Royal Bank of Canada
| Jurisdiction | UK Non-devolved |
| Judgment Date | 23 June 2020 |
| Neutral Citation | [2020] UKFTT 267 (TC) |
| Date | 23 June 2020 |
| Court | First Tier Tribunal (Tax Chamber) |
[2020] UKFTT 267 (TC)
Judge Kevin Poole
Jonathan Peacock QC and Sarah Black of counsel, instructed by Norton Rose Fulbright LLP, appeared for the appellant
Jonathan Bremner QC, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Corporation tax – Oil royalties received by overseas bank and applied to outstanding debt of insolvent oil exploration borrower – Whether bank's rights amounted to immovable property under UK/Canada double tax treaty art. 6(2) – Whether royalty payments subject to corporation tax as ring fence profits of deemed UK permanent establishment – Whether certain discovery assessments invalid – Appeal dismissed – CTA 2009, s. 1313 and FA 1998, Sch. 18, para. 41–46.
The First-tier Tribunal (FTT) dismissed the taxpayer's appeal against discovery assessments made in relation to sums, described as “royalties” received by the taxpayer in years 2008–2011 and further assessments to tax on the “royalties” for years to 2012–2015. The tribunal concluded the discovery assessments were validly made, and for all years in question the sums were taxable in the UK as profits of a ring fence trade; and that the UK/Canada tax treaty did grant taxing rights over these sums to the United Kingdom.
In the early 1980's Sulpetro Limited (Sulpetro) held a licence, alongside others, to exploit the Buchan oil field on the UK Continental Shelf (UKCS). Sulpetro had obtained finance from the Royal Bank of Canada (RBC). Sulpetro entered into financial difficulties in 1985. In 1986 it sold its interest in the Buchan field to BP Petroleum Development Ltd (BP), and in 1987 RBC appointed a receiver. As part of the sale to BP, Sulpetro had obtained a right to receive payments described as royalties from BP, in relation to oil production from the Buchan field, if the oil price exceeded $20/barrel. As a result of the receivership, this right passed to RBC. In 1990 the oil price exceeded $20/barrel and payments started to be made. BP sold the interest in Buchan to another company (Talisman) in 1996, and payments continued to be made by the new owner to RBC.
In 2013, HMRC, when reviewing Talisman's corporation tax returns, enquired into the nature of the “royalty” payments to RBC. This led to HMRC raising assessments for the years 2008–2015 on RBC in relation to corporation tax due on the payments it had received by virtue of the extension of UK taxing rights to the UKCS under CTA 2009, s. 1313. These assessments were the subject of the appeal.
Under article 6 of the UK/Canada Double Taxation Convention of 8 September 1978, the UK can exercise taxing rights over income derived from immovable property, situated in the UK. The treaty specifies that immovable property includes “rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources”. The FTT had to determine whether the payments to RBC were in respect of such rights.
RBC's position was that the treaty contemplated payments arising from the grant of rights to work mineral rights etc. as arising from immovable property, and allowed the UK to tax such payments. However, RBC argued the payments they had received arose from the transfer of rights, not the grant of rights, and the treaty did not give the UK the ability to tax such payments. Further arguments were that the payments received by RBC were properly seen as part of the capital receipts from the original disposal of the field to BP (in the nature of an “earn-out”); or that the payments arose from the novation of the original agreement to exploit the Buchan field. The FTT rejected each of these arguments. The FTT found that the payments were sufficiently closely tied to the source of the profits – the production of oil from the Buchan field – to arise from rights contemplated by art. 6.
The taxpayer also raised a technical contractual argument that the licensing arrangements did not give Sulpetro or its successors the “right to work” the Buchan field; this was also dismissed by the tribunal. The FTT therefore held that the UK/Canada tax treatment did allow the UK to exercise taxing rights over the payments.
Under CTA 2009, s. 1313(2), profits arising to a non-UK resident company from exploration or exploitation activities or rights on the UKCS are to be treated as profits arising to a UK permanent establishment of the non-resident company. Exploration rights include interests in or to the benefit of assets produced from exploration or exploitation activities. The FTT concluded that the payments made to RBC were derived from the oil produced, and represented part of the value of such production, and as such fell within CTA 2009, s. 1313(2). The tribunal also rejected arguments that the profits of the permanent establishment should reflect the original write-off of sums owed by Sulpetro to RBC and determined these fell outside the deemed trade.
Whilst the assessments for 2012–2015 were made during the enquiry windows for these periods, the assessments for earlier periods fell outside the relevant windows and were thus “discovery assessments” under FA 1998, Sch. 18, para. 41–46. The FTT had to determine whether these assessments were validly made.
The taxpayer contended that correspondence between HMRC and BP, and correspondence between HMRC and RBC between 1988 and 1992 showed that HMRC were aware of the royalty payments for many years, and thus should not be able to raise discovery assessments for years 2008–2010. Additional arguments were advanced in relation to 2011, as, by the time this assessment was raised, HMRC had been aware of the royalty payments through their 2013 enquiries for some time. The FTT rejected the argument that the Officer issuing the discovery assessments should have been aware of the correspondence in the period 1988–1992, and determined that they were entitled to raise the discovery assessments on the basis of what they had found out. The elapse of time between the opening of the enquiry and the time of the issue of the 2011 assessment was not sufficient for the matter to have gone stale for that year.
However, RBC should have been aware of the potential taxable nature of the payments it was receiving. Accordingly, the further condition for the issue of discovery assessments, that the bank was “careless” under the provisions of FA 1998, Sch. 18, para. 46 was met.
The taxpayer's appeal failed on all three issues; and was therefore dismissed.
This is a complex case in which a non-UK resident bank was found to have a UK tax liability in respect of exploration activities carried on in the UKCS. This highlights the broad nature of the provisions and may perhaps serve as a warning for other entities which have an indirect interest in similar activities. The asymmetry in expectations of historical knowledge between the taxpayer and the HMRC officer should also be noted.
For commentary on profits derived from the UKCS see In-Depth at and for commentary on discovery assessments see In-Depth at .
[1] This appeal considers whether UK ring fence corporation tax is properly payable by the Appellant (“the Bank” or “RBC”) in respect of its receipt of certain sums paid to it during its accounting periods ended 31 October 2008 to 2015 inclusive.
[2] In broad terms, the Bank had (through its Canadian head office) advanced loans of CAD $540 million in the early 1980s to Sulpetro Limited (“Sulpetro”), a Canadian company, to help fund the exploitation by its group of companies of rights to drill for oil, largely in the Buchan field of the North Sea. The Sulpetro group sold its interest in the Buchan oil field to the BP group in 1986, in exchange for various sums including (crucially, in the present appeal) an entitlement to contingent royalty payments on production from the oil field (linked to the excess of the market price of the oil in question above a benchmark level) (“the Payments”).
[3] Sulpetro was already in financial difficulties at the time of the sale to BP and ultimately went into receivership in 1993, by which time some Payments had started to be made due to the rise in oil prices. After the remainder of its assets were realised, Sulpetro still owed the Bank some CAD $185 million and its rights to all future Payments were formally assigned to the Bank with the approval of the Canadian courts for nominal consideration (though there does also appear to have been a purported prior assignment of those rights to the Bank when they were first created).
[4] BP later sold its interest in the Buchan field to another UK company, Talisman Energy (UK) Limited (“Talisman”), as a result of which Talisman assumed the obligation to make the Payments. The Payments made by it have been accounted for as a deduction from its ringfence profits of its UK oil exploitation trade.
[5] The Bank has treated the Payments received by it as income of its banking business in Canada (which it has accounted for as a partial recovery of the bad debt it had previously recognised in respect of its loan to Sulpetro), and not reported it in any UK tax return. Although it has at all times had a permanent establishment in the UK, this transaction did not involve it.
[6] HMRC1 were checking Talisman's corporation tax return for 2013 when they became aware of the Payments being made by Talisman to the Bank. They now claim that the Bank ought to account for UK corporation tax on the Payments it received during the relevant years, as part of a ring-fence activity carried on through a deemed UK permanent establishment. This appeal covers the years from 2008 to 2015 and essentially involves three issues:
- whether the...
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