OT66090 - Transferable tax history - TTH allocation on a loss carry back - Allocation of activated TTH - Example

Company A acquired an interest in an oil field in 2020, with £30m TTH. £5m is for 2017, £18m for 2016 and £7m for 2015.

It runs the field until CoP in 2030, and makes a total net profits amount of £60m during that period. After CoP, it incurs decommissioning costs of £45m in 2031, £20m in 2032 and £20m in 2033. It only makes loss in its ring fence trade in 2033, of £15m.

The first activation event occurs in 2032, when, post-CoP, decommissioning costs for the asset exceed the total net profit amount. However, this is not a loss period, and so no allocation of TTH is made.

Further TTH is activated in 2033 as more decommissioning costs are incurred. At the end of 2033, the excess of decommissioning costs over the total net profits amount is £85m-£60m = £25m. The total activated TTH amount is the lower of this amount and the total TTH amount that was originally transferred (£30m). Therefore, £25m is activated.

Because 2033 is a loss period, the £25m activated TTH amount must be allocated to the pre-transaction accounting periods on a last in, first out basis. Therefore, £5m is allocated to 2017 (up to the amount of TTH transferred in that period), £18m is transferred to 2016 (again up to the same limit), and the remaining £2m in allocated to 2015.

The £15m loss is then carried back in accordance with the normal rules. Assume, for ease, that due to other assets in the company, the company’s ring fence profits for each year from 2018 to 2032 were £500,000, giving a total of £7.5m over the period. The 15m loss is set against those profits first on a last in, first out basis, leaving £7.5m loss remaining. Assuming that the company has no other profits in 2015-2017, the £7.5m is set against the £5m activated TTH in 2017, and the remaining £2.5m against the activated TTH in 2016.

The closing balance of activated TTH for 2033 is the £25m allocated, less the £7.5m that has been set against that activated amount, giving £17.5m.

If a further £3m is spent on decommissioning in 2034, giving a £3m ring fence loss, the total activated TTH amount is the closing balance of the previous period (£17.5m) plus the £3m additional activated TTH amount = £20.5m. This is less than the closing balance of the total TTH amount, which is £30m (the original TTH amount), less decommissioning losses already set against activated TTH (£7.5m) = £22.5m.

The £20.5m is then allocated on a LIFO basis to years where there is an unused transferred profits amount. There is now no unused transferred profits amount for 2017, as the loss from 2033 has already been set against it. There is £15.5m unused transferred profits in 2016, to which the TTH can be allocated. The remaining £5m is allocated to 2015. The £3m loss is then carried back in accordance with the normal loss rules.