OT26280 - Capital Allowances: Mineral Extraction Allowance

Abandonment

Where an asset representing qualifying expenditure for MEA is demolished, the net cost (cost of demolition less money received for the remains of the asset) is added to that qualifying expenditure. This cannot be treated as part of the cost of any replacement asset.

Particular problems may arise with onshore sites. Installations are comprised of a number of different elements, buildings of various types, plant and machinery, fencing, access roads, jetties etc. all of which may have to be demolished or removed when the operation of the installation ceases. Most of the cost of such expenditure will fall Section 163 CAA2001 or Section 340 CAA2001 (IBA). There may, however, be other costs incurred following such demolition on restoring the site of the installation to its former state or some other condition, as set down in the conditions of the Agreement whereby the land has been occupied and used. Certain of these may not come within the terms of Section 163 or Section 340. The sort of operations giving rise to such costs could include reinstatement of drainage systems, reseeding and planting of trees etc. In 1990 the OTO advised The United Kingdom Oil Industry Taxation Committee, that such expenditure, incurred largely to discharge an obligation assumed in return for securing occupation of the site would be capital in nature. The cost would fall either within the provisions of CAA2001/s395(1)(d) as "expenditure on the construction of any works in connection with the working of a source of mineral deposits" or, where such costs were incurred after the cessation of the trade, as falling within CAA2001/s416. In both instances MEA would be due. In relation to mineral extraction generally, the 1985 Consultative Document records the practice that the cost of landscaping or restoring a mining site while a mining trade is being carried on is normally treated as revenue expense and relieved accordingly. It is not considered that this practice, while appropriate to continuous restoration, e.g. of an open cast mining site, could be extended to land restoration cost on demolition of an oil terminal as the cost is clearly capital.

As regards Abandonment more generally, see the section of the Manual commencing at OT27000.