Income Tax (Trading and Other Income) Act 2005 section 161

Mineral exploration and access

Section 161 restricts the deduction of intangible drilling costs incurred on production wells in the mineral extraction industry, particularly oil and gas, where the presence of mineral deposits in commercial quantities has already been established.

• The section applies where a trader incurs expenditure on mineral exploration and access in an area where commercial mineral deposits have already been confirmed.
• Intangible drilling costs of production wells — such as rig hire costs that do not result in acquiring machinery or plant — are not deductible simply because similar exploration costs would have been allowed before deposits were found.
• A deduction is only permitted if it would have been allowable even had the presence of commercial mineral deposits not yet been established in that area.
• Disallowed intangible drilling costs are treated as capital expenditure and may instead qualify for mineral extraction capital allowances under Part 5 of the Capital Allowances Act 2001.