V&E Advises Total E&P North Sea UK Limited and Total Oil UK Limited in Successful Appeal
V&E advised its clients Total E&P North Sea UK Limited (formerly Maersk Oil North Sea UK Limited) and Total Oil UK Limited (formerly Maersk Oil UK Limited) (together the Companies) in their successful appeal in the Court of Appeal (CoA), handed down on October 29, 2020. The main issue in dispute concerned whether the filing position of the Companies was just and reasonable. As the concept of just and reasonable is used in a number of UK tax provisions, the decision is likely to have significance beyond the facts of the case.
The case concerned how profits should be apportioned for any period that straddled the government’s surprise announcement on March 23, 2011 that the rate of supplementary charge on the adjusted ring fence profits of North Sea oil and gas companies would jump, overnight, from 20% to 32%. In applying the sudden 12% increase, companies with accounting periods that straddled March 24, 2011 (which included the Companies), were required to apportion their profits on a time apportionment basis, unless doing so would work unjustly or unreasonably in a particular company’s case.
During the period in question, the Companies had to stop production and incur significant capital expenditure, either due to severe storm damage or scheduled maintenance, that resulted in an uneven distribution of their profits, with significantly more profits arising in the pre-March 24 period. Therefore, both companies elected to exercise their right to apportion their profits for the period ending December 31, 2011 using a method other than time apportionment, being when profits were actually earned. HMRC rejected the companies’ approach on the basis that the method adopted was not a just and reasonable alternative to time apportionment.
The First-tier Tribunal (FTT) held in favour of the Companies, however, the Upper Tribunal reversed the FTT decision, ruling that a company may only elect to allocate its profits to the pre- and post-March 24, 2011 on a basis other than time apportionment where the factors making time apportionment unjust or unreasonable “are specific to the company”, i.e., factors affecting all companies will not make time apportionment unjust or unreasonable.
The CoA has reinstated the decision of the FTT and held that, although time apportionment was the default method, the legislation does not require that a company must be affected by unique circumstances to depart from time apportionment. The CoA also held that if general issues affecting companies were to be disregarded, then the legislation could have set that out clearly, which it has not.
The CoA stated, “…the availability of the election should not depend on there having been something out of the ordinary and/or not shared by other companies. If a company made a disproportionate share of its profits for the straddling period in the Earlier Period as a result of something routine (shut ins, say) rather than an exceptional event, it could still justifiably complain of retrospective taxation if profits were apportioned in accordance with section 7(4). Time apportionment would have the consequence that some of its pre-24 March 2011 profits were subject to tax at 32% rather than the 20% which prevailed when they were generated. The simple fact is that any company with a straddling period which earned profits at a higher rate before 24 March 2011 than afterwards would find some of its profits from the Earlier Period taxed at 32% if section 7(4) were applied. It makes no difference whether profits in the Later Period are depressed by an unusual event or a routine one.”
In respect to the method of apportionment, the CoA held that, although the overall objective is to apportion the profits of a complete accounting period, there can be different methods of doing so and, therefore, allocating profits earned in an accounting period by reference to “actual” performance is a legitimate way of apportionment.
It stated, “Such an exercise should both produce figures which, when aggregated, match the profit for the entire accounting period and provide an intelligible basis for determining how that profit should be apportioned between the Earlier and Later Periods.”
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