Oil companies will be stopped from gaining an unfair tax advantage by delaying their claims for relief for operating expenditure they have incurred while they are benefiting from ‘safeguard’ relief. Companies will not be able to use the deferral of claims for operating expenditure incurred from today, during a period in which safeguard applies, to reduce the PRT payable in any later period.


1. The operation of safeguard can mean that no PRT is payable in a chargeable period, whether or not a company has incurred any significant expenditure which would qualify for 100% relief. The company therefore derives no benefit from claiming the expenditure it has incurred while safeguard still applies. Some companies have therefore instead deferred claiming the expenditure to a subsequent period, in which safeguard no longer applies, when the claim has a direct effect in reducing its PRT payable.

2. This deferral of claims is contrary to the intention of safeguard relief. This relief was introduced as a special overriding relief, designed to ensure that, while it applies, PRT – calculated after taking account of all other reliefs and allowances – does not reduce a participator’s return on capital in any chargeable period to 15% or less. It was not intended that further benefit should be available by deferring expenditure claims so that expenditure incurred during safeguard could be claimed and allowed against profits of a later chargeable period.

3. Although deferral of expenditure claims during safeguard is not a new practice, its extent has been increasing, and significant sums of revenue are now at stake.

4. In order to ensure that the change does not impact on investment in the North Sea, it will only apply to operating expenditure. The tax benefits of deferring claims for capital expenditure will remain available.


1. PRT is a field-based tax, with each separate oil or gas field being assessed for tax separately. PRT is currently charged, for half-yearly periods, at 50% on the value of oil and gas produced, tariffs received and any receipts from selling assets, less the expenditure incurred developing and running the field. PRT was abolished on 16 March 1993 for fields given development consent on or after that date.

2. PRT differs from most other taxes in that expenditure relief does not reduce a company’s tax liability until the expenditure has been claimed by the company and allowed by the Inland Revenue. When the expenditure has been claimed and allowed, it reduces PRT liability for the next half-yearly assessment rather than necessarily for the period in which it was incurred.

3. The PRT regime includes a number of reliefs and allowances which are designed to ensure that the tax does not impact unfairly on smaller or more marginal oil and gas fields. ‘Safeguard’ is one of these reliefs. It allows fields to achieve a certain level of return on investment before they incur any PRT liability. This relief applies in all half-yearly chargeable periods from the first production of oil or gas until ‘payback’ (i.e. when the company’s total revenue from the field has exceeded its total expenditure there), and then for half as many periods again. When safeguard applies, profits in the period are compared with a threshold level which is 15% of cumulative capital expenditure up to payback. If profits are below the threshold, no PRT is payable. If profits are above the threshold, PRT payable is limited to 80% of the excess, if that is less than the amount of PRT payable under normal rules.

4. The total amount of tax revenue raised by this measure is approximately 200 million pounds. Because the effect will only arise when safeguard no longer applies to the fields in question and the deferred expenditure claims are finally submitted, the immediate effect is relatively small. It is expected that 10 million pounds tax revenue will be raised in 2001/02 and 30 million pounds in 2002/03 (nil in 2000/01). The additional tax yield will peak in 2004/05 at 55 million pounds.

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