OT30101 - Capital Gains

Drilling Expenditure. Amount for Deduction. Section 195(1).

TCGA92\s195(1) provides that the amount qualifying for deduction is restricted to expenditure incurred by the person making the disposal:

a. In searching for oil anywhere in the licensed areas or

b. In ascertaining the extent or characteristics of any oil-bearing area, the whole or part of which lies in the licensed area, or what the reserves of oil of any such oil-bearing area are.

For UK licences "oil" and "licensed area" again have their PRT meaning at OTA75\s12(1). For overseas licences "oil" means "any petroleum (within the meaning of the Petroleum Act 1998) and "licensed area" means "the area to which the concession applies".

Qualifying expenditure "incurred by the person making the disposal" can include "inherited" expenditure. Company A may have acquired a licence from group company B in circumstances where either

- ICTA88\s343 applied (company reconstruction without a change of ownership), or

- an election was made under CAA90\s158 (election to disapply sales between connected persons rules).

In both cases company A will "inherit" the capital allowances written down values of company B, but will be subject to an SRA clawback on a later sale outside the group, with reference to the SRAs of both companies. The words "incurred by the person making the disposal" in TCGA92\s195(1) should in these circumstances be construed in conjunction with ICTA88\s343(2)(b)(ii) or CAA90\s158(1)(b) so that the expenditure of both A and B is included to the extent that such expenditure is subject to a clawback on A.

In similar circumstances company A, instead of on selling the licence outside the group, may leave the group whilst still holding the licence. The de-grouping charge in TCGA92\s179 might be triggered. In calculating the chargeable gain TCGA92\s195 will have limited effect since there will be no SRA clawback as per TCGA92\s195(2).