Commissioners of Inland Revenue v Mobil North Sea Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Keith of Kinkel,Lord Fraser of Tullybelton,Lord Brandon of Oakbrook,Lord Templeman,Lord Oliver of Aylmerton |
| Judgment Date | 09 July 1987 |
| Judgment citation (vLex) | [1987] UKHL J0709-1 |
| Date | 09 July 1987 |
| Court | House of Lords |
[1987] UKHL J0709-1
House of Lords
Lord Keith of Kinkel
Lord Fraser of Tullybelton
Lord Brandon of Oakbrook
Lord Templeman
Lord Oliver of Aylmerton
My Lords,
I have had the opportunity of considering in draft the speeches to be delivered by my noble and learned friends Lord Templeman and Lord Oliver of Aylmerton. I agree with them, and for the reasons which they give would allow the appeal.
My Lords,
I have had the advantage of reading the draft speeches prepared by my noble and learned friends Lord Templeman and Lord Oliver of Aylmerton and I entirely agree with them. For the reasons given by them I would allow this appeal.
My Lords,
I have had the advantage of reading in draft the speech prepared by my noble and learned friends Lord Templeman and Lord Oliver of Aylmerton. I agree with both of them, and for the reasons which they give I would allow the appeal.
My Lords,
Oil beneath the bed of the North Sea within the jurisdiction of the United Kingdom is regarded as a national asset which is expected to be exhausted about the end of the century. Successive governments have sought to divide fairly the profits from North Sea oil between the government taking its share in the form of premiums, royalties and taxes and the operator taking its share from the price obtained for oil produced from a licensed field. The government decides from time to time on the division of profits which the government considers to be reasonable, taking into account the need to encourage exploration and development, the risks and uncertainties involved in all North Sea operations, the immense costs of such operations, and the fluctuating market price of oil. By the Oil Taxation Act 1975, enacted after a five-fold increase in the price of oil, the government imposed a petroleum revenue tax on the profits accruing to the operator from each oil field in each chargeable period of six months. The amount of petroleum revenue tax is then deductible in the assessment of the operator for corporation tax. In calculating the profits or losses derived from an oil field in each chargeable period for the purposes of petroleum revenue tax, allowances are made under the Act of 1975 for expenditure on the exploration, operation and development of the oil field. No allowance is permitted for interest or other costs of borrowing but certain types of expenditure qualified for an additional deductible allowance, described as a supplement, originally equal to 75 per cent. of the amount of the qualifying expenditure.
The expenditure qualifying for supplement included:
"expenditure (whether or not of a capital nature) which is incurred … in acquiring, bringing into existence, or enhancing the value of an asset which is to be or is subsequently used in connection with the field and whose useful life continues after the end of the claim period in which it is first so used: …" (section 4(1)).
Expenditure incurred in bringing into existence a platform with ancillary work for the extraction and transportation of oil thus qualified for supplement.
The rate of petroleum revenue tax was 45 per cent. in 1975 and was increased to 60 per cent. in 1979, 70 per cent. in 1980, and 75 per cent. in 1982. The changing rate reflects the general judgment of the government as to a reasonable division of the profits from oil in the light of changing circumstances and the representations of the oil industry. Alterations have been made from time to time in allowances permitted for different items of expenditure and in the rate of supplement and in the qualifications for supplement. These alterations reflect the particular judgment of the government as to the need for and effect of allowances and supplement and must also be conditioned by the wish to deal fairly with individual operators. In particular, amending legislation which reduced allowances or supplement was accompanied by transitional provisions designed to mitigate the effect of the change for the benefit of an operator who had incurred or had contracted to incur expenditure before the announcement or intelligent anticipation of the change. Thus when section 19 of the Finance (No. 2) Act 1979 reduced the rate of supplement from 75 per cent. to 35 per cent. the reduction only took effect in relation to expenditure incurred in pursuance of a contract entered into on or after 1 January 1979. Elaborate transitional provisions were applied by section 13 of and Schedule 5 to the Oil Taxation Act 1983 to the alterations effected by that Act to allowances for expenditure on long-term assets under section 4 of the Act of 1975.
The supplement created by the Act of 1975, having been reduced in 1979, was withdrawn by section 111(1) of the Finance Act 1981 for expenditure incurred:
"after the end of the chargeable period ('the net profit period') in which a net profit from the field first accrues to the participator."
Transitional provisions were introduced by section 111(7) of the Finance Act 1981 which was in these terms:
"(7) This section applies whether the net profit period ends before or after the passing of this Act but subsection (1) above shall not disqualify any expenditure which was incurred before 1 January 1981 or which is incurred before 1 January 1983 in pursuance of a contract entered into before 1 January 1981."
In this appeal the appellant operator, Mobil North Sea Ltd. ("Mobil"), claims the benefit of the transitional provisions of section 111(7) of the Act of 1981.
Mobil is the operator of the oil field block 9/13 held under licence P. 139 known as the Beryl Field. Mobil installed an oil platform, Beryl A, which came into production in 1976 and which achieved a net profit from the field in the chargeable period ending June 1980. By an agreement ("the Bechtel agreement") which became binding and came wholly into force in 1980, Mobil commissioned a second oil platform known as Beryl B. By that agreement Bechtel Great Britain Ltd. ("Bechtel") agreed to carry out "the work" defined by article 1.1 as:
"engineering, procurement, and management of construction, hookup, testing and commissioning of: a fixed, steel, drilling and production platform which has a design production capacity of 100,000 barrels of oil per stream day … and which is located in water approximately 400 feet deep in the Beryl Field…; a multiwell subsea drilling template; a subsea oil pipeline; a one-rig drilling package; petroleum processing facilities; water injection facilities; gas reinjection facilities; safety and utility systems; living quarters for approximately 180 persons; and various ancillary systems and facilities; …. all as more fully set forth…"
in a document forming a bid package which had been supplied to Bechtel. The work was to be carried out in two phases. Article 3.1.9 of the Bechtel agreement provided as follows:
"For phase II [Bechtel] agrees to accept complete responsibility as a principal for its agents and subcontractors, except that [Bechtel] shall contract, as agent for [Mobil]: (1) for engineering, procurement and construction (fabrication, towout and installation) of the platform structure (jacket), the multiwell subsea drilling template, all associated piling and certain appurtenances; and (2) for construction (fabrication, towout and installation), hookup, testing and commissioning of all deck sections and modules. When [Bechtel] enters into contracts as agent for [Mobil], such contracts shall be in a form which will permit [Bechtel] to exercise those rights of [Mobil] thereunder necessary or appropriate for [Bechtel] to manage the work or discharge its obligations under this agreement."
Article 18.3 of the Bechtel agreement provided that:
"[Bechtel] shall not contract or subcontract any portion of the work without prior written approval by [Mobil] of the contractor or subcontractor and of the provisions of the contract or subcontract …. [Bechtel] warrants the performance of all contractors and subcontractors and shall furnish such information relative to contractors and subcontractors as [Mobil] may reasonably request. Subcontracts and purchase orders shall not bind nor purport to bind [Mobil] but shall contain provisions permitting assignment to [Mobil] upon [Mobil's] written request for such assignment."
Mobil agreed to pay Bechtel a fixed fee by instalments payable during the course of the work and:
"6.1.3 reimbursement of all costs, expenses and charges, hereinafter called reimbursable costs, incurred in the performance of the work …."
Reimbursable costs included:
"6.12 Contracts, subcontracts, and purchase orders, approved by [Mobil], at actual invoiced cost to [Bechtel]."
By an amendment to the Bechtel agreement dated 2 April 1980, Mobil agreed to fund advances to pay reimbursable costs. Bechtel was to provide invoices in relation to its own reimbursable costs defined as:
"7.2.1.3 … those reimbursable costs relating to [Bechtel's] own employees and agency personnel, overhead and employee benefits and computer, reprographic and other services provided by [Bechtel] in accordance with this agreement,…"
Advances for Bechtel's third party reimbursable costs were to be paid into bank accounts established by Bechtel and by article 7.2.1.4 were to be used "solely for payments to third parties for performance of that part of the work contracted or sub-contracted by [Bechtel] …" Bechtel's third party reimbursable costs were defined by article 7.2.1.5 as:
"those costs incurred for performance of the work by contractors, subcontractors and vendors that have entered into contractual arrangements with [Bechtel] in connection with the work … and which are reimbursed by [Mobil] to [Bechtel] at cost in accordance with this...
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