OT30201 - Capital Gains

Rebasing of Assets Held at 31 March 1982. Election for Universal Rebasing at 31 March 1982. TCGA92\s35(5)

It was recognised that such elections, if made by oil companies, had the potential to create huge paper losses on what are wasting assets, i.e. UK and UKCS production licences and related plant and machinery etc, because of high oil prices in 1982. As a result FA88\Sch8\Para12 (now TCGA92\Sch3\Para7) excluded certain disposals from the ambit of an election.

Excluded Disposals - TCGA92\Sch3\Para7

The disposals excluded are disposals of, or of an interest in:

1. plant and machinery
2. an asset which the vendor has at any time held for the purposes of, or in connection with, a trade (or part of a trade) involving the working of a source of mineral deposits (as defined in CAA90\s121) - this will include a foreign oil licence.
3. a licence under the Petroleum Act 1998 or the Petroleum (Production) (Northern Ireland) Act 1964.
4. In relation to disposals after 21 January 1990, shares which on 31 March 1982 were unquoted and derived the greater part of their value directly or indirectly from -

• "oil exploration or exploitation assets" (see viii. below) situated in the UK or UKCS
• or
• such assets as above and "oil exploration or exploitation rights" (see ix. below) taken together.

This extra exclusion was brought in by FA90\s63.

Plant & Machinery and Mineral Trade Assets

Disposals of plant and machinery and mineral trade assets fall within a. and b. above only where capital allowances have been allowed in respect of any expenditure attributable to the asset, or would have been allowed if claimed. Where the vendor acquired the asset on a "no gain/no loss disposal" this test is made by reference to the vendor, the person who last acquired it otherwise than under a no gain/no loss disposal, or any person who subsequently acquired it on such a disposal (i.e. looking through intra-group transfers under TCGA92\s171).

Oil Licence Disposals

The condition that capital allowances have or could have been claimed does not apply to oil licence disposals. It was felt that non-traders holding licences for areas in which there had been discoveries but no decision to develop could otherwise have established large capital losses on disposals covered by an election.

Share Disposals

The amendment to exclude share disposals was introduced in FA90 to counteract the disposal by oil groups of subsidiary companies which at 31 March 1982 primarily held valuable licence interests and related assets in one or more UK/UKCS oil fields. Disposals of shares, would have circumvented the exclusion of disposals of the underlying oil assets and would therefore have been covered by an election. "Shares" include stock and any security as defined in ICTA88\s254(1) but only shares etc which on 31 March 1982 were neither quoted on a recognised stock exchange nor dealt with on the Unlisted Securities Market.

As an election made before 22 January 1990 could have become potentially disadvantageous because of the amendment, an oil company (or group) which had elected was given the right to revoke what was otherwise an irrevocable election in writing before 1 January 1991.

It should be noted that the excluded "shares" may be quoted at the time of the disposal, or held in another company following a company reconstruction/amalgamation or in some other form of shares etc because of a share capital reorganisation since 31 March 1982.

TCGA92\Sch3\Para7(2)(d) and TCGA92\Sch3\Para3 look at whether the shares were unquoted on 31 March 1982 taking into account the operation of TCGA92\s126 to TCGA92\s130. s127 deems the new shares etc arising from a company reconstruction or share reorganisation to be the same as the original shares held. Therefore, if the original shares were unquoted at 31 March 1982 and derived the greater part of their value from oil exploration or exploitation assets or rights in the UK or UKCS, the disposal is excluded from the benefits of the rebasing election.

Example

Suppose company A has an unquoted subsidiary B whose 1982 value was dominated by a UKCS oil field. It then creates another subsidiary C after 31 March 1982 and exchanges its shares in B for shares in C. Under TCGA92\s127 and TCGA92\s135, the latter are treated in all respects as were the shares in B. If A sells shares in C, the disposal is excluded by Para7(2)(d) notwithstanding that C’s shares were not issued at 31 March 1982.

Intra-group transfers of the UK or UKCS oil rights and assets out of a subsidiary prior to the disposal of its shares will similarly not avoid the exclusion.

Example

As in the above example A has an unquoted subsidiary B whose 1982 value was dominated by UKCS oil field. B transfers its field interest to a new subsidiary C in exchange for shares in C. B then pursues a different activity before being sold to a third party. Although at the time of sale, B’s activities have nothing to do with oil, the disposal is excluded from the rebasing election as its shares derived their value at 31 March 1982 from the UKCS oil field.

Definitions

"Oil Exploration or Exploitation Assets" are assets which have at some time been used in connection with activities of searching for, winning or exploiting oil in the UK or UKCS which are either:

• non-mobile assets (e.g. most platforms, pipelines etc)

or

• mobile assets dedicated to an oil field in which the company (or a connected person) is, or has been, a participator (e.g. a shuttle tanker used to evacuate crude or a floating production platform).

These terms have their PRT meaning at OTA75\Part 1.

Broadly a mobile asset is "dedicated to an oil field" if it is used in connection with the field, and is likely to continue to be so used, during substantially the whole of its life, although not necessarily to that field exclusively (e.g. a support vessel used 80% of the time on one field and 20% on several other fields).

There is no statutory definition of "mobile" but its dictionary meaning implies ease and expectation of movement while in use.

It was necessary to include connected persons in relation to mobile assets to cover intra- group transfers at no gain/no loss.

"Oil Exploration or Exploitation Rights" are rights to assets to be produced by oil exploration or exploitation activities, being activities carried on in connection with searching for, winning or exploiting oil in the UK or UKCS, or rights to interests in or to the benefits of such assets.

Such rights will include rights to future oil production under the licence but also a subordinated interest in that oil e.g. a net production interest.