B5.653 Admissible and inadmissible deductions in mining cases
Capital allowances are available1 in respect of capital expenditure incurred in connection with the working of a mine, oil well or other source of mineral deposits of a wasting nature. The intangible costs of drilling the second and subsequent production oil wells (such as costs for the hiring of a drilling rig) in a particular area may be eligible for 100% corporation tax relief, provided that they were incurred before 26 November 1996 (or before 26 November 1997 under a contract made before 26 November 1996). Where such expenditure is incurred after 25 November 1996, the costs of second and subsequent productions, like the intangible costs of drilling the initial production well, are only eligible for the mineral extraction allowance2, see B5.650.
There have been a number of cases concerning the deductibility of various items of expenditure and involving consideration of their nature as capital or revenue items; the validity of these decisions is not affected by the capital allowances legislation, although where the expenditure was disallowed as a deduction on the grounds that it was capital expenditure, it may qualify for allowance under those provisions3.
The following items have been held to be capital, and therefore not deductible as a revenue expense in computing the profits of the trade:
(a) the annual exhaustion of mineral deposits4;
(b) the cost of making bores and sinking pits even though the value of such work might be exhausted by the year's