When does section 225G of the Income Tax (Trading and Other Income) Act 2005 apply?

Section 225G applies when three conditions are met: the person disposing of oil acquired it through their own extraction activities or oil rights, the disposal is not a sale at arm's length as defined in Schedule 3 to the Oil Taxation Act 1975, and section 225F does not already apply to the transaction.

What is the effect of section 225G on oil disposals not at arm's length?

Where section 225G applies, both the person disposing of the oil and the person acquiring it are treated for income tax purposes as if the transaction took place at the oil's market value. This prevents sellers and connected buyers from using non-commercial pricing to reduce their tax liabilities.

How is market value determined under section 225G?

Market value is determined using the definitions in paragraphs 2 and 3A of Schedule 3 to the Oil Taxation Act 1975. However, references to the notional delivery day are replaced with the actual day of disposal, and paragraph 2(4) of that schedule is disregarded entirely, ensuring the valuation works in an income tax context.

What is a typical situation where section 225G applies instead of section 225F?

A common situation is where oil is extracted from a field that received development consent on or after 16 March 1993 and falls outside the petroleum revenue tax regime. For non-arm's length disposals from such fields, section 225F does not apply because PRT is not in point, so section 225G imposes market value instead.

Income Tax (Trading and Other Income) Act 2005 section 225G

Valuation where disposal not sale at arm's length

Section 225G ensures that when oil is disposed of other than by a genuine arm's length sale, and the disposal is not already covered by the petroleum revenue tax (PRT) valuation rules in section 225F, the transaction is treated as taking place at market value for income tax purposes.

The section applies where a person disposes of oil they acquired through their own extraction activities or through oil rights they hold, and the disposal is not an arm's length sale
The section only applies where the PRT-based valuation rule in section 225F does not already cover the disposal — a common scenario being oil from fields outside the scope of PRT (those given development consent on or after 16 March 1993)
Both the person disposing of the oil and the person acquiring it are treated for income tax purposes as if the transaction took place at the oil's market value
Market value is determined using the definitions in Schedule 3 to the Oil Taxation Act 1975, but with modifications so that the relevant date is the actual date of disposal rather than the notional delivery day used for PRT purposes

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