Annex 1: Minor changes in the law Change 29: Oil taxation: deduction for excess of nominated proceeds: section 283
This change clarifies the meaning of section 493(1A)(b) of ICTA.
For income tax and corporation tax purposes a separate “ring fence trade” is deemed to exist by virtue of section 16 of ITTOIA (for income tax) or section 492(1) of ICTA (rewritten in section 279 for corporation tax). The activities making up the ring fence trade are set out in section 16(2) of ITTOIA and section 492(1)(a) to (c) of ICTA (rewritten in section 274 for corporation tax).
Section 493 of ICTA contains rules which ensure that the correct value of oil or gas is brought into account in computing the profits of the ring fence trade. Section 493(1A) of ICTA deals with what is termed “an excess of nominated proceeds”. This is a concept that is part of the Petroleum Revenue Tax (PRT) regime. It allows a company to “nominate” a crude oil sales contract (within the crude oil forward market) as being a contract through which crude oil will actually be delivered, rather than only being a financial (or “paper”) transaction. The “excess” may arise if crude oil is delivered through a contract that has not been so nominated, and HMRC’s value exceeds the actual contract price of the oil (the excess is calculated by multiplying the volume delivered by the price/value difference).
Where this is the case, the same “excess” is also treated as a deduction by virtue of section 493(1A)(b) of ICTA. But the wording of section 493(1A)(b) is unclear in referring to “any trade to which section 492(1) [of ICTA] does not apply”. It is not clear whether this refers to the activities listed in section 492(1)(a) to (c), or to the deemed “separate trade” referred to in the full-out words of section 492(1), or to both. The use of the word “any” in “any trade” suggests a wide application. The explanatory notes published with the legislation that introduced this provision (section 151 of FA 2006) state that the intention is to give a deduction in computing profits of the non-ring fence trade, whereas the wording of section 493(1A)(b) might suggest that it only applies in the case of a separate trade that is deemed to exist by section 492(1).
Section 283 therefore clarifies the legislation by expanding the reference to refer to both the concept of the deemed separate trade, and the activities listed in section 492(1) of ICTA, thereby making it clear that the deduction can be given against the profits of any non-ring fence trade, not solely a deemed trade created by section 279.
This change is in principle adverse to some taxpayers and favourable to others. But it is expected to have no practical effect as it is in line with generally accepted practice.