OT26210 - Capital Allowances: Mineral Extraction Allowance

Purchase of Mineral Asset

CAA2001/s407 reflects this. Where:

1. a trader has incurred capital expenditure on acquiring a mineral asset from another trader, and
2. part of the value of that asset is attributable to expenditure by the previous trader on mineral exploration and access,

such of the buyer’s qualifying expenditure "as it is just and reasonable" to be attributed to the value in (2) is to be treated as incurred on mineral exploration and access and, therefore, subject to relief at 25%. This is restricted to the qualifying expenditure on mineral exploration and access by the previous owner. This expenditure can include payments on which SRA has been given to the previous owner (CAA2001/s411).

Example . A straightforward case would be the disposal of an oil licence by trader A to trader B. Where A has incurred expenditure of £1m on the issue of the licence and £3m on exploration and access, relief will be given for the former as 10% MEA and for the latter as SRA. If the licence interest is sold to B for, say, £10m clearly part of this amount is attributable to the exploration and access expenditure by A. B can claim MEA on £3m at 25% and on £1m at 10%. No relief would be due on the balance of £6m.

Whether part of the value of the sold asset is attributable to exploration and access expenditure is a question of fact. It is normally accepted that where the sale price exceeds the seller’s qualifying expenditure, this condition is satisfied and relief at 25% will be due on at least some of the consideration. There will be cases where this is clearly not so, e.g., to take an extreme case, where a licence interest in the exploration stage is sold and where (all) expenditure by the vendor has been abortive. In such a case OTO is likely to argue that no/little part of the value of the licence is attributable to this abortive exploration and access expenditure. There will be many instances where the matter is not so clear cut and, where, in worthwhile cases, it will be necessary to look carefully at what expenditure has been incurred.