OT27001 - Abandonment and Decommissioning

Introduction

This manual describes the reliefs available from 7 August 2000 onwards and gives the references for both CAA 90 and CAA 01.

Details of the previous legislation are given in the old Ring Fence CT Manual at Chapter 5 Plant and Machinery: Abandonment.

In oil industry usage, “Abandonment” and “Decommissioning” mean essentially the same, describing what happens to offshore installations and pipelines when the fields they serve have become fully depleted. “Abandonment” was never an entirely apt term as its legal meaning is the voluntary relinquishment of possession of property and the more precise “Decommissioning” is now generally used – particularly since technological developments give rise to the possibility of reusing installations.

RTZ Oil and Gas Limited v Elliss (61 TC 132) confirmed that most abandonment/decommissioning expenditure is of a capital nature. It follows that costs may be expected to qualify for relief under the Capital Allowances code, in the vast majority of instances as Machinery or Plant.

In broad outline, the previous legislation enabled a person carrying on a ring fence trade to elect for a 100% capital allowance for expenditure incurred on the demolition of offshore machinery or plant in connection with the closing down of the whole or part of an oil field. Where the conditions for relief were not met, 25% reducing balance relief could be claimed under the normal capital allowances rules relating to demolition.

The need for change arose because relief was generally only available for demolition costs. Once it became possible to reuse installations, the legislation produced a distorting effect on commercial decisions by making demolition a significantly more favourable option in tax terms. This was also contrary to the Government’s environmental objectives and, after discussions with the oil industry, the legislation was amended to extend demolition reliefs to cover costs of removal, preparing for reuse and/or mothballing offshore installations.

In general, where the relevant conditions are met, ring fence trade, will qualify for 100% relief on decommissioning expenditure; otherwise relief will be on a 25% reducing balance basis.