abandonment expenditure deductions, and
  • the carrying forward to a new trade of any unused relief for abandonment expenditure incurred in connection with a permanently discontinued trade.

The terms “abandonment activities” and “abandonment expenditure” are defined in section 684. Abandonment activities are essentially those activities required by a petroleum lease on the cessation of production in a relevant field or part of a relevant field. The definition includes the dismantling and removal of pipelines used to bring petroleum to dry land. “Abandonment expenditure” is expenditure on “abandonment activities”.

Details

Definition

(1) So much of a loss in a petroleum trade in a period as does not exceed deductions for abandonment expenditure related to that trade will be an “abandonment loss”.

Allowance for abandonment expenditure

(2) Where —

  • a person has been involved in winning petroleum from a relevant field or part of a relevant field or in bringing the petroleum to shore from the field or the part of it, and
  • the person incurs abandonment expenditure on that field or the part of it and the expenditure is not borne by some other person,

then, a 100 per cent allowance will be made in respect of the abandonment expenditure for tax purposes for the chargeable period in which the expenditure is incurred.

Abandonment losses

(3) Losses will arise where petroleum income of the period in which the abandonment expenditure is incurred is insufficient to fully absorb the 100 per cent allowance in respect of such expenditure. In such cases, the loss may be carried back to be set off against the income from petroleum activities or petroleum profits of the 3 previous years. The loss will be set off against the most recent income or profits available to absorb it in the 3 year period.

Paragraph (a) addresses loss relief for income tax purposes. The opening lines are modelled on section 381 but allow a carry back of losses for 3 years. Subparagraph (ii) is intended to require the set-off of the abandonment loss against later periods in priority to earlier periods.

Paragraph (b) is intended to prevent any double relief for abandonment losses. The application of section 381 covers questions in relation to the computation of the relief, claims to the relief and appeals.

Paragraph (c) provides for an extension of the carry back of abandonment losses for the purposes of corporation tax.

(4) Provision is made for a carryover of unused abandonment losses where a person “permanently discontinues” one trade and subsequently commences a new trade. If the losses have not been used against income from petroleum activities or petroleum profits of the person who incurred them, or have not been surrendered by way of group relief, they will be deductible in the first chargeable period of a new petroleum trade carried on by the person.

Post-trading abandonment expenditure

(5) Abandonment expenditures incurred after a petroleum trade has ceased is brought back into the final period of trading. If the deductions for the expenditure then create a loss, that loss may be carried back, for set-off under subsection (3), against income and profits of the 3 years preceding the final year of trading.

When is expenditure incurred?

(6) Expenditure is incurred on the day it becomes payable.

Allowances to be made in taxing petroleum trade

(7) Allowances for abandonment expenditure are to be made in taxing a person’s petroleum trade, that is, in the case of income tax, in charging trading profits and, in the case of corporation tax, in computing trading income. An allowance will not be made to 2 trades in respect of the same expenditure.

Bar on double relief

(8) An allowance, other than an allowance under subsection (2), will not be made in respect of abandonment expenditure.

However, the following capital allowance provisions are applied, with any necessary modifications, for the purposes of this section —

  • subsections (1) and (2) of section 316, which provide for the interpretation of “capital expenditure” for the purposes of capital allowances,
  • section 317(2), which provides that a person will not be treated as having incurred expenditure borne directly or indirectly by the State, and
  • subsection (5) of section 320 which pertains to the date of commencement or permanent discontinuance of a petroleum trade.

Application of certain provisions of section 693

(9) The provisions of subsections (9) to (11) and (15) of section 693 apply for the purposes of this section as they apply for the purposes of that section. Thus —

  • by applying to the allowance for abandonment expenditure the provisions of section 304(4), a petroleum trader liable to income tax is permitted to carry forward allowances to the extent to which they cannot be offset against profits of the particular chargeable period to which the allowable expenditure relates,
  • section 307(2)(a) is applied so as to treat, for corporation tax purposes, an abandonment expenditure allowance as a trading expense,
  • section 321 is applied for the interpretation of this section (that section defines, for example, “chargeable period”, “chargeable period related to expenditure” and “chargeable period related to” another event, that is, a disposal on the discontinuance of a trade),
  • the provisions of subsections (2) and (3) of section 306 are applied so as to identify the basis period for a year of assessment for the purposes of income tax, and
  • provision is made for the deduction from the abandonment expenditure incurred of any VAT included in that expenditure which is creditable or refundable to the person incurring the expenditure.

Relevant Date: Finance Act 2020