BP Oil Development Ltd v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 29 July 1988 |
| Date | 29 July 1988 |
| Court | Chancery Division |
Chancery Division.
Mr. Peter Whiteman Q.C. (instructed by the solicitor to British Petroleum Co. plc) for the taxpayer.
Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Vinelott J.
The following case was referred to in the judgment:
I.R. Commrs. v. Mobil North Sea Ltd. TAX[1987] BTC 8074
Petroleum revenue tax - Tariff receipts allowance - Formula for calculating allowance by reference to specified tonnage of oil and gas - Tariff receipts earned by oil company for transportation and processing of oil and gas - Whether formula to be applied once for transportation and again for processing, resulting in two allowances or whether formula to be applied once only - Oil Taxation Act 1983 section 9 schedule 3 subsec-or-para 1Oil Taxation Act 1983, sec. 9, Sch. 3, para. 1(2), 2(1)..
This was an appeal from the determination of a Special Commissioner that the taxpayer's tariff receipts allowance for each of the six-month periods to 31 December 1983 and 30 June 1984, calculated in accordance with the formula set out in the Oil Taxation Act 1983, Oil Taxation Act 1983 schedule 3Sch. 3, was only to be applied once in relation to an agreement with the participators in another oilfield for the use of the taxpayer's facilities for the transportation and processing of oil and gas won from the other field.
The taxpayer owned the Forties field in the North Sea about 100 miles off the Scottish coast. The assets of the field included a pipeline running from the field to the coast and thence across country to its processing plant and temporary storage facilities at Kinneil.
Another group ("Marathon") owned the Brae field some 70 miles north of the Forties field and a pipeline from Brae to Forties connected to the taxpayer's pipeline to Scotland.
By an agreement, effective from June 1980, the taxpayer agreed with Marathon to transport oil and to transport and process gas from the Brae field. The charge for transportation to Scotland and temporary storage was 50p per barrel and the charge for processing the gas and related operations such as delivery and further storage was £14.50 per tonne of raw gas. (Seven barrels were approximately equal to one tonne.)
Sums received by a participator in an oilfield for the use of the pipeline and other facilities of the oilfield for the purpose of transporting, storing or processing oil won from a neighbouring oilfield ("tariff receipts") were brought into the charge to petroleum revenue tax by the Oil Taxation Act 1983 section 6Oil Taxation Act 1983, sec. 6, which by subsec. (2) and (3) linked the receipts to the amount of oil and use of specific assets.
An allowance ("tariff receipts allowance") was introduced byOil Taxation Act 1983 section 9sec. 9 of the 1983 Act. The cash equivalent of a specific tonnage (at the relevant time 375,000 tonnes) was excluded from the charge, the cash equivalent of the oil being calculated by a formula set out in Oil Taxation Act 1983 schedule 3 subsec-or-para 2Sch. 3, para. 2(1) to the 1983 Act.Oil Taxation Act 1983 section 9 subsec-or-para (6) schedule 3 subsec-or-para 1Section 9(6) and Sch. 3, para. 1(2) repeated the connection between the tariff receipts and the assets for the use of which they were received.
The question was whether, where an oilfield participator received from a third party one sum for performing certain operations in relation to a quantity of oil belonging to that third party, and also another sum from the same third party for performing further operations in relation to part of the same quantity of oil: (i) the formula should be operated twice, once in relation to the first sum (and the whole quantity of oil) and again in relation to the second sum (and the lesser quantity of oil to which it specifically related) as the taxpayer contended; or (ii) the two sums should be added together to form a single amount of tariff receipts, all relating to the whole quantity of oil so that the formula would be operated once only, as the Revenue contended.
Held, allowing the taxpayer's appeal:
The purpose of Oil Taxation Act 1983 schedule 3 subsec-or-para 1Sch. 3, para. 1(2) in linking the particular quantity of oil to the asset to which qualifying tariff receipts were referable was to identify a particular amount of qualifying tariff receipts with the particular amount of oil to which the qualifying tariff receipts related. Had one allowance only for each user field been intended, the linkage between the tariff receipts and the particular facility for the use of which they were paid would have been unnecessary. The formula must therefore be applied separately where different amounts of qualifying tariff receipts were received for different facilities, that is for the use of different assets. If that were not so, it would be unnecessary to link the receipts with the asset.
1. On 26 February 1987 one of the Special Commissioners heard the appeals of BP Oil Development Ltd. ("BP") against assessments in respect of the Forties oilfield to petroleum revenue tax as follows: Six-month period to 31/12/83: £1,206,111,967 Six-month period to 30/6/84: £1,102,586,934
2. The issue between the parties related to the application of the formula (set out in Oil Taxation Act 1983 schedule 3 subsec-or-para 2Sch. 3, para. 2(1) to the Oil Taxation Act 1983) by which a "tariff receipts allowance" is calculated, in money terms. Where an oilfield participator receives from a third party one sum for performing certain operations in relation to a quantity of oil belonging to that third party, and also another sum from the same third party for performing further operations in relation to part of the same quantity of oil:
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(2) is the formula operated twice: once, in relation to the first sum (and the whole quantity of oil) and again in relation to the second sum (and the lesser quantity of oil to which it specifically relates), as BP contends? or
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(3) are the two sums added together, as the Revenue contends, to form a single amount of "tariff receipts", all relating to the whole quantity of oil, so that the formula is operated once only?
3. There was no oral evidence. The Commissioner had before him an agreed statement of facts, to which was annexed: a copy of the letter of intent (June 1980) between BP and Marathon Oil UK Ltd.; a copy of the Brae-Forties Transportation and Processing Agreement (15 August 1985); an agreed synopsis of the latter; and agreed computations on the alternative bases contended for by the parties.
4. The facts and the contentions of the parties are set out in the reserved decision which was issued on 24 March 1987. As will be seen therefrom the Commissioner decided the issue in principle in favour of the Revenue's contention.
5. Figures were subsequently agreed between the parties in accordance with the decision and on 12 May 1987 the Commissioner formally determined the appeals by confirming the assessments for the two periods at £1,206,111,967 and £1,102,586,934 respectively.
6. Immediately after the determination of the appeals BP declared its dissatisfaction therewith as being erroneous in point of law and on 3 June 1987 required the Commissioner to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970 section 56Taxes Management Act 1970, sec. 56 as applied by the Oil Taxation Act 1983 schedule 2 subsec-or-para 1Oil Taxation Act 1975, Sch. 2, para. 1.
7. The question of law for the opinion of the court was whether, on the true interpretation of Oil Taxation Act 1983 schedule 3 subsec-or-para 2Sch. 3, para. 2 to the Oil Taxation Act 1983, the Commissioner erred in holding that the receipts in respect of Brae field gas and oil fell to be aggregated in computing the amounts of the tariff receipts allowance.
This is an appeal by BP Oil Development Ltd. ("BP") against assessments to petroleum revenue tax for the two successive six-month periods ending 31 December 1983 and 30 June 1984, each in a figure exceeding £1 billion. In computing BP's profits for the purposes of that tax, certain receipts ("tariff receipts") are required to be brought into the calculation as "positive amounts"; but in arriving at the amount of tariff receipts to be so brought in, account has to be taken of a "tariff receipts allowance", which reduces the amount of such receipts for computational purposes. The only issue before me in the present appeals - and I am asked only for a decision in principle - relates to the manner in which, in the circumstances of the case, the statutory formula for arriving at the amount of the tariff receipts allowance falls to be applied.
Petroleum revenue tax was introduced by the Oil Taxation Act1975. For the purposes of that tax, each oilfield is treated as a separate taxable entity. Broadly speaking, expenditure on assets connected with the operation of a field is a "negative amount" in the computation of profit/loss, without reference to the usual distinction between capital and income. There is, therefore, no separate system of capital allowances/balancing charges. Under the 1975 Act, the "positive amounts" in the profit/loss computation were substantially confined to oil profits derived from the field in question. However, it became apparent that assets belonging to a particular oilfield were often, by arrangement, used (at least in part) by other oilfields ("user fields"); and the extension of facilities to user fields in different ownership would naturally not be gratuitous. It appears that an oilfield's receipts of this description came to be known in the industry as "tariff receipts". Since the acquisition of the assets in question had given rise to "negative amounts" in the oilfield's tax accounts, it was thought right that the tariff receipts should come in as a "positive amount"; and that was brought about by Oil Taxation Act 1983 section...
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