OT19550 - PRT: Appendices

Appendix 7: Safeguard interaction with Schedule 5

PRT - EXPENDITURE CLAIMS - SCHEDULE 5 OTA 1975

As will be seen from OT17700 problems can occur in connection with Schedule 5 claims to uplift whenever a field starts to pay PRT under the benefit of a safeguard reduction (S9 OTO 1975). Following a series of discussions and correspondence through 1983 to 1986 with the United Kingdom Oil Industry Taxation Committee (UKOITC) the Oil Taxation Office was able to establish an approach in relation to Schedule 5 claims which will be applied to:

1. Claims by a responsible person that certain expenditure qualified for supplement and that issue was undecided at the time assessments on the participators, to which a safeguard reduction applied, were about to be made.
2. An appeal by a responsible person against refusal of a claim that an amount of expenditure qualifies for supplement where the interests of the participators in the field in pursuing the appeal conflict. This can happen where one or more of the participators starts receiving the benefit of safeguard relief before another.

The note below which was issued by the Controller of the Oil Taxation Office on 15 January 1986 to UKOITC and copied to the Association of British Independent Oil Exploration Companies (BRINDEX) reproduces the practice announced in January 1984 in relation to claims and goes on at paragraphs 5 and 6 to include the approach to appeals against refusals of claims.

PRT - EXPENDITURE CLAIMS - SCHEDULE 5 OIL TAXATION ACT 1985

The purpose of this note is to explain what action is permissible, under the legislation, in relation to expenditure claims which fall to be decided at or about the time when Section 9 OTO 1975 ("safeguard" relief) first provides an effective reduction in PRT payable. The note covers the right not to claim supplement; the possibility that some only of the participators in a field may want supplement claimed on their behalf; and resolves the difficulties which may arise when some or all of the participators start receiving the benefit or relief under Section 9 before a claim to supplement can be decided, or at the time it has been formally refused.

1. There is no statutory obligation on a responsible person (or a participator in relation to a Schedule 6 claim) to claim supplement even though the relevant expenditure is likely to satisfy the provision of Section 3(5) OTA 1975. If supplement is not claimed it will not be allowed and the relevant expenditure will be treated for the purposes of Section 9 OTO 1975 as not qualifying for supplement; but the supplement may not be made the subject of a separate claim should there be a change of mind (see however Paragraphs 3 and 4 below).
2. The requirement in Schedule 5, paragraph 2(4)(b) that expenditure claimed should be divided between the participators in accordance with their field interests, need not be regarded as requiring the amount claimed under Paragraph 2(4)(a) as qualifying for supplement to be similarly allocated. Accordingly, it is open to the responsible person to claim supplement on part only of the expenditure stating that the whole of the supplement on that part represents the share of a particular participator or participators (i.e. not necessarily all the participators). The supplement so allocated may not exceed the relevant participators’ proportionate shares in the expenditure qualifying for supplement.
3. If a claim has been made for expenditure alone, or for expenditure and supplement, then, at any time before a decision is made on the claim, it may be withdrawn. Provided the time limit for claiming (Schedule 5 Paragraph 2(1)) has not expired, the claim may be re-submitted. For example, an undecided claim for expenditure and supplement may be withdrawn and re-submitted as a claim for expenditure only.
4. The practice outlined in Paragraph 3 above may be taken a stage further where a decision has been made in respect of some of the expenditure claimed, but not in respect of the remainder. That part of the claim which relates to undecided expenditure may be withdrawn and, subject to the time limit, re-submitted as a separate claim.
5. It may happen that, if the 3 year time limit for appealing against a decision (Schedule 5, Paragraph 5(1)) is near expiry, a claim for supplement is refused before the matter has been fully argued (and before the responsible person has been able to withdraw the claim and perhaps re-submit it in a different form, in accordance with Paragraphs 3 or 4 above). Where the responsible person appeals against such a refusal on the grounds that the notice of the decision allowed, in respect of expenditure covered by the notice, amounts qualifying for supplement which were less than the amounts claimed by him under Schedule 5, Paragraph 2(4)(a), the appeal will be dealt with as described in Paragraph 6 below.
6. Where following discussion, it is agreed that the appeals should, in principle, succeed, the OTO will be prepared to agree, under Schedule 5, Paragraph 6(1)(b), with the responsible person on an amount of expenditure qualifying for supplement which is less than that originally claimed. The whole of the supplement on that part of the expenditure so allowed may be allocated to a particular participator or participators (i.e. not necessarily all the participators), insofar as the amounts so allocated do not exceed the relevant participators’ proportion shares in the expenditure qualifying for supplement.

1. GENERAL BACKGROUND

For those periods to which safeguard applies, PRT is limited to 80% x adjusted profit less 15% of accumulated capital expenditure.

"Adjusted Profit" is the assessable profit (before any reduction for losses or oil allowance) with field qualifying expenditure plus supplement, abortive expenditure, E & A expenditure, research expenditure, CFA and any unrelievable field losses for the period being added back.

2. EXAMPLES (assuming rate of PRT at 75%)

(1) Assessable profit £38.5M without further claims. Accumulated Capex £190M.

(2) Claim for non-qualifying expenditure £10M

Assessable Profit £28.5M

Accumulated Capex £190M

(3) Claim for qualifying expenditure £10M plus supplement £3.5M

Assessable profit £25M

Accumulated Capex £200M

3. NOTES

It will be observed that in example 3 no benefit is obtained by claiming supplement of £3.5M, as the supplement and the expenditure to which it relates is added back in the calculation of "adjusted profit" for safeguard purposes.

As a result of claiming supplement the PRT payable under the normal rules is reduced by £2.62M (75% x £3.5M). However the increase in the "adjusted profit" from £28.5M to £38.5M has the effect of reducing the amount of safeguard relief from £21.37M to £11.95M. A PRT charge of £6.8M replaces a previous one of £NIL. Where as in example 3 expenditure and/or supplement falls to be allowed in the safeguard period then in accordance with the Controllers letter of 5 January 1986 to UKOITC, the OTO would accept withdrawal of the claim prior to a decision having been made on it.

It is important to bear in mind that the expenditure allowed as qualifying for supplement in example 3 is reflected in the safeguard capital base not only for the period in which it is included but for all subsequent periods for which safeguard applies.

Although in example 2 the PRT charge is eliminated the "trade off" is that the safeguard capital base is reduced to £190M for the period and each subsequent period for which safeguard runs.