OT26245 - Capital Allowances: Mineral Extraction Allowance

Pre-trading Expenditure

The Provision of Plant or Machinery

Pre-trading expenditure on mineral exploration and access on the provision of plant or machinery which is "sold, demolished, destroyed or abandoned" before trading commences is treated as incurred on the first day of trading. Relief is given on the net cost, i.e. expenditure incurred less any sale, insurance, salvage, compensation monies received from the sale, demolition, destruction or abandonment. In effect, the net cost is relieved as a balancing allowance in the chargeable period in which trading commences. Where the source in connection with which the plant and machinery was used has ceased before the date of commencement, the balancing allowance is restricted by the amount of expenditure incurred more than six years prior to the date of commencement. CAA2001/s402 cases are likely to be rare, relief normally being given as SRA. Where the plant and machinery is still owned when the trade commences, relief will be given under the normal P&M rules.

Not incurred on Plant and Machinery

Where the source on which exploration and access expenditure has been incurred has not been abandoned before the date of commencement of the trade, CAA2001/s400 treats expenditure as qualifying expenditure incurred on the date of commencement, with relief at 25%. Where exploration of the source has ceased before the commencement of trading, a balancing allowance arises at the date of commencement computed on the difference between:

1. Expenditure incurred within six years of the date of commencement, and
2. Any capital sum received prior to commencement of trade to the extent to which it is reasonably attributable to the incurring of the expenditure at the source in question.

Like relief under CAA2001/s402, there is a six year bar where the source has been given up (CAA2001/s401(4)). Again, much pre-trading expenditure is allowed as SRA, so cases are likely to be rare, e.g. where seismic is purchased.