What is an arm's length sale of oil under the Oil Taxation Act 1975?

Under Schedule 3 paragraph 1 of the Oil Taxation Act 1975, an arm's length sale of oil requires three conditions to be met simultaneously: the contract price must be the sole consideration, the sale terms must not be influenced by any wider commercial relationship between the parties or connected persons, and the seller must have no interest in the oil after the sale.

Why does the arm's length definition matter for petroleum revenue tax?

The arm's length definition prevents related parties, such as companies in the same group, from setting artificially low oil sale prices to reduce petroleum revenue tax liability. Where a sale fails the arm's length test, the oil must be valued at market value rather than the stated contract price, ensuring accurate PRT calculations under United Kingdom law.

Who are connected persons under the Oil Taxation Act 1975 arm's length test?

Connected persons are defined by reference to section 1122 of the Corporation Tax Act 2010. This covers companies under common control, business associates, and individuals linked by close family ties. If any connected person has a relevant relationship or interest affecting the oil sale, the arm's length test can fail even if the buyer and seller themselves appear independent.

What happens if an oil sale fails the arm's length test under the Oil Taxation Act 1975?

If an oil sale fails the arm's length test — for example, because side payments exist, a group relationship influences pricing, or the seller retains a downstream interest — the oil must be valued at its market value for petroleum revenue tax purposes. The stated contract price is disregarded, and HMRC applies an independent market valuation instead.

Oil Taxation Act 1975 Schedule 3 paragraph 1

Definition of sale of oil at arm's length

Schedule 3 paragraph 1 defines what constitutes an arm's length sale of oil for the purposes of the Oil Taxation Act 1975, setting out three conditions that must all be met.

An arm's length sale requires that the contract price is the only consideration — there must be no side payments, benefits in kind, or other forms of value passing between the parties
The terms of the sale must not be influenced by any wider commercial relationship between the buyer and seller (or persons connected with either of them), beyond the sale contract itself
The seller (and any connected person) must have no direct or indirect interest in what happens to the oil after the sale, including any resale or any products derived from it
The definition of "connected persons" follows the Corporation Tax Act 2010, section 1122, which covers relationships such as companies under common control, business partners, and close family members

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