What does section 3A of the Oil Taxation Act 1983 do?

Section 3A restricts the amount of long-term asset expenditure that qualifies for petroleum revenue tax relief where part of the asset's use generates tax-exempt tariffing receipts. A just and reasonable apportionment must be made, and the portion attributable to tax-exempt tariffing use is excluded from relief. It applies to expenditure incurred on or after 1 January 2004.

What are tax-exempt tariffing receipts under United Kingdom oil taxation law?

Tax-exempt tariffing receipts are broadly amounts received by a participator for allowing third parties to use an asset such as a pipeline or processing facility, where those receipts fall outside the charge to petroleum revenue tax. The logic is that if the income from a particular use is not taxed, relief on the corresponding expenditure should also be restricted.

How is the apportionment of expenditure carried out under section 3A?

The participator must carry out a just and reasonable apportionment of total qualifying expenditure between the portion relating to tax-exempt tariffing use and the portion relating to other qualifying use. The apportionment reflects the actual or expected pattern of use of the asset, and what counts as just and reasonable depends on the specific facts and circumstances.

Can you give an example of how section 3A applies to restrict expenditure relief?

If a participator spends £10 million on a processing facility and 30% of its use generates tax-exempt tariffing receipts from third-party processing, then £3 million of the expenditure is excluded from relief under section 3A. The remaining £7 million continues to qualify for the normal allowance against petroleum revenue tax.

Oil Taxation Act 1983 section 3A

Exclusion from section 3(4) of expenditure on assets giving rise to tax-exempt tariffing receipts

Section 3A restricts the amount of long-term asset expenditure that qualifies for relief where part of the asset's use generates tax-exempt tariffing receipts.

This section applies to expenditure incurred on or after 1 January 2004 on long-term assets that qualifies under the general rules for relief.
It targets situations where some of the asset's use (or expected use) gives rise to tax-exempt tariffing receipts — that is, certain income from allowing third parties to use the asset that is exempt from the petroleum revenue tax charge on receipts.
A just and reasonable apportionment must be made to identify the portion of expenditure attributable to the tax-exempt tariffing use of the asset.
That apportioned portion is then excluded from the expenditure eligible for relief, so only the remainder qualifies for the normal allowance.

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