United Kingdom

19.A56. The writing-down allowance mentioned in connection with exploration expenditure is also available for the amortisation of capital expenditure incurred in developing a mine and plant, machinery and works acquired or constructed for the purpose of mining, providing the latter are likely to be of little or no value when the mine is no longer worked. In addition, an initial allowance of 40 per cent of the expenditure incurred is given for expenditure on construction of works of a similar nature.

19.A57. Certain categories of expenditure are expressly excluded from the ambit of the provisions outlined above, namely:

  • (a) costs of acquiring a site or right to mine inside the United Kingdom;

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    (b) expenditure on works constructed wholly or mainly for processing raw product;
  • (c) office buildings; and
  • (d) facilities for occupation by or the welfare of, workers.

An industrial buildings allowance is granted in respect of buildings provided for occupation or use by mining workers.

19.A58. Where a taxpayer engaged in a mining business incurs capital expenditure on a mineral asset, and the acquisition of that asset entitles him to work a mine, oil well or other source of mineral deposits of a wasting nature, he is entitled to a depletion allowance in respect of the expenditure. The amount of depletion allowance is computed by reference to a variable fraction of the royalty value of the output of the mine in a taxable year:

  • (a) where the first working of the mine after the expenditure was incurred (i.e. acquisition of the mine) is less than ten years before the end of the taxable year, one-half of the royalty value of the output;
  • (b) where that first working is less than twenty but not less than ten years before the end of the taxable year, one-quarter;
  • (c) in any other case, one-tenth.

19.A59. ‘Royalty value’ in relation to any output from a mine means the amount of royalties that would be payable on that output if the person working the mine were a lessee under a lease for a term expiring immediately after the output was produced, granted to him at the date when the expenditure was incurred (i.e. date of acquisition), and providing for the payment of such royalties on output from the source as might reasonably have been expected to be provided for by such a lease, but reduced by the amount of any royalties. The allowance is limited to the amount by which capital expenditure on acquisition exceeds aggregate depletion allowances for prior years. Balancing charges and allowances are provided where operations are terminated, calculated by appraising the market value of the land as notionally restored to its original condition.

19.A60. It appears that the depletion allowance was instituted in an attempt to equate the position of a taxpayer who acquired land for mining purposes with that of a taxpayer who works a mine on a royalty basis and thereby obtains a deduction from profits for royalties paid by him. Further, it was recognised that a proper ascertainment of mining profits must give some allowance or relief in respect of the wastage of capital expenditure on the purchase of the land.

19.A61. The equation of the treatment of mining leases or rights to ordinary leases for tax purposes was expressly repudiated by the Royal Commission on the Taxation of Profits and Income (1955):

‘The problem of allowance for mining depletion cannot be governed by the tax treatment of premiums paid for the acquisition of leases. The special treatment of such premiums is partly a product of the special conceptions of the tax on the annual value of land under Schedule A, under which the primary subject of taxation is the income that is inherent in the right of occupation of land. But a mining venture is taxed on the profits (if any) which arise from the venture itself, the mineral areas acquired being merely a part of the whole assets committed to the venture.’