OT26254 - Capital Allowances: Mineral Extraction Allowance

Oil Licences

Where the asset being acquired is a UK oil licence, the buyer’s qualifying expenditure is specifically restricted by CAA2001/s410. Where the buyer acquires a licence, or an interest in a licence, issued under the Petroleum Production Act 1934 or the Petroleum Production Act Northern Ireland 1964, the qualifying expenditure of the buyer is restricted to the amount paid by the original licensee to the relevant government department in obtaining the licence. This means the initial payment and does not include any continuing annual payments. The initial payments are likely to be small unless the licences were issued at auction. Where only an interest in a licence is acquired the initial payment is apportioned on a just and reasonable basis.

The OTO view is that CAA2001/s410 can apply only to the costs of acquiring the licence itself. Any expenditure which has been incurred by the vendor on E&A and which is reflected in the value of the licence when sold falls to be considered under CAA2001/s407.