OT30100 - Capital Gains

Drilling Expenditure. Introduction. TCGA92\s195.

TCGA92\s195 (formerly FA88\s63) provides that, on a disposal of a licence, certain exploration or appraisal expenditure incurred by the vendor is treated as enhancement expenditure within TCGA92\s38(1)(b).

TCGA92\s195 will allow a deduction in computing chargeable gains where there has been a recovery of SRA given on exploration or appraisal costs, but should not be seen as pre- judging whether such a recovery should be made, provided these are capital costs falling within CAA90\s137, as opposed to expenditure attracting relief under CAA90\s136 non of a capital nature. In practice it will be rare for this exception to apply.

The rules apply retrospectively to any disposal of a UK or UKCS licence (or licence interest) whenever made.

As from the enactment of FA 1996 the rules also apply retrospectively to overseas licences. A revised TGCA92\s196 widens the meaning of licence in TGCA92\s195 to include "foreign oil concession". It also widens definitions of "oil", "licensed area", "licensee" and adds a definition of "overseas petroleum". In relation to TGCA\s195 (and FA88\s63) these definitions are deemed always to have had effect.

Unlike TGCA92\s194, the TGCA92\s195 rules are not restricted to pre-development work obligations or licence swaps and can also apply to disposals not at arm’s length.