OT30101 - Capital Gains: Drilling Expenditure - Amount of Deduction

TGCA92\S195(1)

TCGA92\S195(1) provides that the amount qualifying for deduction is restricted to expenditure incurred by the person making the disposal -

  1. In searching for oil anywhere in the licensed areas, or
  2. 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.

Qualifying expenditure 鈥渋ncurred by the person making the disposal鈥� can include 鈥渋nherited鈥� expenditure. Company A may have acquired a licence from group company B in circumstances where either

  • CTA10\S939 + applied (company reconstruction without a change of ownership), or
  • CAA01\S569 applies (election to treat sales as being for an alternative amount between connected persons).

In both cases company A will 鈥渋nherit鈥� the capital allowances written down values of company B, but will be subject to an capital allowances claw back on a later sale outside the group, with reference to the allowances of both companies.

The words 鈥渋ncurred by the person making the disposal鈥� in TCGA92\S195(1) should in these circumstances be construed in conjunction with CAA01\S569(3) 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 research and development allowance claw back (see TCGA92\S195(2)).