OT19300 - PRT: Appendices
Appendix 3: PRT/Accounts Reconciliations (full version)
- Purpose of this Paper
- Why reconciliations are needed
- OTO’s aim
- The accounts and CT computations
- The Reconciliation
- Examination of the Reconciliations
- Results
The following paper was issued to UKOITC (The United Kingdom Oil Industry Taxation Committee, formed in 1965) and BRINDEX on 2 July 1991.
Purpose of this Paper
This paper was produced in order to update the instructions and guidance given to Inspectors within OTO. A copy of it has been supplied to UKOITC and Brindex for the help and guidance of their members.
Why reconciliations are needed
For most of the taxes dealt with by the Inland Revenue it is not
normal to adopt an audit approach to tax returns. Rather
computations are submitted by taxpayers based on accounts. In the
case of companies of the size dealt with by the Oil Taxation Office
these will often be accounts which have been subjected to internal
audit and external audit on an ongoing basis. Because of the
structure of the PRT legislation however, particularly that part
relating to the allowance of expenditure, most expenditure claims
are submitted, examined and determined long before audited accounts
covering the claim period are available. Returns of incomings for
PRT purposes are also made ahead of audited financial accounts. As
regards expenditure, and particularly at the first claim stage,
OTO’s examination methods involve some inspection of basic
records and consideration of accounting systems, but it has always
been recognised that this process falls well short of a full audit
and the OTO would need further reassurance as to the accuracy of
PRT claims and returns. This can only be achieved by a
reconciliation of those claims and returns with the audited
accounts and CT computations when they become available.
For PRT as with any tax there will always be some items of
income and occasionally some items of expenditure where the
taxability or allowability of the payment may be in doubt. Within
the context of CT it is possible for an Inspector to see from the
accounts that there has been a receipt which has been treated as
non-taxable. The sort of items that are in mind are insurance
receipts, compensation payments, recoveries from partners of
payments made earlier. Where there is doubt as to whether these
items should be taken into account for PRT purposes it will not be
apparent to the Inspector who deals with the expenditure claim that
the taxpayer may have taken the benefit of the doubt and claimed
the gross payment or left out an item from the return of receipts.
This may be a perfectly proper course of action but the Inspector
is not in a position to consider the technical merits of the
decision that has been taken unless he or she is aware of the item
concerned. Companies should be encouraged to provide details of
such receipts spontaneously. However where they do not do so the
PRT/Accounts reconciliation will disclose the existence of such
receipts and provide the opportunity for the Inspector who deals
with the claims to consider the technical merits of the
company’s view.
As was considered above it is common for a field that is
assessed up to date and in particular for one that is paying tax
for claims to be made in advance of submission of related accounts
and CT computations. The same will be true of a field which
surrenders CFA. By contrast in the early years of the development
of a field (other than a donor of CFA) claims for expenditure
relief under Schedules 5 and 6 may be made many years after the
related accounts and CT computations have been submitted. Equally,
where a taxpayers incurs exploration, appraisal or research
expenditure but has no or limited PRT-liable field interests,
claims for relief under Schedule 7 may not be made until many years
have elapsed since the expenditure was incurred. In these
circumstances there is no good reason why decisions should be taken
on claims unless they can be seen to reconcile back to the accounts
and computations that the OTO already hold. Similarly, in view of
the long periods involved in the development of most fields claims
for the early years should in future be submitted together with
reconciliations as a matter of course and it will increasingly
become the practice of OTO not to take decisions on such claims
until they have been reconciled to the earlier accounts and CT
computations.
It may be the case that within the OTO a different Inspector
deals with the field and the CT computation. The Inspector dealing
with the CT will take overall responsibility for PRT/Accounts
reconciliations and if a claim is received for a back year the
Inspector examining the claim will not take a decision on it
without first consulting the Inspector responsible for the
reconciliation. It would help this process if claims would identify
the schedule within reconciliations where the expenditure unclaimed
is recorded.
OTO’s aim
OTO’s aim is to obtain a reconciliation of claims and
returns to accounts and computations for every producer and for
every year in which that producer is involved in the North Sea. For
the future it will be the aim to receive the reconciliations
together with the CT computations in line with the target dates set
by pay and file. Indeed for a company making PRT expenditure claims
a reconciliation should henceforth be regarded as a integral part
of the CT computation. It is recognised that there are in many
cases a substantial number of back years for which reconciliations
still need to be provided. In some cases it may be necessary to
adopt a different standard of reconciliation for these earlier
years in order to clear the backlog. Wherever possible and in
particular where it can be seen that little or no tax is at risk,
OTO will adopt a pragmatic approach to the need to clear
reconciliations for early years.
The primary purpose of the reconciliation is to provide a
check on PRT not on CT so CT appeals should not be kept open solely
because reconciliations are outstanding. However Inspectors have
found the analysis in reconciliations helpful in examining CT
computations and there have been instances of errors in CT
computations being discovered in the course of performing the
PRT/Accounts reconciliation.
Companies that have not submitted reconciliations should be
encouraged to supply details of the dates by which they expect to
supply reconciliations. If companies are reluctant to supply
timetables or if having done so they fall behind schedule careful
consideration should be given to what action is appropriate on
OTO’s part taking into account all relevant facts. Depending
on the circumstances it may be necessary to defer taking decisions
on claims until reconciliations are received.
It is important that when companies are taken over or when a
field interest is sold, the purchaser retains access to all the
information needed to produce outstanding reconciliations and to
analyse expenditure shown as unclaimed on reconciliations that have
been prepared. If we are involved in any pre-transaction clearances
the opportunity should be taken to draw attention to the need to
retain access to old records.
The accounts and CT computations
Before considering the reconciliation to the accounts it is
convenient to consider the information that ideally should be
provided in the CT computations. UK incorporated companies will
submit audited accounts and in nearly all cases non UK incorporated
companies will also provide audited accounts. In any case where a
company declines to submit audited accounts OTO will need to
consider with the company whether the accounts submitted are
adequate for tax purposes, the company’s reasons for not
submitting audited accounts, and possibly further measures by way
of inspection of primary accounting records that may be needed on
an ongoing basis. If extra resources are needed to examine claims
and computations from companies that do not produce audited
accounts this may lead to some delay in the taking of decisions.
The starting point for the computations should be an analysis
of the movement on the fixed asset accounts
between the opening and closing balances of the year of both
tangible and intangible assets. The movement should be broken down
on a field by field basis and also within each field by reference
to capital allowance categories. Non field expenditure, in
particular exploration expenditure, should be analysed by block or
by licence wherever possible highlighting in particular areas which
are close to development. It should also be the aim to analyse
operating expenditure on a field by field basis as well as between
internal categories and the allocation of any head office costs,
parent company costs or research and development into the company
and/or into fields should also be shown.
Receipts such as compensation and insurance receipts should
be identified. They may not appear in the profit and loss account
but may be treated as adjustments to fixed assets accounts that is
as credits to those accounts. These items need to be identified so
that the gross expenditure on the fixed asset account can be
reconciled with expenditure claims. When such items are identified
in the computations by Inspectors dealing with CT they should
report them to the Inspector dealing with the particular field or
other affected area of claim for consideration. Miscellaneous
receipts should be reported in a similar fashion (e.g., receipts
arising out of exploration or research).
The Reconciliation
The reconciliation should take account of incomings to identify
all receipts and reconcile them to the PRT1. In particular S493
adjustments should be reconciled between the CT accounts and the
PRT returns and tariff receipts and chargeable disposal receipts
also need to be identified.
The format of the reconciliation is a matter for the
particular company but it should provide all the information set
out below. Companies should be encouraged to supply only a
reconciliation of the accounts to claims and refrain from providing
the intermediate stages that the company needs to go through such
as reconciliations to trial balances and billings. Operators will
however be expected to provide reconciliations between Schedule 5
claims and billings to all other participators in fields for which
they are operator. OTO will consider operators performance in this
area in any review of the suitability of a particular operator to
act as responsible person.
A reconciliation which amalgamates several years may be
acceptable in clearing arrears where little or no tax is at stake.
This may be in situations where it is accepted that there is little
likelihood of there being any tax payable in respect of the field,
in situations where expiry of time limits is not likely to be a
factor because the periods terminate before the first claim period
for any affected field ends, and in circumstances where the
expenditure is clearly seen to be in a period where the field is
pre-pay back. It will still be necessary to have a more detailed
year by year analysis and consideration of accruals around the
period at which a field approaches pay back. Because Sch 7 claims
are always intended to be tax effective it will be necessary to
reconcile them on an annual basis.
The reconciliation should be designed to tie the expenditure
in the accounts which has already been analysed on a field by field
basis back to identified expenditure claims under Schedule 5 and
Schedule 6. There should also be a full reconciliation of
exploration expenditure and any research and development as
analysed in the accounts and computations back to the Schedule 7
claims. The analysis of claims should identify the claim numbers
agreed with the OTO and if that information is not available the
date of the claim.
The reconciliation should identify unclaimable expenditure in
particular items such as interest, depreciation, onshore
exploration and buildings. Expenditure on exempt gas fields also
needs to be separately identified. This is necessary so that it can
be seen that none of this expenditure has unwittingly franked
claims that have been made. Inspectors should look for negative
amounts in this expenditure analysis as these may indicate receipts
which have been ignored for PRT purposes.
If the reconciliation reveals over claims they should be
explicitly identified when the reconciliation is presented to OTO.
(
See also Examination of the Reconcilitions below).
There will be a residue of expenditure which is in principle
claimable for PRT purposes but has not yet been claimed. This will
relate to fields under development, and similar prospects and also
unutilised exploration expenditure where the taxpayer has no need
of Schedule 7 claims. It is important that this expenditure is
analysed to the extent that is possible when the reconciliation is
prepared. This will enable future claims to be checked against this
analysis and avoid a further reconciliation. It will be useful if
an ongoing memorandum of unclaimed amounts is submitted each year
with the reconciliation for the latest year showing the unclaimed
amounts of earlier years updated by claims made since the previous
reconciliation.
OTO does not recognise as a general principle that there may
be a setting off of over claims against "under claims". Companies
are not obliged to claim expenditure and OTO cannot be involved in
considering whether an "under claim" arose as a result of
deliberate policy or as a result of error. In considering
culpability in relation to over claims OTO will not as a matter of
principle accept the offsetting of over claims with "under claims"
but a flexible approach will be taken in settling particular cases
and regard will always be had to all of the circumstances and the
merits of the particular case before forming a view on culpability.
Where the company is not the operator for a field it will
probably have unreconcilable differences because of differences in
exchange rate policies and accruals. The resolution of such
problems will be dealt with on a case by case basis. Inspectors
will need to consider carefully explanations put forward and
exercise judgement in reaching agreement with companies. Similarly
the reconciliation may include amounts described as negative
unclaimed amounts. These may constitute over claims. And accounts
expenditure may need to be increased in the course of the
reconciliation by various adjustments to make the figures
reconcile. Inspectors will need to consider such adjustments
critically. It would help the process of reconciliation and the
examination of claims if companies would, when making claims,
always specifically identify and give the reasons for negative
items of expenditure included within claims.
It will be necessary to analyse the turnover in the accounts
between arms length and non arms length sales in order to agree
adjustments under S493. If this analysis is provided before final
agreement of valuation issues has taken place it is possible that
there may be changes in the designation of sales from arms length
to non arms length. It may be necessary therefore to check that the
analysis is agreed. Errors in this area are likely to operate
against the taxpayers interest.
In certain circumstances, the OTO will agree to examine
‘informal’ claims, particularly those relating to
Schedule 7 expenditure. This procedure enables a company to submit
details of allowable expenditure without, in the case of Schedule 7
claims, specifying the field of claim or period for allowance until
a formal claim is submitted. The procedure operates on the basis
that the same care is required for an informal as for a formal
claim, and that the latter must specify the exact items being
claimed from any informal ‘pool’. The reconciliation
should be to the informal claim, which will normally be based on
accounting periods. Where subsequent formal claims have been made
they will already be reconciled to the informal claim.
Examination of the Reconciliations
The fact that reconciliations have been received in OTO should
be taken into account by each Inspector with PRT responsibilities
for the taxpayer and for each field in which the company is a
participator in examining claims.
It is expected that the first reconciliations that are
received from any company will need the most careful examination.
Inspectors will need to satisfy themselves that the reconciliation
has been competently performed and that all matters that need to be
considered have been considered. It will also be necessary for the
Inspector to inform himself as to the detailed way in which the
reconciliation has been completed and presented. Provided the
method of doing the reconciliation remains consistent it is to be
anticipated that future reconciliations will be agreed more
readily. The greatest value in reconciliations will therefore have
been achieved by the time the reconciliation is completed. By that
time companies will probably have made any further claims that they
feel they ought to have made and they will have notified OTO
individually of over claims as they have been identified.
Paragraph 9 Schedule 2 OTA 1975 provides that where any
return statement, declaration or accounts as are mentioned in
Paragraph 8 Schedule 2 were made or submitted by any person neither
fraudulently nor negligently and it comes to his notice that those
were incorrect, then, unless the error is remedied without
unreasonable delay, the return statement, declaration or account
shall be treated as having been negligently made or submitted by
the first mentioned person. It is important therefore that as
companies discover errors or over claims in the course of
performing the reconciliations they bring them to OTO’s
attention immediately without waiting for completion of the
reconciliation. This will ensure that in cases where the original
error was not one arising from negligence that Para 9 does not
operate to treat it as such.
Results
It is accepted that a totally balanced reconciliation will often
prove difficult to achieve. Whatever method a company uses most
exercises will finish with an unexplained difference. As far as
seems reasonable, having regard to the amount of the difference
both in absolute terms and in relation to total expenditure, the
company should endeavour to establish the reason or likely reason
for the difference. In the final analysis it is a matter for
judgement at what point and level an unexplained difference should
be accepted. Clearly a difference representing excess PRT claimed
expenditure over CT expenditure gives OTO more cause for concern
than the reverse situation. It is in fact more likely on the
evidence of completed reconciliations seen that the company will
uncover PRT claimable but unclaimed expenditure as a result of the
exercise. Additional expenditure claims submitted in these
circumstances will be subjected to careful examination. Where for
time limit reasons such an additional claim is submitted before
submission and examination of the reconciliation concerned,
examination of the PRT claim may need to be deferred until the
reconciliation is submitted and examined.
When further claims are made as a result of a reconciliation
it is not enough for a company to identify the existence of
unclaimed amounts. There may have been good reason for not claiming
the expenditure. Thus claims arising from a reconciliation must
identify the nature of the expenditure and demonstrate that it is
allowable in the particular field or under Schedule 7.
