OT21740 - Energy Profits Levy: Meaning of operating expenditure

EPLA22\S3 

Operating expenditure must have been incurred for the purposes of: 

  • increasing the rate at which oil is extracted, or increasing the reserves of oil,  

  • increasing the number of years for which it is economically viable to carry out oil extraction activities or for which a facility can be used for the purposes of those activities, or 

  • increasing the amount of tariff receipts earned in respect of upstream infrastructure.  

It cannot be expenditure on routine repair and maintenance, and it must be incurred in relation to an oil well or facility on qualifying matters. 

The legislation does not define “routine repair or maintenance expenditure” (EPLA22\S3(1)(b)) so these words take their normal meaning. HMRC provides guidance at BIM35430 onwards on what we interpret as a repair. HMRC would likely consider expenditure to be routine if it did not represent any real new investment but was more akin to a day-to-day running cost. We would not normally take the view that the regularity with which the activity occurs affects whether or not it is routine. It would not matter whether the activity needed to be (and indeed was) undertaken weekly, monthly, yearly, or even more rarely. The allowance is designed to encourage investment in UK oil and gas activity, so the activity being undertaken should represent a genuine investment. Maintaining the current condition of the asset, or returning it to its original state, where regular maintenance was neglected, is unlikely to represent any new investment and instead will likely be viewed as routine maintenance. In cases of doubt, it may be useful to consider whether a company has discussed the work being undertaken with the North Sea Transition Authority (NSTA). Where the company has not done so, it is likely that the work would be routine. Equally, where the NSTA has been consulted, it is more likely that the work would not be routine. However, consulting the NSTA is in no way decisive, and all the facts must be considered. 

EPLA22\S3(2) and EPLA22\S3(3) sets out when expenditure is incurred in relation to a facility or an oil well on qualifying matters.   Facility is defined in EPLA22\S18(1) and covers a platform (whether fixed or floating), an oil well, a platform well, an oil well head or upstream petroleum infrastructure. Upstream petroleum infrastructure is defined in EPLA22\S18(1) and means any upstream petroleum pipeline, oil processing facility or gas processing facility (as defined by the Energy Act 2011\S90 but as if that section also applied, with the appropriate modifications, to Northern Ireland).  

Qualifying matters in relation to a facility is defined as expenditure incurred on: 

  • The replacement of a valve, pump, pipeline, power generation plant or compressor that is no longer capable of being used for the purposes of oil extraction activities 

  • Modifications to increase capacity or availability to carry out oil extraction activities, or 

  • Modifications to enable handling of reduced volumes resulting from reduced operating pressures or handling of different fluid compositions. 

If expenditure is incurred on the replacement of equipment, then to meet the conditions the existing equipment must be no longer capable of being used for the purposes of oil extraction activities. The meaning of ‘no longer capable’ is not restricted to cases where the physical condition of the asset, due to damage or wear and tear, means that it can no longer be used for oil extraction activities. It could also include cases where, due to regulatory changes, health and safety issues, environmental requirements, or other reasons, the asset is no longer capable of being used. Note that ‘no longer capable’ means that upgrading to a newer or better model would not be a qualifying matter where the existing asset was still capable of being used.  

Qualifying matters in relation to an oil well is defined as expenditure incurred on: 

  • water or gas shut off 

  • fracturing, or 

  • the removal of sand, salt, scale or hydrates 

Example 

Company X modifies a platform to increase the capacity to carry out oil extraction activities and for the purpose of increasing the rate at which oil is extracted. As this is not routine repair and maintenance and is incurred in relation to a facility on qualifying matters, this will be operating expenditure. 

EPLA22\S3(4) provides that a just and reasonable apportionment is required if expenditure incurred is only part operating expenditure.  

Example 

If a company were to replace a damaged pump, and the contract for the new pump included maintenance of that pump for the next 5 years, only the amount relating to the replacement of the pump, and not its maintenance would be operating expenditure for the purposes of generating additional expenditure, assuming all other conditions were met. If the contract did not split out the costs of maintenance and acquisition, then any apportionment should be on a just and reasonable basis, having full regard to the relevant facts and circumstances.