Shell UK Ltd v R & C Commissioners
| Jurisdiction | England & Wales |
| Judgment Date | 02 August 2007 |
| Date | 02 August 2007 |
| Court | Special Commissioners (UK) |
special commissioners decision
Dr A N Brice John Walters QC
Graham Aaronson QC with Michael Bools, instructed by Herbert Smith Solicitors, for the Appellant
Sean Wilken with Jess Connors, instructed by the Solicitor for HM Revenue and Customs, for the Respondents
Petroleum revenue tax - Legislation provides an exemption from tax for gas sold to British Gas under a contract made before the end of June 1975 - Appellant entered into a contract with British Gas on 27 June 1975 and Revenue agreed that gas sold under that contract was exempt from tax - The period of the 1975 contract ended on 31 October 2002 - In March 2002 the Appellant and British Gas entered into an agreement which took the form of amendments to the 1975 contract and which extended its term by ten years - Whether gas sold after 31 October 2002 was sold under "a contract made before the end of June 1975" - No - Appeal dismissed - Oil Taxation Act 1975 section 10 subsec-or-para 1OTA 1975, s. 10(1)(a)
The special commissioners decided that gas sold to British Gas after October 2002 was not sold under a contract made before the end of June 1975 and so was not exempt from petroleum revenue tax.
The taxpayer appealed against assessments to petroleum revenue tax ('PRT') for the six chargeable periods between 31 December 2002 and 30 June 2005 inclusive. The assessments were made because the Revenue took the view that gas sold after 1 November 2002 by the taxpayer to British Gas was not exempt from PRT since it was not gas sold under a contract made before the end of June 1975 within the meaning of s. 10(1)(a) of the Oil Taxation Act 1975 (OTA 1975).
The OTA 1975 imposed a new tax in respect of profits from substances won under the authority of licences under the Petroleum (Production) Act 1934. Section 1(1) of the 1975 Act provided that PRT was charged in respect of profits from oil, defined as any substance won under the authority of a licence under the 1934 Act. Thus oil included natural gas. The scheme of the legislation was to charge tax on assessable profits from oil fields. In computing those profits any gas sold to the British Gas Corporation under a contract made before the end of June 1975 was disregarded.
The taxpayer entered into a contract with British Gas on 27 June 1975 ('the 1975 contract'). The contract had a fixed term of 20 years beginning with a first delivery date of 1 November 1982 and so the term of the contract ended on 31 October 2002. The Revenue agreed that all gas sold under the 1975 contract before the end of October 2002 was exempt from petroleum revenue tax. Towards the end of 1999 the taxpayer and British Gas entered into negotiations about sales of gas after October 2002 and reached an agreement in March 2002 ('the 2002 agreement'). The 2002 agreement took the form of amendments to the 1975 contract; in particular, it changed the provisions about price and the quantities of gas to be sold and it extended the term of the contract from 20 to 30 years.
The taxpayer argued that gas sold to British Gas after October 2002 was gas sold under the 1975 contract and so was exempt from PRT. The Revenue argued that, as a matter of statutory construction, the purpose of the 1975 Act was to exempt from tax gas sold under contracts which were being negotiated at the time of the passing of the Act. In their view the 2002 agreement was not the same contract as the 1975 contract because its terms were fundamentally different; accordingly gas sold to British Gas after October 2002 was not gas sold under the 1975 contract and so was not exempt.
The Revenue accepted that the attribution of that expenditure to gas which would not be exempt from PRT had been undertaken bona fide and without negligence at the time and they were not permitted to claw back the expenditure that had been allowed.
Whether gas sold to British Gas after October 2002 was 'sold under a contract made before the end of June 1975' within the meaning of s. 10(1)(a) of the 1975 Act and so was exempt from tax.
The special commissioners (Dr Nuala Brice and John Walters QC) (dismissing the appeal) said that the ordinary meaning of the words 'a contract made before the end of June 1975' did not include an agreement made in October 2002. Under the 1975 contract the taxpayer had to sell and deliver gas to British Gas up to the contract quantities until 31 October 2002. That obligation came to an end on 31 October 2002. Thereafter gas was sold under the 2002 agreement and not under the 1975 contract. A purposive construction, where the words of section 10(1)(a) were considered within the context and the scheme of the 1975 Act, led to the conclusion that the words 'a contract made before the end of June 1975' do not include the 2002 agreement (Barclays Mercantile Business Finance Ltd v Mawson (HMIT)[2004] BTC 414 applied).
The distinction between rescission and variation of a contract was not relevant in this appeal. Even if the taxpayer was right, and the 1975 contract was varied, and not rescinded, by the 2002 agreement that did not mean that the 2002 agreement became the 1975 contract or that the 1975 contract as varied by the 2002 agreement was a contract made before the end of June 1975. Returning to the statutory language, gas sold after October 2002 under the 1975 contract as amended in 2002 was not gas sold under a contract made before the end of June 1975.
In any event, the main changes in 2002 were for the extension of the duration of the contract and the method of calculating the price. Those changes went to the root of the contract in the sense that they were crucial changes and that it was impossible for both the 1975 contract and the 2002 agreement to be performed together. Therefore, if the distinction between rescission and variation was relevant then the changes made in 2002 went to the root of the 1975 contract so as in effect to rescind it and to make the 2002 agreement a new contract.
The words of s. 10(1)(a) were neither obscure nor ambiguous. However, even if they were, a reference to Hansard would confirm the view that it was the intention of Parliament to exempt from tax only gas sold under the 1975 contract and not gas sold under the 2002 agreement. The 2002 agreement was negotiated in a free market and included a market price; the 1975 contract, on the other hand, was entered into after lengthy negotiations which were at an advanced stage when the tax was introduced and was made with a monopoly purchaser at a statutory reasonable price. The taxpayer's argument imported an artificially extended meaning for the simple expression 'a contract made before the end of June 1975' from another area of law and was to be rejected (C & E Commrs v Zielinsky Baker & Partners Ltd[2004] BTC 5,249 applied).
1. Shell UK Limited (the Appellant) appeals against assessments to petroleum revenue tax for the six chargeable periods between 31 December 2002 and 30 June 2005 inclusive. The assessments were made by the predecessors of the Commissioners for Her Majesty's Revenue and Customs (the Revenue) because they were of the view that gas sold after 1 November 2002 by the Appellant to British Gas was not exempt from petroleum revenue tax because it was not gas sold under a contract made before the end of June 1975 within the meaning of section 10(1)(a) of the Oil Taxation Act 1975. We were informed that the amount of tax in issue was about £150M.
2. The Oil Taxation Act 1975 (the 1975 Act) imposed a new tax in respect of profits from substances won under the authority of licences under the Petroleum (Production) Act 1934 (the 1934 Act). Oil Taxation Act 1975 section 1 subsec-or-para 1Section 1(1) of the 1975 Act provided that petroleum revenue tax was charged in respect of profits from oil. Oil was defined as meaning any substance won under the authority of a licence under the 1934 Act. Thus oil includes natural gas. Oil Taxation Act 1975 section 1 subsec-or-para 2Section 1(2) of the 1975 Act provided that for each oil field the tax was to be charged at the rate of 45 per cent on the assessable profit accruing in any chargeable period from that field. Oil Taxation Act 1975 section 1 subsec-or-para 3Section 1(3) provided that a chargeable period was half a year. Oil Taxation Act 1975 section 2Section 2 contained provisions about the calculation of assessable profits and allowable losses for the purposes of the tax.
3. The relevant parts of section 10 provided:
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10 (1) In computing under section 2 of this Act the gross profit or loss (if any) accruing to a participator in any chargeable period from an oil field -
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(a) any oil consisting of gas sold to the British Gas Corporation under a contract made before the end of June 1975 shall be disregarded; …
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and in the following provisions of this section any oil which falls to be disregarded under this subsection is referred to as "excluded oil".
4. Thus the scheme of the legislation is to charge tax on assessable profits from oil fields. In computing those profits any gas sold to the British Gas Corporation under a contract made before the end of June 1975 is disregarded. We refer to this provision as an exemption from tax as it is referred to in that way in subsequent legislation (namely, in the Gas Levy Act 1981).
5. Since the enactment of section 10(1)(a) the British Gas Corporation has changed its name twice. Throughout this Decision we refer to it as British Gas.
6. The Appellant entered into a contract with British Gas on 27 June 1975 (the 1975 contract). The contract had a fixed term of twenty years beginning with a first delivery date. The first delivery date was 1 November 1982 and so the term of the contract ended on 31 October 2002. The Revenue agreed that all gas sold under the 1975 contract before the end of October 2002 was...
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