OT21564B - Investment Allowance: Operating and leasing expenditure – Leasing expenditure
For leasing expenditure to generate the allowances, it must meet conditions (A) to (E).
Condition A (Regulation 4(2)) is met if expenditure is incurred in relation to the lease of an asset. In this context, expenditure is only in relation to the lease of an asset if it is a payment for the asset being made available. It does not include payments for any other purposes. The legislation highlights in regulation 4(7) that payments for staff, services or finance charges are not payments in relation to the lease of an asset. Where the lease is with an associated company, the amount of any payment which represents a profit or premium on the cost of the asset being made available is also not in relation to the lease of the asset.
For these purposes, “finance charge” means any amount which, in accordance with generally accepted accounting practice, falls or would fall to be treated as a finance charge in the company’s accounts. If there is no such amount explicitly shown, then any amount which could represent the interest rate implicit within the lease, in line with normal commercial or accounting practice would also be a finance charge.
The ‘other purposes’ listed at regulation 4(7) (b) are not exhaustive and there may be other expenditure which does not represent payment in return for the asset being ‘made available’.
Condition B (Regulation 4(3)) requires that the asset is mobile and that its main function is the production or storage of oil. For an asset to be mobile, it does not necessarily need to move on a regular basis but it must be capable of moving to be used in another location. This could mean the asset is used in the same place for many years at a time and this would not necessarily prevent it from meeting condition B, as long as it could be moved to be used at a different site.
It is a question of fact whether the main function of an asset is the production or storage of oil. The asset’s main function will usually relate to the use the asset is put to under the lease in question, rather than the purpose for which it was designed. It will typically include FPSOs used for production and storage. Leasing of other assets, such as tankers or accommodation platforms, cannot generate the allowances because the main purpose of these assets is transportation or accommodation, rather than production or storage.
Expenditure will meet Condition C (Regulation 4(4)) if the lease to which the payment relates is for at least 5 years. Many leases will contain break clauses. Whether the lease can be terminated due to negligence or misconduct within the first 5 years will not, in itself, prevent Condition C from being met.
Condition D (Regulation 4(5)) sets out requirements for the use of the asset in relation to the field or cluster the asset is used in. It ensures that the allowance is only available for new investment.
Condition E (regulation 4(6)) is that investment or cluster area allowance cannot already have been generated in respect of the acquisition of the leased asset, by any company. This means that if investment or cluster area allowance was generated on acquisition of the asset, because it was capital expenditure and the asset was used in the company’s ring fence trade, then no company will be able to generate allowance as a result of subsequently incurring leasing expenditure. Consequently, the position for leasing expenditure will mirror that for capital expenditure, as subsequent purchasers of an asset are also not able to generate the allowances where the previous owner generated it.
Where an FPSO moves to a different field, assuming there has been no allowance generated on the acquisition of the asset, there is no restriction on the ability to generate the allowances. However, we would expect any such move of an FPSO to be subject to normal commercial terms. Where that is not the case, the anti-avoidance provisions contained in Regulation 7 may apply.