Judgment summary
This appeal concerned Perenco UK Limited's (PUK) claim to 100% first-year capital allowances under the Capital Allowances Act 2001 (CAA 2001) for expenditure incurred in 2011 on plant and machinery known as the Field Facilities, part of which it sold on shortly after acquisition.
HMRC issued closure notices dated 28 July 2023 reducing PUK's qualifying expenditure and increasing corporation tax payable by a total of £39,085,004.50 across accounting periods ending 31 December 2011, 2012 and 2013. HMRC also issued penalty assessments of £6,805,161.39, which were later withdrawn, and the appeal against the penalties was allowed by direction (paras 2-3).
The Tribunal considered whether PUK met the conditions in section 11(4) CAA 2001, whether the expenditure qualified under sections 45F and 45G, and whether the anti-avoidance provision in section 197 overrode a joint election made under section 198 with Premier Oil UK Limited. The Tribunal allowed the appeal, finding in PUK's favour on all substantive issues (paras 186-190).
Background
PUK is part of the Perenco Group, a privately owned business that acquires and operates mature hydrocarbon assets (para 8). PUK carried on a ring fence trade for the purposes of section 45F CAA 2001 during the relevant accounting periods (para 9).
BP Group companies BPEOC and ARCO owned approximately 67.5% of the Wytch Farm and Wareham onshore oilfields (the Onshore Oilfields), with Premier Oil UK Limited (Premier) holding the largest minority interest of approximately 12.5% and other Co-Participants holding smaller interests (paras 10-11).
Following the BP Group's public announcement on 22 February 2011 of its intention to dispose of its interest (the BP Interest), PUK negotiated and on 16 May 2011 signed a sale and purchase agreement (the BASPA) to purchase the whole BP Interest for Base Consideration of US$555 million, paying a deposit of US$500 million on signing (paras 16-23).
Pre-emption notices were issued to Co-Participants under existing joint operating agreements. Premier indicated it intended to exercise its pre-emption rights, prompting negotiations between PUK and Premier that culminated in the POSPA, signed on 19 June 2011, under which PUK agreed to sell Premier an approximate 17.9% interest in certain licences (the POSPA Interest), including a share of the Field Facilities (the Disputed Field Facilities), for Base Consideration of US$96 million (paras 28-41).
The shortfall between the pro rata consideration (approximately US$139 million) and the US$96 million actually paid was addressed by a joint election under section 198 CAA 2001, fixing the sale price of the Disputed Field Facilities at US$2, allowing PUK to retain the capital allowances despite transferring ownership to Premier (paras 44-48).
Completion of the BASPA occurred on 14 December 2011 and completion of the POSPA occurred on 20 December 2011 (paras 49-50). Deloitte LLP submitted PUK's corporation tax return claiming first-year qualifying expenditure of £250.4 million on the Field Facilities (para 56). By closure notice dated 28 July 2023, HMRC reduced this to £185 million, giving rise to Disputed Expenditure of £65.4 million (paras 64-65).
Core dispute
PUK claimed entitlement to 100% first-year capital allowances for its entire expenditure on the Field Facilities. HMRC contended that PUK was not entitled to capital allowances in respect of the Disputed Expenditure because the conditions of sections 11, 45F and 45G CAA 2001 were not met, or alternatively, that even if those conditions were met, section 197 CAA 2001 overrode the section 198 election made with Premier (paras 83-84).
The issues for determination were: whether section 11(4) conditions were satisfied in respect of the Disputed Expenditure; whether the Disputed Expenditure constituted first-year qualifying expenditure under section 45F; whether section 45G applied to negate that treatment; and whether section 197 applied to override the section 198 Election (para 86).
A key sub-issue was the point in time at which PUK's purpose in incurring the expenditure should be assessed, given that PUK had entered into the POSPA (committing to sell part of the assets to Premier) before completion of the BASPA (paras 90-101).
Court findings
The Tribunal found that the purpose of the expenditure fell to be assessed at 14 December 2011, when the BASPA completed and PUK obtained ownership of the Field Facilities, not at the earlier date the deposit was paid, because section 11(4)(b) requires that expenditure result in ownership (paras 94-101).
On purpose, the Tribunal found that PUK's primary objective was to purchase and retain the whole BP Interest, and it only entered the POSPA to secure completion of the BASPA and avoid disruption from Premier. Even accepting a partial purpose to sell to Premier, PUK's purpose was at minimum "partly for the purposes of" its ring fence trade, satisfying section 11(4) (paras 110-118).
On "provision" and "ownership", the Tribunal preferred PUK's submissions, finding that the expenditure under the BASPA was expenditure on the provision of the Field Facilities, and that PUK became the legal and equitable owner of the Disputed Field Facilities on completion of the BASPA, sufficient to satisfy section 11(4)(b), following Melluish (Inspector of Taxes) v BMI (No 3) Ltd [1996] AC 454 (paras 125-129).
On section 45F, the Tribunal held that an intention to sell in future did not constitute a separate "use" of the Disputed Field Facilities, and PUK's purpose while it owned them was wholly for its ring fence trade (paras 132-134).
On section 45G, the Tribunal found the relevant period ran from 16 May 2011 to 19 December 2011, and that PUK used the Disputed Field Facilities for its ring fence trade for the six days it owned them (14 to 19 December 2011) and at no time for any other purpose, so section 45G did not apply (paras 136-142).
On section 197, although not strictly necessary given the findings on sections 45F and 45G, the Tribunal found that the POSPA and the Election (but not the BASPA) formed a scheme or arrangement, that a tax advantage within section 577(4) could arise from a section 198 election, but that obtaining that tax advantage was not a main purpose of the scheme or arrangement, so section 197 would not have applied to override the Election (paras 156-185). In any event, since PUK was entitled to 100% first-year allowances, the notional written-down value would be nil, meaning section 197 would have no practical effect even if engaged (paras 151, 189).
Outcome
The Tribunal allowed PUK's appeal, holding that the conditions in section 11(4) were satisfied, the Disputed Expenditure constituted first-year qualifying expenditure under section 45F, section 45G did not deny that treatment, and section 197 would not have applied to override the section 198 Election in any event (paras 186-190).
The parties were directed to seek to agree the correct foreign exchange basis to be applied to the dollar expenditure in consequence of the decision, with liberty to apply to the Tribunal in default of agreement (para 191).
Major issues / areas of contention
- Whether the conditions in section 11(4) CAA 2001 were satisfied in respect of the Disputed Expenditure, including the point in time at which the purpose of the expenditure should be assessed.
- Whether the Disputed Expenditure constituted first-year qualifying expenditure under section 45F CAA 2001, given PUK's prior commitment under the POSPA to sell part of the assets to Premier.
- Whether section 45G CAA 2001 applied to treat the Disputed Expenditure as never having been first-year qualifying expenditure, based on actual use during the relevant period.
- Whether PUK incurred the expenditure 'on the provision of' plant or machinery and 'owned' the Disputed Field Facilities within the meaning of section 11(4)(b), notwithstanding the retrospective allocation of benefits and burdens to Premier under the POSPA's Economic Date provisions.
- Whether the POSPA and the section 198 Election constituted a 'scheme or arrangement' for the purposes of section 197 CAA 2001, and whether the BASPA formed part of that scheme.
- Whether the section 198 Election, fixing the sale price of the Disputed Field Facilities at US$2, gave rise to a 'tax advantage' within section 577(4) CAA 2001.
- Whether obtaining a tax advantage was a 'main purpose' or 'one of the main purposes' of the scheme or arrangement for the purposes of section 197(1)(d) CAA 2001.