What does section 225L of ITTOIA 2005 do?

Section 225L provides a mechanism for adjusting capital allowances in later tax years when the petroleum revenue tax (PRT) position changes for assets partly funded by a regional development grant. If qualifying expenditure increases, additional capital expenditure is deemed incurred. If it decreases, a trading receipt equal to the reduction is recognised.

What are the three conditions that must be met for section 225L to apply?

Condition A requires that asset expenditure was met by a regional development grant. Condition B requires that expenditure was taken into account for capital allowances despite section 534 CAA 2001 and section 225K rules. Condition C requires that in a later adjustment period the PRT-allowable proportion of the expenditure changes compared with the initial period.

How is the adjustment calculated under section 225L when the PRT position changes?

The expenditure qualifying for capital allowances in the initial period is recalculated as if the updated PRT circumstances had existed at that time. The difference between the recalculated figure and the amount originally taken into account forms the adjustment, which is treated either as additional capital expenditure or as a taxable trading receipt in the adjustment period.

What practical scenario commonly triggers a section 225L adjustment?

The most common scenario involves onshore oil-related assets such as initial treatment plants funded partly by regional development grants under the Industrial Development Act 1982. PRT eligibility for such assets can take years to finalise, meaning the capital allowances position must be revisited once the proportion of PRT-allowable expenditure is agreed.

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

Adjustment as a result of regional development grant

Section 225L provides a mechanism for adjusting capital allowances in later tax years when the petroleum revenue tax (PRT) position changes for assets partly funded by a regional development grant.

Where capital allowances were initially given on asset expenditure without fully accounting for a regional development grant, adjustments may be needed in a later "adjustment period" once the PRT eligibility of the expenditure is finalised
The expenditure eligible for capital allowances is redetermined based on the updated PRT position, and the difference from the original amount is identified as either an increase or a reduction in the allowance
If the redetermination increases the eligible expenditure, the person is treated as having incurred additional capital expenditure in the adjustment period on an extension or addition to the asset
If the redetermination reduces the eligible expenditure, the person is treated as having received a trading receipt equal to the reduction in the adjustment period

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