What types of expenditure qualify for exploration and appraisal relief under section 5A of the Oil Taxation Act 1975?

Qualifying expenditure must be incurred wholly and exclusively for searching for oil in UK territorial waters or a designated area, ascertaining the extent or characteristics of an oil-bearing area, estimating reserves, or making non-royalty, non-periodic payments to the OGA to obtain a licence. It may be capital or revenue in nature.

What are the time limits for claiming exploration and appraisal expenditure under section 5A?

The main qualifying window ran from 16 March 1983 to 15 March 1993. Expenditure incurred between 16 March 1993 and 15 March 1995 could also qualify if the participator was already contractually committed before 16 March 1993. A limited further extension applied for new contracts entered into between 16 March and 15 June 1993 for the same purpose as a pre-existing contract.

How are receipts from oil discovered during exploration treated under section 5A?

Proceeds from selling oil won during exploration and appraisal operations must be deducted from the allowable expenditure, reducing the claimable amount. Where oil is disposed of otherwise than at arm's length or appropriated for refining, market value under Schedule 3 is substituted. However, sums received from assigning licence rights or interests are excluded from this reduction.

When can licence payments to the OGA be claimed as exploration and appraisal expenditure?

Payments to the OGA for obtaining a licence are only allowable once the licence has expired, been determined, or been revoked, or once part of the licensed area has been surrendered. If only part of the area is surrendered, only a proportionate share of the licence expenditure qualifies. For example, surrendering half the area allows a claim for half the licence cost.

Oil Taxation Act 1975 section 5A

Allowance of exploration and appraisal expenditure

Section 5A provides rules for allowing exploration and appraisal expenditure as a deduction against petroleum revenue tax (PRT), covering what types of spending qualify, the time limits for incurring such expenditure, and how receipts from oil discovered during exploration reduce the allowable amount.

Exploration and appraisal expenditure incurred after 15 March 1983 and before 16 March 1993 (or within two years after that date if the participator was already contractually committed) may be allowed against PRT, provided it was spent wholly and exclusively on searching for oil, assessing oil-bearing areas, estimating reserves, or obtaining licences in UK territorial waters or designated areas.
The expenditure must not relate to a field for which a development decision (i.e. OGA consent or an approved development programme) had already been made at the time the spending was incurred, and it cannot be claimed under this section if it has already been allowed under other schedules (Schedules 5, 6 or 7) in connection with any oil field.
Where oil is won during exploration and appraisal operations and is then sold or appropriated (e.g. for refining), the allowable expenditure must be reduced by the proceeds received or, if the oil was not sold at arm's length, by its market value determined under Schedule 3 to the Act — though sums received from assigning licence rights or interests in a licensed area are not deducted.
Licence-related payments to the OGA can only be claimed once the licence has expired, been revoked, or part of the licensed area has been surrendered, and where only part of the area is surrendered, only a proportionate share of the expenditure qualifies.

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member