OT26214 - Capital Allowances: Mineral Extraction Allowance

Disposals of Undeveloped Areas

These can create particular problems. Valuations for example can be very complex and in 1988 legislation was introduced under which certain farm-ins and licence exchanges were deemed to be at nil value. The legislation was deemed always to have had effect. The background to and details of the legislation are to be found in the section on CG. See also the section on SRA. The essence of the legislation is that where there are arm’s length farm- ins or exchanges of interests in undeveloped areas, the consideration is taken as nil. This applies worldwide for disposals after 13 September 1995, but prior to that date related only to the UK/UKCS. Where the consideration includes something in addition to the farm-in or the exchange, that addition is valued. The general effect is to accelerate MEA for the vendor whilst denying relief to the acquiring party, i.e. a balancing allowance will accrue to the former and the latter will have nil qualifying expenditure.

This could be open to abuse within a group, i.e. by transferring a licence interest between companies in a group, there would be an immediate balancing allowance of the unallowed qualifying expenditure to date. Disposals between connected persons are therefore specifically excluded from the above treatment by CAA2001/s412.