Capital Gains & Other Taxes Manual - Section 2 - Income Tax and Corporation Tax (Minerals)

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Taxation of Mineral Royalties

2.1 Income and Corporation Taxes Act 1988 s.122

Definitions

2.2 Mineral Royalties

2.3 Minerals

2.4 Mineral Lease or Agreement

Mineral Royalties (Tax) Regulations 1971

2.5 General

Assistance of MV

2.6 Advice to Inspector of Taxes

2.7 Taxpayer's Claim

2.8 Contact with Taxpayer

Ascertainment of Mineral Royalties

2.9 General

2.10 Specified Operations

2.11 Basis of Valuation

Negotiations

2.12 General

2.13 Registration and Returns

Capital Allowances

2.14 Mineral Extraction Allowances

Section 2 - Income Tax and Corporation Tax (Minerals)

Taxation of Mineral Royalties

2.1 Income and Corporation Taxes Act 1988 s.122

For the purpose of Income Tax and Corporation Tax on profits s.122 ICTA 1988 provides in effect that mineral royalties, receivable after 6 April 1970 under a mineral lease or agreement, shall be regarded as divided into equal income and capital parts.

In so far as the capital part is concerned provision is made for treating "the relevant fraction" (ie normally one half) of the receivable royalties as a chargeable gain for the purposes of the Taxation of Chargeable Gains Act 1992, or for Corporation Tax on chargeable gains.

Definitions

2.2 Mineral Royalties

Mineral royalties are defined as "so much of any rents, tolls, royalties or other periodical payments in the nature of rent under a mineral lease or agreement as relate to the winning and working of minerals."

2.3 Minerals

Minerals are defined "as all minerals and substances in or under land which are ordinarily worked for removal by underground or surface working, but excluding water, peat, top-soil and vegetation".

2.4 Mineral Lease or Agreement

A mineral lease or agreement is defined as:-

  • a lease, profit a prendre, licence or other agreement conferring a right to win and work minerals in the United Kingdom;
  • contract for the sale, or conveyance, of minerals in or under land in the United Kingdom;
  • a grant of right under s.1 of the Mines (Working Facilities & Support) Act 1966, other than an ancillary right within the meaning of that Act.

Mineral Royalties (Tax) Regulations 1971

2.5 General

Where a payment is receivable under a mineral lease or agreement which relates both to the winning and working of minerals and to other matters, provision is made under The Mineral Royalties (Tax) Regulations SI 1971 No 1035/71 as to the extent to which such payment, irrespective of any particular allocation, is to be treated as mineral royalties for the purposes of s.122 ICTA 1988.

Assistance of MV

2.6 Advice to Inspector of Taxes

The services of the MV may be required by the Inspector for advice in connection with instances where under Regulation 2 of the above mentioned SI it is necessary to ascertain how much of the payment is to be treated as mineral royalties.

2.7 Taxpayer's Claim

The reference will normally contain the taxpayer's estimate of how much of the payment it is claimed is to be treated as mineral royalties, details of payments received, and should include a copy of the mineral lease or agreement.

2.8 Contact with Taxpayer

Unless instructed to agree a figure the MV should not contact the taxpayer and any additional information required should be sought through the Inspector.

Ascertainment of Mineral Royalties

2.9 General

The ascertainment of how much of any payment is to be treated as mineral royalties is to be arrived at under Regulation 2 by estimating the amount of mineral royalties that might reasonably have been expected to be provided for by the agreement if:-

  • it conferred only the right to carry out specified operations in relation to minerals in or under the land to which the agreement relates; and
  • any buildings, structures, roads shafts, adits or other works existing on the land at the time when the agreement was granted or made were not in existence.

2.10 Specified Operations

Specified operations are defined under the Regulations as "the winning and working, grading, washing, grinding and crushing of minerals, but in relation to any particular agreement, includes only such of those operations as are in fact authorised by the agreement".

2.11 Basis of Valuation

The required amount is based on the terms of the actual agreement modified in accordance with sub-paragraphs 2.9(a) and 2.9(b) above. The Inspector may require the estimate to be expressed as a total royalty payment related to the specified operations carried out in the taxation period or as a notional royalty per unit of output; normally each agreement will only need to be considered once.

Negotiations

2.12 General

Where so instructed the MV should endeavour to agree the amount of the payment to be treated as the notional royalty with the taxpayer or agent in the event of being unable to accept the taxpayer's own estimate as submitted. On no account should an approach be made without instructions.

2.13 Registration and Returns

For the purpose both of registration and returns, cases should be treated as "other revenue cases".

Capital Allowances

2.14 Mineral Extraction Allowances

Taxpayers who carry on a trade of mineral extraction may be able to claim capital allowances on certain qualifying expenditure incurred for the purpose of that trade under ss.98-121 Capital Allowances Act 1990.

These provisions are explained in detail in Section 3.

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