R.T.Z. Oil and Gas Ltd v Elliss
| Jurisdiction | England & Wales |
| Judgment Date | 18 June 1987 |
| Date | 18 June 1987 |
| Court | Chancery Division |
Chancery Division.
Mr. John Gardiner Q.C. and Mr. Peter Trevett (instructed by Messrs. Clifford Chance) for the company.
Mr. Andrew Park Q.C. and Mr. Alan Moses (instructed by the Solicitor of Inland Revenue) for the Crown.
Before: Vinelott J.
The following cases were referred to in the judgment:
Addie (Robert) & Sons' Collieries Ltd. v. I.R. Commrs.TAX(1924) 8 T.C. 671
Alianza Co. Ltd. v. Bell ELRTAX[1906] A.C. 18; (1905) 5 T.C. 172
B.S.C. Footwear Ltd. v. Ridgway (H.M.I.T.) ELRTAX[1972] A.C. 544; (1971) 47 T.C. 519
British Insulated and Helsby Cables Ltd. v. Atherton ELRTAX[1926] A.C. 205; (1925) 10 T.C. 188
Hallstroms Pty. Ltd. v. Federal Commissioner of Taxation UNK(1946) 72 C.L.R. 634
Odeon Associated Theatres Ltd. v. Jones (H.M.I.T.) TAX(1971) 48 T.C. 257
Pitt (H.M.I.T.) v. Castle Hill Warehousing Co. Ltd. WLRTAX[1974] 1 W.L.R. 1624; (1974) 49 T.C. 638
Pyrah (H.M.I.T.) v. Annis & Co. Ltd. TAX(1956) 37 T.C. 163
Regent Oil Co. Ltd. v. Strick (H.M.I.T.) ELRTAX[1966] A.C. 295; (1965) 43 T.C. 21
Southern Railway of Peru Ltd. v. Owen (H.M.I.T.) ELRTAX[1957] A.C. 334; (1956) 36 T.C. 634
Sun Insurance Office v. Clark ELRTAX[1912] A.C. 443; (1912) 6 T.C. 59
Sun Newspapers Ltd. v. Federal Commissioner of Taxation UNK(1938) 61 C.L.R. 337
Tubbs (Elastics) Ltd. v. Whitehead (H.M.I.T.) TAXTAX[1983] BTC 28; [1983] BTC 406 (C.A.)
Tucker (H.M.I.T.) v. Granada Motorway Services Ltd. WLRTAX[1979] 1 W.L.R. 683; (1979) 53 T.C. 92
Corporation tax - Capital or revenue expenditure - Oil production - Abandonment of oil field - Provision made in company's accounts for future abandonment costs - Whether expenditure on abandonment costs was of capital or revenue nature - Whether deductible from profits -Income and Corporation Taxes Act 1970 section 130 subsec-or-para (f)Income and Corporation Taxes Act 1970, sec. 130(f).
This was an appeal from the decision of Special Commissioners that estimated future costs of abandoning an oil field provided for in a company's annual accounts were not deductible in computing the company's liability to corporation tax under Sch. D, Case I.
The taxpayer company had a 25 per cent interest in a consortium holding a licence to exploit the Argyll oil field in the North Sea. The licence incorporated model clauses set out in the Petroleum and Submarine Pipe-lines Act 1975, part II schedule 2Sch. 2, Pt. II, requiring the consortium to plug any well in accordance with specifications approved by the Minister and to remove "clutter" from the sea-bed on the abandonment of the field.
Production commenced in 1975, and, because it was believed that the commercial life of the field would be short, a floating drilling rig was chartered and adapted for use as a production platform instead of a platform fixed to the sea-bed. Pipelines were not laid to an onshore terminal and tankers were instead chartered to transport the oil; these also had to be converted for offshore loading. Under the terms of the charters the rig and the tankers had to be reconverted to their original condition at the end of the charter period.
A sum of £733,649 was included in the company's accounts for the accounting period ended 31 December 1977 for estimated abandonment costs; restoring the rig and tankers to their original condition, removing the clutter from the sea-bed and capping wells and removing well heads. The Revenue refused to allow the company's claim that that sum was deductible in computing its profits.
The company appealed to the Special Commissioners. Accountants called by both parties as experts agreed that it was proper and prudent to make provision in the accounts for the estimated costs of abandoning the field and that the method of making provision was a recognised method and the most accurate that could be devised. The Commissioners accepted that the accounts were drawn up in accordance with the ordinary principles of commercial accountancy. They dismissed the appeal, however, on the ground that the abandonment costs, when incurred, would be capital expenditure excluded from deduction by the Income and Corporation Taxes Act 1970, Income and Corporation Taxes Act 1970 section 130 subsec-or-para (f)sec. 130(f). The company appealed.
Held, dismissing the company's appeal:
1. To give a true and fair view of the profits earned in any given year it was necessary to make provision in the accounts for future abandonment costs. But that provision would have to be made whether the expenditure when incurred would be on revenue or on capital account.
2. The rig and the tankers were profit-earning apparatus, whose purchase would have been capital expenditure, and the contracts of hire were capital assets whether or not they had a balance sheet value. The expenditure on adapting the apparatus for the purposes of the trade was, and the cost of fulfilling the obligation to restore the apparatus to its original condition would be, capital expenditure.
3. The equipment on the sea-bed had had to be installed before the operation of winning oil and transporting it ashore could begin. The acceptance of an obligation to remove the clutter from the sea-bed when the oil field was exhausted and to cap the wells and remove the well heads was part of the consideration given for the right to win oil from the field. The cost of fulfilling that obligation would be capital expenditure.
1. At meetings held on 10-14 and on 17 and 18 November 1980, 17-19 March and 23 July 1981 and 19 January 1982 the Commissioners for the special purposes of the Income Tax Acts heard the appeals of RTZ Oil & Gas Ltd. ("RTZ OG") against (1) an assessment to corporation tax for the accounting period to 31 December 1977, and (2) appeals against decisions on claims for relief under the Income and Corporation Taxes Act1970, Income and Corporation Taxes Act 1970 section 177 subsec-or-para (1)sec. 177(1) in respect of the accounting periods respectively ending on 31 December 1974, 1975 and 1976.
2. Three separate and distinct issues were involved in the appeals. The Commissioners heard the different issues as if they were three separate appeals.
(i) [Sub-paragraphs (i) and (ii) dealt with issues not pursued in the High Court.]
(i) …
(iii) On 17, 18 and 19 March 1981 the Commissioners heard argument and evidence in relation to a provision made by RTZ OG in its accounts for the year ended 31 December 1977 relating to anticipated costs of the future complete or partial termination of its operation in the Argyll field (the abandonment costs). It affected the accounting period ended on 31 December 1976 as well as that ended on 31 December 1977. The Commissioners' decision on that issue was given in writing on 11 January 1982.
(iii) …
3. Immediately after the final determination of the substantive appeal both parties declared dissatisfaction therewith as being erroneous in point of law. On 4 March 1982 the Commissioners were required by RTZ OG, and on 26 March 1982 by the inspector of taxes, to state a case for the opinion of the High Court pursuant to the Taxes Management Act 1970, Taxes Management Act 1970 section 56sec. 56. [The Revenue's appeal was not pursued.]
4. The questions of law for the opinion of the court were whether the Commissioners were correct:
(i) In holding that the provision in RTZ OG's 1977 accounts for expenditure on anticipated costs of the future termination of its operation in the Argyll field was not so uncertain in amount as to render it incapable of being treated as a liability of the year under appeal.
(ii) In rejecting the Revenue's submission that the said provision (and similar provision in the accounts of RTZ OG for 1976) anticipated losses which might be incurred in future years and was not directly related to profits earned in the year under appeal; and in accepting RTZ OG's submission that the provision was an essential charge against the receipts of the trade in order to enable a true profit to be stated for the year.
(iii) In holding that the provision made in RTZ OG's 1977 accounts should properly be regarded as moneys expended wholly and exclusively for the purposes of its trade.
(iv) In holding that the expenditure in issue was of a capital nature.
1. The question for determination is whether a provision of £733,649 made by RTZ Oil & Gas Ltd. ("RTZ OG") in its accounts for the year ended 31 December 1977 relating to anticipated costs of the future complete or partial termination of its operation in the Argyll oil field is deductible by RTZ OG in computing its profits chargeable to corporation tax under Sch. D, Case I.
2. The issue before us is one of three separate and distinct issues relating to the accounting period in question. We heard the different issues as if they were three separate appeals. Our decision in principle on one of these issues ("the Oceanic claim") was given on 19 February 1981. The decision on another issue ("the farm-out agreement") was given on 23 December 1981.
3. RTZ OG was represented by Mr. Stewart Bates Q.C. and Mr. John Gardiner Q.C. Mr. B.E. Cleave of the office of the Solicitor of Inland Revenue appeared for the Crown.
4. We heard evidence from:
Mr. George Frederick Naylor, managing director of RTZ OG since shortly before the Argyll field went into production in June 1975, and head of the energy department of Rio Tinto-Zinc Corporation Ltd. ("RTZ").
Mr. David Tyrrell Young, FCA, a partner in the firm of Spicer & Pegler, chartered accountants, a member of the Council of the Institute of Chartered Accountants in England and Wales ("the Institute"), and of the Auditing Practices Committee of the Institute, and the partner of his firm responsible for the audit of RTZ OG throughout the period since it began trading. His firm are joint auditors of the RTZ group.
Mr. Graham Henry Stacy, FCA, since 1968 a partner in the firm of Price Waterhouse & Co., chartered accountants, and since 1976 its director of...
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