Marathon Oil U.K., LLC
| Jurisdiction | UK Non-devolved |
| Judgment Date | 13 November 2017 |
| Neutral Citation | [2017] UKFTT 0822 (TC) |
| Date | 13 November 2017 |
| Court | First Tier Tribunal (Tax Chamber) |
[2017] UKFTT 0822 (TC)
Judge Thomas Scott
Jonathan Peacock QC of Counsel appeared for the appellant
Akash Nawbatt QC of Counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Capital allowances – Whether payment to subsidiary gave rise to special allowance for general decommissioning expenditure – Meaning of incurred on decommissioning plant or machinery – Appeal dismissed.
The First-tier Tribunal (FTT) decided that a payment of $300m US dollars made by the company to its subsidiary was not incurred on decommissioning plant or machinery and therefore did not give rise to a special allowance for general decommissioning expenditure.
Marathon Oil Corporation, a US tax resident, is the parent company of the Marathon Oil group which is engaged in the worldwide exploration and production of petroleum and natural gas.
This appeal concerned a transaction undertaken by a wholly-owned indirect subsidiary of the Marathon Oil Corporation, Marathon Oil UK LLC, which was the main operating company of the group in the UK. Marathon Oil UK LLC was incorporated in Delaware but UK resident for tax purposes. Marathon Oil UK LLC carried on activities qualifying as a “ring fence trade” in the Brae fields in the North Sea. When production has ceased in an oil or gas field in the North Sea, those who are licenced operators must decommission the site and leave the site “as was”. The participators in the Brae fields were jointly and severally liable for the decommissioning of all installations in those fields.
Marathon Oil Decommissioning Services Ltd was incorporated in Delaware on 4 December 2007 as a wholly-owned subsidiary of Marathon Oil UK LLC but was UK resident for tax purposes.
Marathon International Petroleum (G.B.) Ltd was a wholly-owned indirect subsidiary of Marathon Oil Corporation and was UK resident for tax purposes. It provided services to other companies in the Marathon Oil group relating to the exploration for and production of oil and gas, the decommissioning of oil and gas facilities, and associated technical and administrative services.
Marathon Service (G.B.) Ltd was a wholly-owned indirect subsidiary of Marathon Oil Corporation and was UK resident for tax purposes. Marathon Service (G.B.) Ltd carried out the business of recruiting and training administrative, technical, professional and clerical personnel who were qualified to work in the oil and gas industry, and it supplied the services of those personnel to other companies in the Marathon Oil group.
On 18 December 2008, the following transactions took place (US dollars):
- Marathon Oil UK LLC subscribed for one share of common stock in Marathon Oil Decommissioning Services Ltd, with a par value of $1, for a total consideration of $30m.
- Marathon Oil UK LLC and Marathon Oil Decommissioning Services Ltd entered into an agreement relating to the provision of decommissioning services (the Decommissioning Services Agreement).
- Marathon Oil UK LLC paid $300m to Marathon Oil Decommissioning Services Ltd pursuant to Clause 3.2 of the Decommissioning Services Agreement known as the Initial Brae Consideration.
- Marathon Oil Decommissioning Services Ltd entered into a loan agreement with Marathon Oil Corporation under which Marathon Oil Decommissioning Services Ltd loaned $329,750,000 to Marathon Oil Corporation on the terms set out in the loan agreement. The loan was a permitted investment by Marathon Oil Decommissioning Services Ltd for the purposes of Clause 8 of the Decommissioning Services Agreement.
- Marathon Oil Decommissioning Services Ltd entered into a services agreement with Marathon International Petroleum (G.B.) Ltd pursuant to which Marathon International Petroleum (G.B.) Ltd undertook to provide suitably qualified employees and associated technical and administrative services to Marathon Oil Decommissioning Services Ltd in relation to Marathon Oil Decommissioning Services Ltd's decommissioning activities.
- Marathon International Petroleum (G.B.) Ltd entered into an employee services agreement with Marathon Service (G.B.) Ltd under which Marathon Service (G.B.) Ltd agreed to provide Marathon International Petroleum (G.B.) Ltd with suitably qualified personnel to carry out or supervise decommissioning activities, and with associated technical and administrative services.
In its 31 December 2008 company tax return, Marathon Oil UK LLC made an election for a “special allowance” for general decommissioning expenditure incurred before the cessation of a ring fence trade under CAA 2001, s. 164 of $300m in respect of the Initial Brae Consideration paid to Marathon Oil Decommissioning Services Ltd in accordance with the Decommissioning Services Agreement. This reduced Marathon Oil UK LLC's profits by $300m in the year ended 31 December 2008 for ring fence corporation tax and the supplementary charge on ring fence profits.
HMRC rejected this claim on the basis that the payment was not expenditure incurred on decommissioning plant or machinery but on setting funds aside for future costs.
The FTT made various findings of fact concerning the contractual obligations arising from the agreements entered into on 12 December 2008. In addition, it found that:
- while the main reason for Marathon Oil UK LLC entering into the arrangements was to control the group's tax credit position in the United States, an important element of its reasoning was to obtain the desired UK tax consequences regardless of the US position. There was no reason other than taxation why Marathon Oil UK LLC entered into the transactions.
- between December 2008 and the end of 2016, slightly less than $50m of actual decommissioning costs (regardless of eligibility for tax relief) had been incurred by Marathon Oil Decommissioning Services Ltd on behalf of Marathon Oil UK LLC.
The point of construction subject to the appeal was narrow. HMRC accepted that there was an unconditional obligation and a requirement to pay $300m on 18 December 2008 meaning that for the purposes of CAA 2001, s. 5, the expenditure was incurred on 18 December 2008. However, HMRC argued that for the purposes of CAA 2001, s. 163, the expenditure had not been “incurred on decommissioning plant or machinery”.
Construing the rules purposively, the FTT found that:
- the point in time at which the conditions are tested and any relief given is fixed by reference to when the expenditure on one of the prescribed activities is incurred;
- the expenditure must be incurred on one of four specified activities:demolishing the plant or machinery;preserving the plant or machinery pending its reuse or demolition;preparing the plant or machinery for reuse; orarranging for the reuse of the plant or machinery;
- the relevant connection between the expenditure and the activity is that the former must be incurred on the latter;
- the statutory code (as it stood prior to FA 2009) contained no restriction on the special allowance by reference to the decommissioning activity actually carried out for a particular period;
- although the code is described as dealing with general decommissioning expenditure it operates by reference to specific items of plant or machinery, each of which must satisfy requirements as to use and non-replacement;
- as to whether the provisions contemplate the possibility that the expenditure might precede the decommissioning activity, the code lacks consistency as to the chronology which is intended to apply.
The FTT considered guidance from case law authorities, and how the statute, construed purposively, applies to the facts, view realistically. It concluded that the real purpose or object of Marathon Oil UK LLC in paying $300m to Marathon Oil Decommissioning Services Ltd on 12 December 2008 was to accelerate the special allowance and not to meet decommissioning expenditure.
Given the conclusion that the expenditure was not incurred on decommissioning plant or machinery, it was not necessary for the FTT to consider whether all of the statutory conditions for the relief were satisfied at the time of the payment, but it did so to assist in the event of any appeal. It commented that it suspected that the draftsman did not contemplate, or adequately address, the possibility that years or decades could pass between the expenditure being incurred and the activity in respect of the plant and machinery. However, the FTT concluded that on balance, the statutory conditions were satisfied taking account of the terms of the Decommissioning Services Agreement at the time that the expenditure was incurred.
HMRC had also raised a separate argument that Marathon Oil Decommissioning Services Ltd was not free to use the $300m Initial Brae Consideration because it was subject to an implied Quistclose trust (Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 (HL)). However, the FTT decided that the Initial Brae Consideration was not impressed with a Quistclose trust and that HMRC's argument on this point failed.
The taxpayer's appeal was dismissed.
Prepayment or acceleration techniques are not uncommon given the construction of CAA 2001, s. 5 which determines when capital expenditure is incurred. However, in this case, the taxpayer's appeal was dismissed on the basis that the expenditure was not “incurred on decommissioning plant or machinery”.
The fact that the law was changed by FA 2009 as a result of the disclosure of this planning by the taxpayer to HMRC did not have any bearing on the conclusion reached by the FTT.
[1] This appeal concerns the entitlement of Marathon Oil U.K., LLC (“MOUK”) to a “special allowance” for capital allowances purposes in respect if its accounting period for the year ended 31 December 2008.
[2] The only issue is whether a payment of $300 million made by MOUK to its subsidiary on 18 December 2008 was “expenditure … incurred on decommissioning plant or machinery” within the terms of section 163 of the...
To continue reading
Request your trial
-
London Luton Hotel BPRA Property Fund LLP
...three authorities in support, R & C Commrs v Tower MCashback LLP 1 [2011] BTC 294 (“MCashback”), Acornwood and Marathon Oil UK, LLC [2017] TC 06217. [157] In MCashback Lord Walker, giving the judgment of the Supreme Court, said at [76]: I respectfully consider that Moses LJ was right in der......
-
London Luton Hotel BPRA Property Fund LLP v R & C Commissioners
...MCashback LLP 1 [2011] BTC 294 (“Tower MCashback”), Acornwood LLP v R & C Commrs [2016] BTC 517 (“Acornwood”) and Marathon Oil UK, LLC [2017] TC 06217. Mr Gammie contended that Acornwood did not assist HMRC as it concerned a different statutory test. He suggested that HMRC's construction ap......
-
Hicks
...choose to infer the opposite (as did Montpelier in communicating the change to Scheme users). As I said in Marathon Oil UK, LLC [2017] TC 06217, at [179]: … As with many provisions which prospectively deal with deficiencies or loopholes in legislation, those who have relied on the deficienc......