What restrictions does Schedule 4 paragraph 3 of the Oil Taxation Act 1975 place on allowable expenditure?

Schedule 4 paragraph 3 restricts allowable expenditure under sections 3 or 4 by excluding financing costs, tax payments, and expenditure already relieved elsewhere. Only costs genuinely and directly related to searching for, winning, and transporting oil from the relevant field qualify for petroleum revenue tax relief in the United Kingdom.

How is expenditure on dual-use assets apportioned under Schedule 4 paragraph 3?

Where an asset or service is used for both qualifying oil extraction activities and non-qualifying purposes, expenditure must be apportioned on a just and reasonable basis. Only the proportion relating to qualifying permitted activities can be treated as allowable expenditure, preventing companies from claiming full relief on partly qualifying costs.

Are financing costs allowable for petroleum revenue tax under the Oil Taxation Act 1975?

No. Financing costs, including interest on loans used to fund oil extraction operations, fall within the prohibited categories of expenditure under Schedule 4 paragraph 3. They are excluded entirely from allowable expenditure claims under sections 3 or 4 of the Oil Taxation Act 1975, regardless of their connection to qualifying activities.

What practical steps must oil companies take to comply with Schedule 4 paragraph 3 restrictions?

Companies must maintain careful records identifying costs directly attributable to permitted activities, exclude prohibited categories such as financing costs and previously relieved expenditure, and carry out fair apportionment exercises for dual-use assets. The rules were updated by the Finance Act 2009 Schedule 45 paragraph 1(4).

Oil Taxation Act 1975 Schedule 4 paragraph 3

Restrictions on expenditure allowable under section 3 or 4

Schedule 4 paragraph 3 sets out the restrictions that limit the types and amounts of expenditure that can be claimed as allowable under sections 3 or 4 of the Oil Taxation Act 1975 for petroleum revenue tax purposes.

Expenditure is only allowable if it is incurred for the specific purposes of oil extraction activities in the relevant field and is necessary for those operations.
Certain categories of expenditure are excluded from relief, including financing costs, tax payments, and expenditure that has already been relieved elsewhere.
Where assets are used partly for qualifying purposes and partly for other purposes, only the proportion relating to qualifying activities may be claimed.
The restrictions ensure that only genuine, directly attributable operational costs of oil and gas extraction qualify for petroleum revenue tax relief.

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