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Clause 62 aligns mineral extraction allowances with the existing principles of plant and machinery allowances. In Budget 2013 the Government announced that they would consult on proposals to align the treatment of assets for mineral extraction allowances with that for assets eligible for plant and machinery allowances where profits were not subject to UK tax. This confirms that MEA allowances can only be used for activities that fall under the ambit of British taxation. It will prevent UK taxable profits from being reduced by offsetting activities that are not subject to British tax.
The changes to the legislation confirm that for the purposes of MEAs, a mineral extraction trade consists of an activity that is within the charge to UK tax. It also confirms that the activity of an exempt foreign permanent establishment is treated as a separate mineral extraction trade for the purposes of MEAs and aligns the treatment of MEAs with the existing principles for plant and machinery allowances. It further confirms that notional allowances will be given automatically in calculating the profit or losses of the exempt FPE as if the exempt FPE were within the charge to UK tax.
The tax information impact note tells us that the measure will affect a small subset of companies in the FPE regime that carry on a mineral extraction trade. What is the size of this subset? How many companies are carrying out the mineral extraction works that would be caught by the clause? The note tells us that the measure will be incorporated within routine IT and guidance changes. How long will it take for that to happen? How regularly will those routine changes in HMRC take place? Could the Minister set out the nature of the exempt FPE regime and tell us how many companies are involved?
As we have heard, the clause makes changes to the treatment of mineral extraction allowances where the mineral extraction activity enters or ceases to be within the charge to UK tax. The changes ensure that the treatment of MEAs is certain and consistent between businesses and aligns with the existing treatment for plant and machinery capital allowances. The changes also confirm that a mineral extraction trade consists of an activity that is within the charge to UK tax and that MEAs are available only in respect of activities that are within the charge to UK tax.
The Government announced at Budget 2013 that they would consult informally on their proposals to align, under the foreign branch exemption rules, the treatment of assets eligible for MEAs with the treatment of assets eligible for plant and machinery allowances. Section 18A of the Corporation Tax Act 2009 allows a company to elect for the profits and losses of its FPEs to be excluded from the calculation of profits chargeable to UK tax. There are specific rules for plant and machinery capital allowances that deal with FPEs, but there are no corresponding rules for MEAs.
As the Committee will be aware, capital allowances are made available in respect of capital expenditure on the provision of plant and machinery for the purposes of qualifying activities. The activities of a company are qualifying activities for capital allowance purposes only to the extent that profits or gains from the activity are chargeable to UK tax.
The clause amends the Capital Allowances Act 2001: to confirm that, for the purposes of MEAs, a mineral extraction trade consists of activity that is within the charge to UK tax; to provide for the activity of an exempt FPE to be treated as a separate mineral extraction trade for the purposes of MEAs; to introduce transitional rules for MEAs similar to those for plant and machinery allowances so that, where a disposal value is required to be brought into account, it will not, in most cases, give rise to a balancing allowance or balancing charge when a company elects into FPE exemption; and to stipulate that notional capital allowances are given automatically when calculating the profits or losses attributable to the FPE, as if it were within the charge to UK tax.
The clause will affect a small number of companies with MEAs in relation to foreign branches that choose to make FPE exemption elections. The companies most likely to be affected are mainly those in the oil and gas sector. There were only two responses to the Government’s informal consultation on the proposed changes that closed on 20 September 2013. Both responses recognised the need for the proposed changes and raised some technical points that were considered when finalising the clause’s detailed provisions. Since the draft legislation was published with the autumn statement on 5 December 2013, there have been no representations from companies or their advisers suggesting that any changes to the clause are needed.
I have no information on the size of company subset, as companies in the oil and gas sector may have overseas operations. In answer to how long it will take HMRC to adapt and update the guidance, the guidance will be published in October 2014. I hope that information is helpful. As I said earlier, a small number of companies with MEAs in relation to foreign branches that choose to make FPE exemption elections will be affected by the change. Those companies are likely to be in the oil and gas sector, but I cannot be any more specific. I hope the hon. Lady finds that answer helpful.
In conclusion, the clause brings the treatment of MEAs into line with the existing rules for plant and machinery allowances and confirms that MEAs are only available in respect of activities within the charge to UK tax. I hope the clause will stand part of the Bill.