Total E&P North Sea UK Ltd (formerly Maersk Oil North Sea UK Ltd) v The Commissioners for HM Revenue and Customs

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
JudgeLord Justice Newey,Lady Justice Andrews,Lady Justice King
Judgment Date29 October 2020
Neutral Citation[2020] EWCA Civ 1419
Docket NumberCase No: A3/2019/1656
Date29 October 2020

[2020] EWCA Civ 1419

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE UPPER TRIBUNAL

(TAX AND CHANCERY CHAMBER)

Judge Timothy Herrington and Judge Jonathan Cannan

[2019] UKUT 133 (TCC)

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Lady Justice King

Lord Justice Newey

and

Lady Justice Andrews

Case No: A3/2019/1656

Between:
(1) Total E&P North Sea UK Limited (formerly Maersk Oil North Sea UK Limited)
(2) Total Oil UK Limited (formerly Maersk Oil UK Limited)
Appellants
and
The Commissioners for her Majesty's Revenue and Customs
Respondents

Mr Laurent Sykes QC (instructed by Vinson & Elkins LLP) for the Appellants

Mr Michael Jones (instructed by the General Counsel and Solicitor to HM Revenue and Customs) for the Respondents

Hearing date: 6 October 2020

Approved Judgment

Lord Justice Newey
1

Companies carrying on “oil-related activities” are subject to both corporation tax and a “supplementary charge”. “Oil-related activities” include extracting, or causing to be extracted, oil at any place in the United Kingdom or on the UK Continental Shelf, transporting any such oil and effecting the initial treatment of any such oil (see sections 272 and 274 of the Corporation Tax Act 2010). Such activities are treated as a separate trade and the income from them represents “ring fence profits” on which corporation tax is charged (see sections 275, 276, 277 and 279 of the Corporation Tax Act 2010). The “supplementary charge” is levied on “adjusted” ring fence profits, in calculating which financing costs are left out of account (see section 330 of the Corporation Tax Act 2010).

2

Between 2006 and 2011, the supplementary charge amounted to 20% of adjusted ring fence profits. On 23 March 2011, however, it was announced that the supplementary charge would be increased to 32% from midnight. The change in rate was subsequently carried into effect by section 7 of the Finance Act 2011, which received the royal assent on 19 July 2011.

3

The appellants (“the Companies”), which were known in 2011 as Maersk Oil North Sea UK Limited and Maersk Oil UK Limited (respectively “MONS” and “MOUK”), both carried on “oil-related activities” and so were subject to the supplementary charge. The question raised by this appeal is how much of each company's adjusted ring fence profits for 2011 are liable to the charge at 20% and how much at 32%. Both companies had an accounting period which ran from 1 January to 31 December 2011 and so straddled the point at which the supplementary charge was raised.

Section 7 of the Finance Act 2011

4

Section 7 of the Finance Act 2011 (“the 2011 Act”) provided, as far as material, as follows:

“(1) In section 330 of CTA 2010 [i.e. the Corporation Tax Act 2010] (supplementary charge in respect of ring fence trades), in subsection (1), for ‘20%’ substitute ‘32%’.

(2) The amendment made by subsection (1) has effect in relation to accounting periods beginning on or after 24 March 2011 (but see also subsection (3)).

(3) Subsections (4) to (10) apply where a company has an accounting period beginning before 24 March 2011 and ending on or after that date (‘the straddling period’).

(4) For the purpose of calculating the amount of the supplementary charge on the company for the straddling period—

(a) so much of that period as falls before 24 March 2011, and so much of that period as falls on or after that date, are treated as separate accounting periods, and

(b) the company's adjusted ring fence profits for the straddling period are apportioned to the two separate accounting periods in proportion to the number of days in those periods.

(5) But if the basis of apportionment in subsection (4)(b) would work unjustly or unreasonably in the company's case, the company may elect for its profits to be apportioned on another basis that is just and reasonable and specified in the election.

(6) The amount of the supplementary charge on the company for the straddling period is the sum of the amounts of supplementary charge that would, in accordance with subsections (4) and (5), be chargeable on the company for those separate accounting periods.

(11) In this section—

‘adjusted ring fence profits’ has the same meaning as in section 330 of CTA 2010;

‘supplementary charge’ means any sum chargeable under section 330(1) of CTA 2010 as if it were an amount of corporation tax.”

5

The 32% rate of supplementary charge was thus to have effect in relation to accounting periods beginning on or after 24 March 2011 and, as regards accounting periods straddling that date, subsections (4) to (10) were to apply. Subsection (4) provided for a company's adjusted ring fence profits for a straddling period to be apportioned by time, with “so much of that period as falls before 24 March 2011, and so much of that period as falls on or after that date, … treated as separate accounting periods” and the adjusted ring fence profits “apportioned to the two separate accounting periods in proportion to the number of days in those periods”. If, on the other hand, that basis of apportionment “would work unjustly or unreasonably in the company's case”, it could elect for its profits to be apportioned on “another basis that is just and reasonable and specified in the election”: see subsection (5).

Factual background

6

During 2011, MONS was the operator of six oil fields in the North Sea and had joint interests in three further UK fields. Three of the fields of which MONS was the operator, viz. Gryphon, South Gryphon and Tullich, tied back to the Gryphon Alpha floating production storage and offloading vessel (“the Gryphon FPSO”).

7

On 4 February 2011, a severe storm caused extensive damage to the Gryphon FPSO and subsea equipment (“the Gryphon incident”). As a result, the Gryphon, South Gryphon, Maclure and Tullich fields all suffered a “shut in” pending repairs. Production did not resume for more than two years.

8

MONS incurred capital expenditure of $245,885,402 between 24 March 2011 and the end of 2011. This related substantially to the Gryphon incident, but the opportunity was taken to accelerate some upgrades as well. MONS received two insurance payments in respect of the Gryphon incident: $266,298,078 from “Loss of Production Insurance” and $55,039,192 from “Property Damage Insurance”. The latter payment resulted in a balancing charge for capital allowance purposes.

9

During 2011, Dumbarton, a field which MONS owned jointly with MOUK, was shut in for maintenance over July and August. It is usual for such work to be undertaken in the summer months because the weather is better.

10

MONS' adjusted ring fence profits from all its oil field operations in the year to 31 December 2011 amounted to £69,082,470.

11

Turning to MOUK, in 2011 it had interests in five oil fields, of which one was Dumbarton. Two of the other fields, Janice and Affleck, were tied back to the Janice floating production unit (“the Janice FPU”). A scheduled shut in at the Janice FPU in September 2011 was delayed and lasted for 12 days rather than the five days planned. A second shut in beginning on 24 October 2011 was expected to last 26 days but actually continued for 180 days, 69 of which fell within 2011.

12

MOUK's adjusted ring fence profits from all its oil field operations in the year to 31 December 2011 were £48,094,717.

13

MONS and MOUK each sought to make an election pursuant to section 7(5) of the 2011 Act. Both adopted an “actual” basis in place of the time apportionment for which section 7(4) of the 2011 Act provided. This “actual” basis involved considering the pre-24 March and post-24 March periods independently, as if they were two separate accounting periods, and allocating income, expenditure and allowances to the periods according to when they arose. The First-tier Tribunal (“the FTT”) found that Mrs Linda Ritchie, MONS' tax manager, “used the accruals figures produced by MONS and MOUK's monthly management accounts to provide the ‘actual basis’ on which she submitted MONS and MOUK's tax returns for the 2011 accounting period, including taking account of capital expenditure at the date when it was incurred” (see paragraph 111(ii) of its decision). The FTT concluded as follows in paragraph 136 of its decision:

“Mrs Ritchie appeared to me to be a reliable witness who had made a genuine attempt to produce an allocation of taxable profits in line with the requirements of s 7(5) and by reference to a profit allocation method with which she was familiar and was already being used for internal reporting purposes. As she said ‘ an apportionment based on the Appellants' actual profits per month [was] the most natural alternative’.”

14

The Companies' approach resulted in all their adjusted ring fence profits for the 2011 accounting period being allocated to the period before 24 March (“the Earlier Period”) rather than that from 24 March (“the Later Period”) and so in their escaping the 32% rate of supplementary charge. As the Upper Tribunal (“the UT”) noted in paragraph 19 of its decision, the upshot of the Companies' basis of apportionment was as follows:

MONS $

MOUK $

Adjusted ring fence profits

110,649,391

77,033,311

Companies' actual basis

Earlier period

112,762,117

113,028,916

Later period

(2,112,726)

(35,995,605)

Apportionment on actual basis

Earlier period

110,649,391

77,033,311

Later period

Nil

Nil

15

The Companies were eligible for 100% first year allowances in respect of capital expenditure. Their apportionment of their 2011 adjusted ring fence profits involved allocating capital allowances of respectively $405,066,519 and $140,803,501 to the Later Period on the footing that that was when the expenditure was incurred. That, the Companies maintain, was in accordance with section 5 of the Capital Allowances Act 2001, which provides for capital expenditure “to...

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