OT21245 - Corporation Tax Ring Fence and Supplementary Charge

First-year Allowances for a Ring Fence Trade: Mineral Extraction Allowances: General Rules

The new 100% first-year allowances applies to expenditure which would previously have been relieved at 25%, essentially expenditure on mineral exploration and access. There are no first- year allowances for the costs of acquiring a mineral asset, such as a licence.

CAA01/s416A provides that MEA first-year allowances are available if the expenditure is within CAA01/s416B. This means the trade must be subject to the supplementary charge (CAA01/s416B(5)) and the expenditure must satisfy the basic conditions in CAA01/s416B. These are that expenditure has to be

• incurred on or after 17 April 2002,
• by a company,
• wholly for the purposes of a ring fence trade, and
• be outside the two exclusions in subsections (2) and (3), which deal with mineral assets and connected person transactions.

Of particular note

• unlike plant or machinery, it is not expected that the use of the word wholly, will give rise to difficulties,
• expenditure on the acquisition of mineral assets does not qualify for first-year allowances (CAA01/s416B(2)), these costs continue to attract relief at 10%,
• expenditure on the acquisition of an asset representing MEA expenditure from connected companies does not qualify for first-year allowances (CAA01/s416B(3)),
• any reference to the acquisition of an asset representing expenditure on mineral exploration and access include a reference to the results obtained from the relevant expenditure. This means, for example, a company cannot claim first-year allowances on its costs of buying the seismic results of a mineral exploration activity carried on by a connected company.