OT16500 - PRT: Allowable Losses

Unrelievable Field Losses: Licence Transfers: ‘Anti-Avoidance’: OTA75/S6(1D) and FA01/SCH32

Background

Detail

Examples

Background

These provisions block a loophole in the PRT rules which enabled companies to create (or inflate) unrelievable field losses (UFLs) by transferring their licence interests and electing, together with the other party to the transfer, to opt out of the normal FA80/SCH17 transfer rules via an application under FA80/SCH17/PARA4. See OT18030 for more information on opt outs.

The loophole could be exploited as follows. A participator in a profitable field nearing decommissioning has paid little or no PRT because of safeguard and oil allowance. It transfers its interest in the field to a new participator, both parties agreeing to opt out of the FA80/SCH17 provisions. The new participator then incurs a substantial loss on decommissioning. Were the normal transfer rules to apply, FA80/SCH17/PARA15 (see OT18130) would operate. The decommissioning loss would be offset first against the profits of the old participator (and then any predecessor company) before any balance remaining could be determined as a UFL. If oil allowance had fully covered those profits, no repayment would be due.

But by electing to disapply the transfer rules under FA80/SCH17/PARA4, the new participator’s loss would not have to offset previous profits arising from the relevant field interest. It could therefore claim the loss as a UFL in another field in which it had paid PRT and thereby secure a repayment.

The loophole could also be exploited by a similar opt out transfer earlier in field life before a participator had broken even in the field. The opt out would enable it to crystallise its unused loss and claim it as a UFL when the field permanently ceased production. Had the normal transfer rules applied however, the loss would have been absorbed by future profits arising from the relevant field interest in accordance with FA80/SCH17/PARA7 (see OT18050). Assuming that at the time of transfer the field was not expected to be a ‘PRT-payer’ because of projected oil allowance, it would make no difference to the new participator whether the loss was transferred or not.

FA80/SCH17/PARA4 applications can be refused by the Board if they consider that the opt out will materially affect the total tax chargeable in the field. However, in both cases the opt out results in a material tax difference in another field, the field in which the consequential UFL is claimed.

Detail

FA01/S101 amends OTA75/S6 by providing that the calculation of a UFL is subject to FA01/SCH32 (OTA75/S6(1D)). FA01/SCH32 ensures that a UFL cannot exceed the UFL that would have arisen had there been no transfer of the relevant interest in the field. While essentially anti-avoidance legislation, transactions do not have to be specifically avoidance- motivated to be caught by the new rules. It is also worth noting that the Board’s powers to limit the use of opt out transfers were not extended, not least because opt outs can actually prevent relief being lost in particular cases, see OT16550.

FA01/SCH32 applies where

• there has been a transfer of the whole or part of an interest in a field
• the transfer is an ‘excluded transfer’
• and an allowable loss accrues from the field to the ‘old participator’ (the transferor), the ‘new participator’ (transferee) or a ‘subsequent new owner’ (FA01/SCH32/PARA1).

An ‘excluded transfer’ is defined in FA01/SCH32/PARA2 as

• a transfer to which Parts II and III of FA80/SCH17 do not apply because there has been a successful FA80/SCH17/PARA4 disapplication
• and which takes place under an agreement made on or after 7 March 2001, or in the case where there is a conditional agreement in place before 7 March, where the condition is satisfied on or after that date.

FA01/SCH32/PARA4 provides that transfers exclude illustrative agreements (see OT19412) and redeterminations (see OT18290). Compare FA80/SCH17/PARA1(1), see OT18020.

Under FA01/SCH32/PARA3, a ‘subsequent new owner’ is any participator in the field who owns the field interest (or a part of it) after it has been transferred by the new participator (the transferee in the excluded transfer).

Where the conditions in FA01/SCH32/PARA1 all apply, the allowable loss in question must first be set off against the participator’s own assessable profits arising in other chargeable periods in accordance with the provisions of OTA75/S7. If there are a number of transfers, it may be that not all are ‘excluded’. If that is the case, set offs under FA80/SCH17/PARA7 and FA80/SCH17/PARA15 also need to be made. FA80/SCH17 operates in priority to FA01/SCH32.

The second step is then to offset any balance remaining of the loss against the ‘relevant profits’ accruing to participators who have held the same field interest as the loss-maker at different times. They are referred to as ‘different owners’ in FA01/SCH32/PARA7(1). This subparagraph also makes it clear that the offset is only deemed to take place for the purpose of calculating the UFL. In other words there is no need for any assessments to be amended.

There are provisions in FA01/SCH32/PARA8(2)-(5) which cover the situations in which the interests of the loss-maker and different owner (or different owners) do not equate, e.g. the different owner’s interest is only part of the loss-maker’s interest, in which case only the corresponding part of the latter’s loss should be relieved against the former’s profits.

‘Relevant profits’ are defined in FA01/SCH32/PARA6(2). They are calculated after taking account of

• any expenditure unrelated to the field which was allowed following a claim made on or after 29 November 1994 (see OT16250)
• and any losses relieved under OTA75/S7.

The final balance is then claimable as a UFL.

Under FA01/SCH32/PARA9 an allowable loss may not be relieved against relevant profits if those profits have already been utilised for the purpose of FA01/SCH32/PARA7.

If there is more than one loss-maker, there is an order of set off against relevant profits. Under FA01/SCH32/PARA10(1) the loss accruing to the participator who held the relevant interest at an earlier time is relieved against different owner profits in priority to the loss from the interest accruing to a participator at a later time. FA01/SCH32/PARA10(2) then applies where the field interest is held by more than one loss-making participator at the same time. In such a case the losses are relieved against different owner profits in amounts proportionate to the size of the interest respectively held.

Examples

Example 1

The transfer from X to Y is completed after 7 March 2001 and is subject to a successful FA80/SCH17/PARA4 disapplication. Under the old rules Y’s UFL would have been 70. Its CP6 loss would only have been reduced by 10 under OTA75/S7(3). But under FA01/SCH32, its UFL is reduced to 10 after taking account of X’s relevant profits of 60.

Example 2

The facts are the same as in Example 1 except that in CP3 X’s profits of 40 are calculated after the allowance of a claim under OTA75/S5B (research) of 5. The 5 is ‘unrelated field expenditure’ and needs to be ‘added back’ to arrive at X’s relevant profits. X’s relevant profits therefore become 65 and Y’s UFL is accordingly reduced to 5 (70-65).

Example 3

The facts are the same as in Example 1 except that X transfers only 50% of its interest to Y with the balance being transferred to another company, Z. In calculating Y’s UFL, FA01/SCH32/PARA8(3) means that only 50% of X’s relevant profits (‘the corresponding part’) need to be taken into account. The UFL is therefore 40 (70-30).

Example 4

Both transfers are completed after 7 March 2001 and are subject to successful disapplications under FA80/SCH17/PARA4. Under the old rules, both X and Z would have been able to claim UFLs of 50. But the UFL that would have arisen had there been no transfers of the interest would have been 50 (combined losses of 100 less relevant profits of 50). Under FA01/SCH32/PARA10(1) Z’s UFL remains 50, but X’s UFL is reduced to 0. X’s loss is offset in priority to Z’s as it accrued at an earlier time.

Example 5

Both transfers are completed after 7 March 2001.The XY transfer is subject to a successful FA80/SCH17/PARA4 disapplication, but the YZ transfer is within FA80/SCH17 Parts II and III.

Under the old rules, Z’s UFL would have been 40 after taking into account the necessary carry back of 10 under FA80/SCH17/PARA15 to cover Y’s assessable profits. But, although Z itself has not been party to an excluded transfer, its loss is still within FA01/SCH32. There is an ‘excluded transfer’ between X and Y (FA01/SCH32/PARA1(1)(b)) and Z is a ‘subsequent new owner’ (FA01/SCH32/PARA1(1)(c)). Z’s UFL is therefore reduced to 10 (50-10-30), the UFL which would have been claimable had there been no field transfers.