Revenue Note for Guidance
This section provides for —
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”.
(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”.
(2) Where —
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.
(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.
(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.
(6) Expenditure is incurred on the day it becomes payable.
(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.
(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 —
(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 —
Relevant Date: Finance Act 2021