What reductions can be made to an assessable profit for payment on account purposes under Schedule paragraph 3 of the Petroleum Revenue Tax Act 1980?

Schedule paragraph 3 permits two reductions to the assessable profit computed under paragraph 2. First, allowable losses available under section 7(1) of the Oil Taxation Act 1975 may optionally be deducted. Second, the participator's share of the oil allowance under section 8 of the Oil Taxation Act 1975 must be mandatorily deducted before calculating the payment on account.

Is the reduction for allowable losses mandatory or optional under Schedule paragraph 3?

The reduction for allowable losses is optional. The legislation uses the word 'may,' indicating that the participator can choose whether or not to set allowable losses against the assessable profit at the payment on account stage. This contrasts with the oil allowance reduction, which uses the word 'shall' and is therefore mandatory.

How does the oil allowance reduction differ from the loss relief reduction under paragraph 3?

The oil allowance reduction is mandatory — the assessable profit 'shall' be reduced by the participator's share of the oil allowance under section 8 of the Oil Taxation Act 1975. In contrast, the loss relief reduction is permissive — the participator 'may' choose to apply allowable losses. This distinction gives flexibility on losses but not on the oil allowance.

Can you give an example of how Schedule paragraph 3 reductions work in practice?

If an assessable profit is £10 million, the participator may optionally deduct £2 million in allowable losses, reducing the profit to £8 million. The participator must then deduct their £3 million share of the oil allowance, producing a final assessable profit of £5 million for the payment on account calculation.

Petroleum Revenue Tax Act 1980 Schedule paragraph 3

Reduction of assessable profit for payment on account purposes

Schedule paragraph 3 explains how an assessable profit calculated for the purposes of a payment on account may be reduced by allowable losses and the oil allowance.

Once an assessable profit has been computed under the payment on account rules (paragraph 2 of the Schedule), it may be reduced by certain reliefs before the payment on account is determined.
Any allowable losses carried forward or otherwise available may be set against the assessable profit, following the rules in section 7(1) of the Oil Taxation Act 1975.
The assessable profit must also be reduced by the participator's share of the oil allowance for the chargeable period, in accordance with section 8 of the Oil Taxation Act 1975.
The reduction for allowable losses is optional (the profit "may" be reduced), whereas the reduction for the oil allowance is mandatory (the profit "shall" be reduced).

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