Cats North Sea Limited v The Commissioners for HMRC

The appeal concerns the capital allowances treatment of the disposal by Amoco (UK) Exploration Company LLC (“Amoco”) of its interest in the Central Area Transmission System North Sea Oil and Gas pipeline and associated assets (“the CATS Pipeline”) to its subsidiary, the Appellant (“CNSL”), and the subsequent disposal by Amoco of its shares in CNSL to a third party purchaser. (Together those transactions are referred to as the “Disposal” below.)

At its core the dispute between the parties focusses on the interaction of the oil tax ring fence trade provisions with the capital allowances code. There is a subsidiary issue concerning the impact of an election made by Amoco’s parent (BP) and whether that had effect not only on the application of the Petroleum Revenue Tax (“PRT”) rules but also ton he application of the corporation tax ring fence trade rules to Amoco and potentially, in turn, CNSL.

CNSL appeals against the conclusions of the final closure notice issued by HMRC on 30 March 2021 in respect of CNSL’s accounting period ended 31 December 2015.

The burden of proof rests with the Appellant to show that it is entitled to apply the capital allowances regime as claimed by it. The ordinary civil standard of the balance of probabilities applies.

There is a hearing bundle of 492 pages. However, all facts are agreed. The hearing proceeded by way of submissions only.

The agreed facts are as follows.

Amoco was a member of the group of companies headed by BP plc at all relevant times. CNSL is a UK incorporated and resident company incorporated on 6 October 2014 as a direct wholly owned subsidiary of Amoco. CNSL was dormant until 1 October 2015.

The CATS Pipeline was originally built to transport hydrocarbons from the Everest/ Lomond fields in the North Sea to mainland UK. BP first incurred capital expenditure in relation to the CATS Pipeline in 1990, with first throughput being achieved in May 1993. At all relevant times prior to the Disposal, the CATS Pipeline was owned as a contractual joint venture, operated by Amoco. Immediately prior to the hive-down described below, the BP group held a c.36.2% interest in the CATS Pipeline, which was held entirely by Amoco.

Prior to 2014, the majority (c.63.8%) interest in the CATS Pipeline was held by a third party, the BG Group (now part of the Royal Dutch Shell group). In 2013, the BG Group hived-down its interest in the CATS Pipeline to a new holding company and, in 2014, the BG Group sold the shares in that new holding company to Kellas (“the BG Disposal”), accompany ultimately controlled by Antin Infrastructure Partners Luxembourg II SARL (“Antin”).

In July 2014, immediately after completing the acquisition of the BG Group’s interest in the CATS Pipeline via the BG Disposal, Antin made an offer to buy Amoco’s interest in the CATS Pipeline business.

The Disposal was implemented in two stages, as follows:

At the time of the Hive-down, both Amoco and CNSL were members of the BP group (and, on that basis, other companies within that group were “associated companies” of Amoco and CNSL, for the purposes of s271 of the Corporation Tax Act 2010 (“CTA 2010”)). On completion of the Share Sale on 17 December 2015:

Prior to the Hive-down, Amoco’s CATS Pipeline activities involved the transportation of hydrocarbons extracted by BP group and non-BP group companies from the CATS Pipeline user fields, and the receipt of tariffs as consideration for that transportation. From the initial construction of the CATS Pipeline up to the implementation of the Hive-down, Amoco submitted its company tax returns on the basis that these activities formed part of its “ring fence trade” as defined in s 277 CTA 2010 (that is to say, an inside the ring fence trade, or “IRF trade”), because:

Prior to the Hive-down, Amoco filed its company tax returns on the basis that its activities in respect of the CATS Pipeline formed part of its single IRF trade. As a result, all of the CATS Pipeline profits up to the date of the Hive-down were chargeable to corporation tax and supplementary charge at the rates applicable for IRF trades (the combined rate as at the date of the Hive-down was 50%). In computing its IRF profits during this period, Amoco claimed capital allowances at IRF rates for qualifying capital expenditure in respect of the CATS Pipeline. As at the date of the Hive-down, Amoco had incurred, IRF, a total of £167,467,319.35 of qualifying capital expenditure on plant and machinery in relation to the CATS Pipeline.

CNSL was not an actual or a deemed participator in the Everest field. Accordingly, during the period between the Hive-down and the Share Sale, CNSL submitted its company tax return on the basis that only CNSL’s activities in transporting BP group hydrocarbons through the CATS Pipeline were treated as “oil extraction activities”. That is to say, only those activities were IRF and its remaining CATS activities in transporting non-BP group hydrocarbons were outside the ring fence (or ORF). (For completeness, as a result of the partial non-IRF usage of the CATS Pipeline by a connected company following the Hive-down, Amoco was required to make a notification under section 45G of the Capital Allowances Act 2001, which had the effect that allowances which Amoco had previously claimed in the five-year period prior to the Hive-down in respect of first-year qualifying expenditure on the CATS Pipeline were withdrawn and were replaced by writing down allowances at 25%. The notification was submitted to HMRC on 18 December 2015.)

At the time of the Hive-down, based on estimated future throughput over the remaining economic life of the CATS Pipeline (i.e. to 2045) and BP’s interests in the Andrew, ETAP, Culzean and Kinnoull fields at the time of the Hive-down, CNSL anticipated that approximately 13.55% of the total tariff income received by CNSL in respect of CATS activities would be in respect of the transportation of BP group hydrocarbons, with the remaining 86.45% in respect of the transportation of non-BP group hydrocarbons through the CATS Pipeline. These estimates were used in determining the apportionment of expenditure for capital allowances purposes in CNSL’s company tax return for the accounting period ended 31 December 2015, as filed, although, for the avoidance of doubt, the parties disagree as to whether such apportionment is appropriate.

In practice, in the period between the Hive-down and the Share Sale, CNSL determined that 11% of tariff income received by CNSL in respect of its CATS activities related to the transportation of BP group hydrocarbons from the Andrew, ETAP, Culzean and Kinnoull fields (and so was treated in CNSL’s company tax return for the accounting period ended 31 December 2015 as arising IRF), and the remaining 89% related to the transportation of non-BP group hydrocarbons (and so was treated in CNSL’s company tax return for the accounting period ended 31 December 2015 as arising ORF).

Following completion of the Share Sale, CNSL’s company tax return was filed on the basis that CNSL’s CATS Pipeline activities were entirely ORF, as BP group companies ceased to be “associated companies” of CNSL for the purposes of section 272 CTA 2010, and there were no Antin group companies which transported hydrocarbons through the CATS Pipeline.

The CATS Pipeline was a “qualifying asset” of the Everest field for PRT purposes (s8 Oil Taxation Act 1983 (“OTA”).

Although Amoco disposed of its interest in the Everest field in 2009, it remained a “deemed participator” in the field for PRT purposes for all subsequent chargeable periods by virtue of ss 98 (1) and 98(2) of the Finance Act 1999.

Accordingly, in the absence of making the Election (as defined below), the “tariff receipts” arising to Amoco in respect of the CATS Pipeline were chargeable to PRT (s6 OTA).

With effect from 1 January 1996, Amoco made an election under s231(1) of the Finance Act 1994 in respect of the CATS Pipeline (the “Election”).

By virtue of s233(1) Finance Act 1994, the effect of the Election was that tariffs received by Amoco in respect of the transportation of hydrocarbons from non-PRT fields through the CATS Pipeline would not be regarded as a “tariff receipt” for the purposes of the Oil Taxation Acts. Accordingly, only tariffs received by Amoco in respect of the transportation of hydrocarbons from PRT fields would be chargeable to PRT.

The parties have agreed that the appeal raises the following issues.

Prior to the Hive-down, Amoco had filed its company tax returns on the basis that it was conducting a wholly-IRF trade. Following the Hive-down, CNSL’s transportation of “associated company” hydrocarbons through the CATS Pipeline were IRF activities, by virtue of s272(4) CTA 2010, which were treated for the purposes of the charge to corporation tax under s279 CTA 2010 (“s279”) as a separate trade, distinct from other activities carried on by the company, including ORF transportation of non-associated company hydrocarbons through the CATS Pipeline.

If it is not necessary to take into account the ‘deeming effect’ of s279 in determining whether the Hive-down represents a “transfer of a trade” for the purposes of Part 22 CTA 2010, it is common ground that the Hive-down would represent a “transfer of a trade” for the purposes of Part 22 CTA 2010, as defined in s940B CTA 2010 (as supplemented by s951 CTA 2010).

ISSUE 1: does Chapter 1 of Part 22 CTA 2010 (“Part 22”) apply in the present case?

ISSUE 2A: On the footing that Part 22 applies as a result of the Hive-down, what are the capital allowances consequences of the Disposal for CNSL?

ISSUE 2B: On the footing that Part 22 does not apply as a result of the Hive-down, what are the capital allowances consequences of the Disposal for CNSL?

ISSUE 3: What, if anything, is the effect of the Election on the analysis of the above Issues? If the Tribunal were to determine that the Election does have an impact on the analysis of the preceding Issues, the parties would seek to agree between themselves the specific numerical impact which this has on CNSL’s tax return for the year ended 31 December 2015, reflecting the principles articulated by the Tribunal in its determination of Issue 3 (and failing agreement the parties would apply to the Tribunal for a determination of that dispute).

In this part of the decision I set out the key elements of the parties’ cases. Each has put forward a preferred, secondary and tertiary approach. I have addressed the detailed arguments arising more specifically in the discussion section of this decision in so far as those arguments go to the basis of this decision. The decision would be unwieldy were I to address every variation which the parties addressed in the hearing and there is limited value in so doing.

These alternative cases assume that the Election has no effect which means that Issue 3 is answered as having no effect.

CNSL’s preferred analysis may be summarised as follows:

In following CNSL’s primary analysis the answers to the agreed issues would be:

CNSL’s secondary analysis is relied upon should I conclude that section 279 is relevant when analysing the Hive-down and there is a transfer of trades (not a trade) on the Hive-down. In that situation CNSL says:

In following CNSL’s secondary analysis, the answers to the agreed issues are:

If I conclude that there is a transfer of a single trade on Hive-down CNSL says:

In following CNSL’s tertiary analysis, the answers to the agreed issues are:

In short CNSL says that the Election means that in fact Amoco was carrying on an IRF and ORF trade before the Hive-down. If I conclude that CNSL is correct on the effect of the Election CNSL says that:

The core of HMRC’s case is that disposal events within the meaning of s61(1) CAA 2001 have arisen in relation to the CATS Pipeline in CNSL’s accounting period ending 31 December 2015. As a result, capital allowances balancing charges arise for CNSL and CNSL’s chargeable profits for corporation tax purposes have therefore been understated.

In addition, HMRC maintain that the Election did not cause Amoco to be carrying on an IRF and ORF trade in relation to the CATS Pipeline for Corporation Tax purposes. Consequently under each of their preferred analyses HMRC says that the Election has no effect.

HMRC’s preferred analysis is:

HMRC’s secondary case is:

HMRC’s tertiary case is:

The concept of a separate IRF trade is provided in particular in this case by s279 which states that:

As explained above, it is agreed by the parties that when the definition of oil-related activities is worked through the operation of the CATS Pipeline was entirely IRF for Amoco (subject to the dispute about the application of the Election dealt with later in this decision); and was partly IRF and partly ORF for CNSL.

Where a company ceases to carry on a trade, cessation rules apply. Where that is in the context of a sale of the trade to another company the starting point is that there is no succession to the transferor’s losses and capital allowances.

However, Part 22 “contains rules for cases where a trade is transferred between companies meeting stated ownership conditions who are within the charge to tax” (see s940A(1)) CTA 2010). (The parties agree that the ownership and tax conditions are met.)

Section 940B CTA 2010 defines a “transfer of a trade” as occurring if “on a company ceasing to carry on a trade, another company begins to carry it on” (s940B(2)).

Section 951 CTA 2010 is a deeming provision that extends the core provisions of s940A to situations beyond that arising where a transferor transfers its trade to the transferee who carries it on. It expressly covers:

In each case the legislation causes the transfer to fall within the definition of a “transfer of a trade” in s940B CTA 2010) by deeming the rules to have effect as if the transferor carried on the trade or part trade as a separate trade. In this case Amoco transferred part of its trade to CNSL. The relevant provisions in s951(3) and (4) CTA 2010 provide as follows:

Section 952 CTA 2010 provides for apportionment if, when applying s951, part of the trade is treated as a separate trade for the successor:

When the Part 22 rules apply the operation of the capital allowances code in CAA 2001 (which would otherwise result in a balancing charge or allowance arising on the cessation of the use of the assets) is altered. Section 948 CTA 2010 provides:

Section 11 CAA 2001 sets out the general conditions for the availability of allowances:

Section 162 CAA 2001 provides that if a person carries on a ring fence trade, it is “a separate qualifying activity for the purposes of this Part”.

Carrying on a ring fence trade is defined (as far as relevant) as meaning activities which fall within the definition of “oil -related activities” in s274 CTA 2010 and which constitute a separate trade (whether as a result of s279 CTA 2010) or otherwise.

Therefore an IRF trade and an ORF trade are separate qualifying activities.

Both s11 CAA 2001 and s162 CAA 2001 are in the same Part of the Act, i.e. Part 2.

Section 53 CAA 2001 sets out rules regarding the pooling of expenditure:

Section 206 CAA 2001 requires qualifying expenditure which is incurred partly for the purposes of a qualifying activity and partly for other purposes to be allocated to a single asset pool. More particularly the provision states:

Section 207 CAA 2001 provides for adjustment of allowances and charges to reflect, in particular, the use of plant and machinery in a chargeable period for purposes other than those of a person’s qualifying activity:

Section 61 CAA 2001 sets out when disposal events arise for capital allowances purposes. So far as relevant it states:

A table sets out the values to be brought into account and it is agreed that if s61(1)(e) applies the amount is the market value of the plant or machinery at the time of the event (Item 7 of the table). Section 62 CAA 2001 caps the market value at historic cost.

I am particularly grateful to the parties for their clear presentation of their cases including the provision of summary flowcharts by CNSL.

This is a complex case, but aside from consideration of the effect, if any, of the Election there are two key points which may be helpful to note in summary form at this point:

With that in mind and having regard to the fact that some of the issues which were raised by the parties and addressed in the hearing fall aside by virtue of my conclusions, I will order the issues in the following way:

I was invited by Mr Peacock to address all issues whether forming part of my decision or not. As noted earlier, I have decided that doing so would make this decision unwieldy and the value in doing so is extremely limited.

As Mr Peacock comments in his skeleton argument, the determination of this dispute requires the consideration of a series of complex questions of statutory interpretation in respect of which the parties propose a number of alternative, interlocking, analyses. In making my decision I am required to consider the statutory language in context and so as to give effect to the purpose of Parliament in enacting the relevant provisions as made clear most recently by the Supreme Court in R (on the application of AAA (Syria) & Ors) v Secretary of State for the Home Department [2023] UKSC 42 at [129]. That purposive approach to the construction of the legislation is one which I address at various points in the discussion below.

The first of the questions and upon which the parties’ cases turn fundamentally is whether Part 22 applied on the Hive-down.

I have concluded that Part 22 does apply and that it does so on the basis of the transfer by Amoco of part of its trade to CNSL for the following reasons.

The parties agree that the ownership and tax conditions of Part 22 apply in this case. There has been a transfer from a parent to a wholly owned subsidiary.

Furthermore, the parties agree that if it were not for the question regarding the application of s279 it would be clear that Part 22 applies: Amoco transferred part of its trade – that involving the transportation of hydrocarbons through the CATS Pipeline - to CNSL and CNSL carried on that part of the trade as trading activity.

The tension arises from the fact that what was transferred by Amoco to CNSL was part of Amoco’s IRF trade but CNSL could not at any time carry it on wholly as an IRF trade. Section 279 says that oil-related activities are treated as a separate trade. Therefore in accordance with s279 CNSL carries on an IRF trade and an ORF trade ab initio on the Hive-down.

Mr Peacock submitted that:

The fundamental issue therefore is whether s279 should be applied in the context of Part 22 such that the Hive-down falls outside the scope of Part 22. Mr Peacock submitted, in essence, that s279 is stated to apply for corporation tax purposes and there is no exception for the application of Part 22. Indeed, he submitted that it is relevant that other provisions within Part 22 (namely ss.944D and 944E) make specific provision for IRF trades. These provisions deal with the modification of the transfer of trades rules in the context of decommissioning or non-decommissioning losses.

I note that ss944D and 944E (dealing with transfer of losses on a transfer of a trade) were only introduced with effect from 1 April 2017, after the accounting period with which this appeal is concerned. Neither party sought to say that the provisions influence the interpretation of s940B, s948 or s951 beyond Mr Peacock submitting that their existence means that it is contemplated that Part 22 deals with the transfer of ring-fenced trades. However, I do not consider that this takes the question of how Part 22 applies in this context much further forward. HMRC are not arguing that a ring-fenced trade is outside the provisions of Part 22. Clearly the draftsman of Part 22 was aware of issues relating to the specific ring fence regime but that does not mean in itself that s279 should be interposed in the manner sought by CNSL. Instead, the matter comes down to the manner in which Part 22 is applied in the context of a trade which is ring-fenced when conducted by the transferor and IRF and ORF when conducted by the transferee.

I agree with Mr Peacock that s279 applies for the charging of corporation tax on income, and calculating capital allowances is part of the way in which that charge is calculated. Indeed, s162 CAA (which states that where a person carries on an IRF trade it is a separate qualifying activity) does so by referring to a ring fence trade as activities which fall with the CTA 2010 definition of oil-related activities and constitute a separate trade whether as a result of s279 CTA 2010 or otherwise.

Regarding Mr Peacock’s submissions that Part 22 does not envisage the transfer of a trade (or part) which is then carried on as two trades by the transferee, I agree with Mr Bremner’s submissions that the normal approach to statutory drafting (in accordance with s6(c) Interpretation Act 1978) is that reference to “trade” in s951 CTA 2010 can include “trades”. Consequently, s951(3)(a) CTA 2010 can be read as: “a company (“the transferor”) ceases to carry on a part of a trade (“part Y”) and another company (“the transferee”) begins to carry on the activities of part Y as its trades.” Therefore even when one applies s279 in relation to CNSL on the Hive-down, the result of CNSL carrying on two trades ab initio is a matter which is within the scope of s951(3).

Coming back to the purpose of Part 22 to facilitate intra-group reorganisations where the same business is carried on by two group companies and both the transferor and transferee can be said to be trading when carrying on that business, I see no reason why the split into two trades – especially where that is a matter of tax legislation deeming, in this case by s279 CTA – should offend that underlying purpose.

Mr Peacock submits that this conclusion does not work under s951 CTA 2010 because:

In relation to the first of those submissions I agree with Mr Bremner that s951 extends s940B. It is therefore wrong to apply the narrow interpretation of the words in s940B in isolation. Section 951(3) provides the route for the transfer of part of a trade to come within the scope of the Part 22 provisions and the interpretation described relying upon the Interpretation Act is not excluded by s940B.

Turning to the second submission regarding the nature of the “activities”, it is necessary to consider the case of Falmer Jeans. Falmer Manufacturing (“FM”) took cloth given to it by Falmer Jeans and manufactured jeans, for which it was paid a cost-plus payment. FM then transferred its trade to Falmer Jeans by way of sale and there was then a question as to whether Falmer Jeans could use the losses that had been made by FM. After the transfer Falmer Jeans had separate internal accounts for the manufacturing activity to which it accorded a margin, and for the retail sale of jeans. The question was whether Falmer Jeans obtained the benefit of FM's losses. The Special Commissioners had decided that Falmer Jeans did not obtain the losses. Their decision had focussed on whether the trade had been transferred rather than the activities of the trade. In FM there was a trade resulting from the costs-plus nature of the manufacture and payment but in Falmer Jeans itself the activities were subsumed within the existing trade of the sale of the jeans. The Special Commissioners’ approach was said to be wrong by Mr Justice Millett.

Mr Justice Millett reviewed the existing authorities considering the legislation preceding s951 CTA 2010 i.e. s252 of the Income and Corporation Taxes Act 1970 (“ICTA 1970”) (which had later become s343 of the Income and Corporation Taxes Act 1988). The provisions in Part 22 are those resulting from the tax law rewrite which the parties agree was supposed not to change the substance of the law. Mr Peacock did not seek to argue that s252 ICTA 1970 was different in substance from the provisions contained in Part 22.

Mr Justice Millett concluded that:

He set out a detailed explanation of how the provisions should be applied. He started by considering the operation of s252(1) ICTA 1970 which contained the provisions dealing with the situation where the predecessor has ceased to carry on a trade and the successor has begun to carry it on (i.e. the predecessor to s940B CTA 2010). He then considered s252(7) ICTA 1970 which dealt with the transfer of part of a trade where the successor carried on that part as its trade or as part of its trade (i.e. the predecessor to s951 CTA 2010) at p281 j:

Mr Justice Millett then turned to s252(8) ICTA 2010 which was the predecessor of s952 CTA 2010:

This led Mr Justice Millett to conclude (at p282h):

Applying these principles to the case before him, Mr Justice Millett said that sub-s (7) was brought into operation and, importantly, that when sub-s (1) was then applied to “the notional separate trade thereby created”, it was obvious that the two trades were identical. He explained, however, that the trades carried on by FJ and FM did not operate identically: FJ did not make up its customers' cloth to its customers' specifications, but its own cloth to its own requirements; and FJ did not charge its customers a separate fee for the manufacturing activities which it had begun to carry on. However, it carried on the activities for reward. The activities formed part of FJ’s trade. It was impossible to identify any physical activity of the trade formerly carried on by FM which was not undertaken by FJ, except the charging of a fee.

I therefore agree with Mr Bremner that the focus is on the activities carried on by Amoco and then CNSL. A reference to activities is explained by Mr Justice Millett as referring to what is in fact done. Mr Justice Millett specifically envisaged a situation where the activities are differently described in the predecessor and successor.

When one considers the situation in this case the “activities” as referred to by Millett J are in substance the same for Amoco before the Hive-down and CNSL after the Hive-down as a matter of fact. CNSL in fact provides the CATS Pipeline for the transportation of BP group and non-BP group hydrocarbons as Amoco did. The difference is the effect of the corporation tax oil rules on the charging of those two parts of the activity. Just as the fact that in Falmer Jeans the activities were subsumed within Falmer Jeans trade and were not a separate trade, so in this case the activities carried on by Amoco as one trade become split into two deemed trades (by virtue of s279). I agree with Mr Bremner that s951 is concerned with the activities actually carried on. It is not restricted by the classification for tax purposes of those activities. Instead, as Millett J made clear it is the “notional trade” which must be considered and whether the activities comprising that notional trade are the same.

Mr Peacock submits that Falmer Jeans is simply not relevant as it does not concern oil activities and the specific rule contained in s279. In addition, he says that it is wrong to rely on Falmer Jeans to conclude that the activities must be considered as a matter of fact with no further qualification arising from s279, given that s279 itself specifically refers to “activities”. He submitted that the consequence of s279 is that the oil related activities (IRF) are a separate trade and this therefore provides the start and end point for the analysis under Part 22. Amoco transferred part of its trade and that part was wholly IRF. When the assets were held by CNSL they were used partly for ORF. Therefore the provisions of Part 22 could not be satisfied as the result of s279 is that the activities are different for predecessor and successor. In particular, the successor, CNSL could never carry on the activities in the same way as Amoco because it could not carry on a wholly IRF trade.

I agree with Mr Bremner that this takes the effect of s279 too far for the following reasons.

The parties agree that both s279 and s951 are deeming provisions but differ as to the way in which the deeming should apply here. Both parties have relied on the case of Fowler v HMRC [2020] UKSC 22 as setting out the approach to deeming provisions. At paragraph 27 Lord Briggs said:

The parties agree that the purpose of s279 is clearly as an adjunct to s274 to create the ring fence so as to apply the special rules and the special higher rates of tax and create a separate trade even if there are other non-oil related activities. However, Mr Peacock submits that in so doing Parliament has made it abundantly clear what the extent of the deeming is: it is “for the purposes of the charge to corporation tax on income”. That is a purpose without relevant qualification.

However, I agree with Mr Bremner that as Mr Peacock submits the purpose of s279 is to apply the special rules and the special higher rates of tax to the IRF activities and it is this purpose which should be focussed upon. It specifically applies where a company carries on oil-related activities as part of a trade and it then carves those activities out as a separate trade for the application of the more limiting rules which follow and the higher rates of tax. To my mind, that is re-enforced by reference to the treatment as a separate trade being for the purposes of the “charge” to corporation tax on income as a separate trade. That focus on the charge to tax is then followed through in the subsequent provisions contained in ss279A, 279B and 279C CTA 2010. As Mr Bremner submitted the ring fence regime is in essence therefore concerned with the calculation of the charge to corporation tax.

I agree with Mr Peacock that capital allowances form part of the calculation of the corporation tax charge, but when considering the interaction with Part 22 (where that interaction is not expressly stated in the legislation) the purpose of s279 must be set alongside the purpose of Part 22. Part 22 provides rules to allow restructuring within a group of companies such that a trade (or part thereof) can be moved from one group company to another without triggering capital allowance charges and preserving the continuity of losses and capital allowances.

Inevitably, as in Falmer Jeans, the two group companies may carry on the activities of that trade or part trade differently and the focus is therefore on considering the activities of the notional trade to consider whether those are the same. Here the activities are still being carried on by CNSL such that what Millett J described as the notional trade is the same for both it and Amoco. As a matter of fact, CNSL was carrying on the activities of part of Amoco’s trade.

This conclusion also means that the intragroup transfer does not produce unexpected results for a group transfer – the TWDV is inherited by CNSL and CNSL is treated as if it had been carrying on the transferred trade since Amoco began to do so. It is then a question as to whether CNSL’s use of the assets gives rise to a disposal event just as it would be necessary to ask if there had been no transfer and a change of use by Amoco.

Mr Peacock submits that it is wrong to focus on “activities” in this way. He submits that s279 specifically applies in relation to the “activities” of the company and requires those activities to be considered as “distinct from all the other activities” of the company, whilst also badging those activities as a “separate trade”.

However, I agree with Mr Bremner that s951 CTA 2010 deems a notional trade is transferred where, as a matter of fact, the activities carried out by the transferor and transferee are the same. The activities may then be viewed through the s279 prism for the purposes of applying the specific charging regime to which s279 is directed, but that is a separate process to consideration of whether Part 22 applies.

Mr Peacock submitted that the word “activities” is used in both s951 CTA 2010 and s279 and must be assumed to have the same meaning. Consequently, when applying s951 CTA 2010 the reference to “activities” must be interpreted in line with the direction given in s279 when the very same concept is described. While it is clear that both sections use the same word, I consider that again the purpose of the use of each section must be taken into account in using the term. Section 951 CTA 2010 is concerned to identify whether a trade continues to be carried on; section 279 deals with the tax charge applicable to an ORF trade. Therefore the fact that “activities” is used in both does not undermine the conclusions reached above.

Therefore I conclude for the reasons stated that Issue 1 is answered yes – Part 22 applies to the Hive-down either on the basis that:

Mr Peacock submits the correct analysis is that on Hive-down if Part 22 applies, CNSL should be treated as inheriting the TWDV of Amoco and allocating it to two separate IRF and ORF capital allowances pools, apportioning by reference to anticipated throughput of the CATS Pipeline. I consider that this misses the step of the transfer of the tax written down value from Amoco to CNSL and the application of the disposal event provisions contained in s61 CAA.

I consider that to split the plant and machinery into two trades under s951 is inconsistent with the conclusion I have already reached that s279 is not to be applied within the deeming provisions of s951 CTA 2010. I conclude that consistent with Mr Justice Millett’s approach there is one “notional” trade transferred to CNSL by Amoco and acquired by CNSL even though CNSL carries it on as two trades by virtue of s279. Section 951 CTA 2010 does not look beyond whether the successor, CNSL, has stepped into the shoes of Amoco in relation to the capital allowances position relating to the CATS Pipeline. I see no problem as a matter of logic with concluding that CNSL inherits the TWDV of Amoco with the capital allowances inherited on the basis of one trade having been transferred, recognising in so doing that the tax consequences of the transfer itself are distinct from the tax consequences of use of the assets. It is then a question of whether that inherited position is continued or is altered by virtue of what CNSL does, or more particularly is deemed to do, with the CATS Pipeline. For the reasons I explain more fully below that is then applying the capital allowances code consistently.

The effect of s951 CTA 2010 applying is that CNSL as successor is to be treated under s948 as if it has been carrying on the transferred trade since Amoco began to do so, and anything done to or by Amoco is to be treated as having been done to or by CNSL. I struggle to find a way to read this provision to say that allocation to two pools for IRF and ORF is permitted under s948 given that Amoco did not allocate the CATS Pipeline other than to the IRF pool. Instead, I consider that it is the role of other provisions in the CAA 2001 to deal with the fact that CNSL carries on IRF and ORF trades, as I explain later.

Section 61(1)(e) CAA 2001 applies where plant or machinery begins to be used wholly or partly for purposes other than those of the qualifying activity.

The qualifying activity of Amoco was the IRF trade carried on by it. I have decided that CNSL is given the TWDV of the CATS Pipeline under s951 when it acquires and starts to carry on the “notional trade”. However, in starting to carry on the CATS Pipeline business, CNSL begins to use the CATS Pipeline for an ORF trade as well as the IRF trade. Both parties agree that the IRF trade and the ORF trade are separate qualifying activities.

Starting to use the plant and machinery for purposes which are not wholly IRF qualifying activity therefore triggers a disposal event under s61 CAA 2001. The value to be taken into account as the disposal value on that event is the market value of the assets capped at historic cost (i.e. the inherited historic cost of Amoco).

Mr Peacock submitted that CNSL did not “begin” to use the plant and machinery for purposes other than that of the IRF qualifying activity because to begin required that something else was done with the assets first and CNSL could never use them wholly for the IRF qualifying purpose.

I do not agree that “begin” indicates something happening before. As a matter of normal language “begin” means “perform or undergo the first part of an action or activity” (Oxford English Dictionary). CNSL “began” to use the CATS Pipeline for an ORF trade as soon as it acquired the CATS Pipeline.

In addition, as Mr Bremner submitted, CNSL is treated under s948 as having carried on the transferred trade since Amoco began to do so. Mr Peacock submits that this is an illustration of the error in applying Part 22 as CNSL could never have carried on the trade as Amoco did as it was not a deemed participator in the Everest field. However, I see little reason why for the application of Part 22 the effects of other tax computational provisions identifying what is and what is not an IRF trade should be relevant. As I have said previously, to do so is inconsistent with the approach set out by Mr Justice Millett in Falmer Jeans. Therefore, if this was necessary, Mr Peacock’s submission regarding “begins” is answered by CNSL inheriting Amoco’s “beginning”.

I therefore conclude that there is a disposal event under s61 CAA 2001 on CNSL beginning to use the CATS Pipeline for ORF activities. The value to be brought into account is the market value of the plant and machinery capped at the historic cost of £167 million. That historic cost was the basis on which the capital allowances had been claimed by Amoco. The calculations resulting from the bringing into account of the £167 million are not in dispute. The tax written down value of the CATS Pipeline was -£2 million and therefore there would be a balancing charge of £169,197,035 just as there would have been if Amoco had sold the CATS Pipeline for its market value.

Mr Peacock submitted that this case addresses highly technical legislation where no objectively “right” answer is apparent. He called into question HMRC’s apparent high-level analysis in correspondence to the complex interactions. However, I consider that having reached my conclusions of the matter technical analysis it is appropriate to stand back and consider how the conclusions fit within the tax code framework.

If Amoco had retained the plant and machinery and had started to use it for purposes other than its IRF qualifying activity a disposal event would have arisen.under s61 CAA. The market value of the assets capped at historic cost would have been brought into account. Under CNSL’s analysis the plant and machinery moves from being used in the IRF trade qualifying activity to being used in the IRF and ORF qualifying activities with dramatically different consequences simply as a result of an intragroup transfer for a consideration of $1.

Under CNSL’s preferred analysis, s951 CTA 2010 did not apply on Hive-down and the sale of the CATS Pipeline to CNSL was a disposal event such that Amoco brought into account only the $1 consideration under s61 CAA 2001. Alternatively, even if Part 22 applies the TWDV of Amoco is immediately apportioned between two pools for IRF and ORF activity in CNSL so that carrying on the ORF activity does not trigger a disposal event. Somehow, simply by virtue of the Hive-down, the plant and machinery can start to be used for purposes other than the qualifying activity of the IRF trade without the tax consequences which would have arisen if that change has taken place in Amoco. Furthermore, as Mr Bremner submits, CNSL’s analysis would leave them with tax depreciation of more than 65% of the cost, despite the fact that the CATS Pipeline had not depreciated in value.

There is no good reason why the interaction with the rules contained in s279 should have the result that the basic structure of the capital allowances code is side-stepped by interposing a subsidiary. I agree with the submission of Mr Bremner that this would be a perverse result. I consider that clear wording to achieve that result would be needed and no such wording has been identified. In Fowler terms the deeming effect of s279 would go too far and would produce “unjust, absurd or anomalous results”. (I recognise that these contextual considerations are altered if the CATS Election is considered to have the effect of causing Amoco to have had an IRF and ORF trade prior to the Hive-down, but for reasons I explained later I have concluded that the CATS Election did not have such effect.)

CNSL has two qualifying activities: the IRF activity and the ORF activity from Hive-down. Section 11 CAA 2001 requires that allowances under Part 2 of the CAA 2001 (i.e. the part dealing with plant and machinery allowances) must be calculated separately for each qualifying activity which a person carries on. In addition, where a person carries on more than one qualifying activity s53(2) CAA 2001 provides that expenditure relating to the different activities must not be allocated to the same pool. Therefore there must be an IRF pool and an ORF pool. Consequently CNSL must set up an IRF and ORF pool from Hive-down.

Furthermore, the result of s206 CAA 2001 is that a single asset pool must be set up for each of the IRF and ORF activities. That is because s206(2) CAA 2001 directs that where there is qualifying expenditure which is incurred by a person carrying on a qualifying activity and the expenditure is partly for the qualifying activity and partly for other purposes, the qualifying expenditure must be allocated to a single asset pool. The wording in subsection (3) makes the position clear. That states:

CNSL says (in the context of its preferred analysis which argues that there is no disposal event under s61 CAA 2001 on Hive-down and the TWDV is allocated between IRF and ORF pools on the basis of anticipated throughput) that expenditure should be apportioned between the two pools. HMRC says that 100% of the expenditure is added to each pool.

It is not necessary for me to decide which case is right on this matter of the allocation to pools. That is because, given the position I have reached, HMRC’s analysis results in no further charge on the sale of CNSL. While that sale gave rise to a further disposal event in the IRF single asset pool, this was again at market value capped at historic cost so no further balancing charge arose. Consequently, once it is concluded, as I have, that CNSL inherited Amoco’s tax written down value on the transfer of the CATS Pipeline to it, but the use of the CATS Pipeline for ORF activity triggered a £167 million disposal event, CNSL has no reason to challenge the allocation of £167 million to each of the IRF and ORF pools.

However, given the dispute about the allocation of the disposal value brought into account as a result of CNSL starting to use the CATS Pipeline for ORF activity, I have decided that it is appropriate to briefly address this allocation issue (which also arises under the alternative analyses) which is likely to be of wider interest. To be clear though, CNSL disputes this analysis and I have not set out all the arguments relied upon by Mr Peacock.

I consider that HMRC is correct that there is no legislative basis for an apportionment at the stage of allocating qualifying expenditure to pools (as CNSL seeks to do). Under section 11(4) CAA 2001, expenditure is “qualifying expenditure” if (inter alia) it is capital expenditure on the provision of plant or machinery “wholly or partly for the purposes of the qualifying activity”. Although Section 11 CAA 2001 envisages that the expenditure may be wholly or partly for the purposes of the qualifying activity it does not contain any apportionment provision. Section 11(3) directs that plant and machinery allowances must be calculated for each qualifying activity a person carries on, but is silent about apportioning expenditure. I therefore conclude that the qualifying expenditure under s11 CAA 2001 is the total even where it is only partly for the purposes of a qualifying activity.

Indeed, when asked by me at the hearing, Mr Peacock confirmed that there was no legislation he could point to specifically directing an apportionment of qualifying expenditure. He relied upon s11(3) CAA 2001 combined with s53 CAA 2001. Section 53 CAA 2001 states that expenditure relating to different activities must not be allocated to the same pool, but that is directing that two pools are set up, not what amounts are allocated to them. Under HMRC’s interpretation expenditure is allocated to two pools; it is not expenditure relating to different activities being allocated to one pool.

Mr Peacock also relied upon s7 CAA 2001 which says that if an allowance is made under Part 2 (plant and machinery allowances) it must not be made under any other part; but here there is no allowance being made under another part.

HMRC relies upon s57 and s206(3) CAA 2001. Section 57 provides that a person's available qualifying expenditure in a pool for a chargeable period also includes any amount allocated to the pool for that period under s206(3) CAA 2001. Section 206(3) directs that if a person is required to bring a disposal value into account in a pool for a chargeable period because the plant or machinery begins to be used partly for purposes other than those of the qualifying activity, an amount equal to that disposal value is allocated (as expenditure on the plant or machinery) to a single asset pool for that chargeable period. Therefore HMRC say that the £167 million disposal value is not only taken into account in the IRF pool but is also treated as qualifying expenditure in the ORF pool. It is then s207 CAA 2001 which sets out provisions for just and reasonable adjustment but that only applies to the calculation of subsequent balancing charges and writing down allowances.

To understand how this works in practice I asked HMRC for a worked example, which I set out below as it illustrates that allocating the qualifying expenditure to each of the pools does not cause there to be double allowances.

The table illustrates an example where an asset is acquired for £100 with an intention to use it 50% for qualifying activity 1 and 50% for qualifying activity 2. That was in fact the actual use in year 1 but in year 2 the actual use changes to 75% for qualifying activity 1 and 25% for qualifying activity 2.

One can see that the allocation of 100% of the qualifying expenditure to each of the pools does not mean that the taxpayer receives capital allowances twice. The adjustment for use is applied at the level of the allowances.

For the reasons briefly noted above, I considered the 100% allocation to each of the IRF and ORF pools to be the correct approach under the legislation.

By this stage CNSL had an IRF pool and an ORF pool following either party’s case.

HMRC maintain that:

Consequently, HMRC say that there is no balancing charge on the share sale. While disputing the earlier conclusions, this resulting conclusion clearly would not be challenged by CNSL.

This issue only arises if, as I have, it is decided that there was a transfer of a trade within Part 22 on the Hive-down.

The question is whether, as a result of the CATS Election, and following the enactment of CTA 2010, Amoco did not, in fact, carry out a wholly IRF trade at the date of the Hive-down. In essence, should Amoco be considered by virtue of the Election not to be carrying on one IRF trade but an IRF and an ORF trade immediately before the Hive-down such that it transferred two trades to CNSL? If so, CNSL maintains that Part 22 still does not apply as the trades in CNSL are not the same and are not constituted of the same activities as in Amoco. If, however, Part 22 is considered to apply, CNSL maintains that there is still no difference as a result of the Election (as CNSL is unable to carry on the IRF trade). However, under HMRC’s analyses there would then be two trades transferred on Hive-down with a balancing charge arising in relation to the partial cessation of the IRF trade by CNSL after that transfer.

Prior to the Hive down Amoco submitted its corporation tax returns on the basis that all of its CATS Pipeline activities formed part of its “ring fence trade” as defined by s277 CTA on the basis that:

The Finance Act 1994 introduced rules which enabled the company to make an election so that only tariffs earned in respect of assets used to get hydrocarbons from PRT fields would be liable to PRT. If as in Amoco’s case, a pipeline was used to transport hydrocarbons from non-PRT fields such an election would mean that the company would not be liable to PRT on those amounts.

As stated in the preamble to the OTA, it is an Act to bring sums received or receivable into charge to PRT.

Section 6(2) OTA, so far as relevant, provides:

Section 6(4) OTA then excludes certain amounts from the s6(2) definition by stating that certain specified amounts do “not constitute a tariff receipt for the purposes of” the OTA.

The CTA then picks up the definition of “tariff receipt” in s291(9) which states that “tariff receipt” has the same meaning as in the OTA. That definition is used in section 291 as one of the conditions for amounts to be treated as receipts of these separate ring fence trade under s279 CTA. The condition is set out in s291(2) which, so far as relevant, states that:

The election provisions are contained in sections 231-234 Finance Act 1994.

Section 231 provides so far as relevant:

Mr Bremner noted that it was understood that the provisions were specifically directed at the CATS Pipeline.

Section 232 FA 1994 then restricts a participator’s allowable expenditure on elected assets where the election is made.

Section 233 FA 1994 is headed “Tax relief for certain receipts of an electing participator”. It then proceeds to say, so far as relevant:

The Oil Taxation Acts are defined as Parts I and III of the Principal Act, the 1983 Act and any other enactment relating to PRT. Section 234(1) FA 1994 states that expressions used in the Chapter have the same meaning as in the OTA. Section 15(2) OTA defines “the Principal Act” as the Oil Taxation Act 1975.

In essence, Mr Peacock says that where there was a pipeline which was used to transport hydrocarbons from non-PRT fields, an election could be made under provisions introduced by Finance Act 1994 so that sums received from that activity would not be tariff receipts. Under s233 FA 1994 the CATS Election means that Amoco was treated as not receiving tariff receipts. The provision states that the sums received in respect of use in connection with a non-PRT field shall not be regarded as a tariff receipt for the purposes of the Oil Taxation Acts. When the corporation tax provisions are considered the ring fence provisions include tariff receipts as defined by the Oil Taxation Act 1983. Once an election is made such that sums are no longer regarded as tariff receipts then it is also not a tariff receipt for the ring fence provisions in s291 CTA. Consequently once the Election was made Amoco’s receipts from transporting hydrocarbons from non-PRT fields were not tariff receipts for ring fence purposes and Amoco had a trade which was partly IRF and partly ORF. The link between the FA 1994 provisions and the CTA provisions was made clear as a result of the rewrite of the corporation tax rules in 2010.

In relation to HMRC’s argument that there is greater need for clawback of allowances in CNSL if this is right, as too many allowances would have been given, the amount of tax paid by Amoco would also have been incorrectly inflated. In so far as HMRC seek to rely on a press release issued in relation to the FA 1994, that is impermissible; although even if one did consider the press release it would add little to the debate.

Mr Bremner says:

Mr Bremner’s submissions included ones addressing essentially matters of fairness in allowing CNSL to depart from a position adopted by Amoco. However, I consider that the heart of the dispute regarding the effect of the CATS Election concerns the interpretation and application of, in particular, s233(1) and the wording that sums (to which the Election applied) shall “not be regarded as a tariff receipt for the purposes of the Oil Taxation Acts”.

It has been made abundantly clear by the courts that a purposive approach to the interpretation of legislation should be applied. I agree with Mr Bremner that the draftsman has used particular phrasing when using “not be regarded as” rather than simply saying that the amounts would not be tariff receipts for the purposes of the Oil Taxation Acts. I agree that the natural implication of the words “not to be regarded as” is that otherwise the amount would be a tariff receipt. As Mr Bremner submitted, the definition of “tariff receipt” used in s291(9) CTA to identify the amounts which are treated as receipts of a separate (IRF) trade under s279 remains unchanged.

To my mind the conclusion that the effect of the CATS Election is confined to PRT is reinforced by the drafting in section 233 FA 1994. Amounts are not regarded as “tariff receipts” for the purposes of the Oil Taxation Acts, and the definition of Oil Taxation Acts is specifically linked to any enactment relating to PRT. That is because the draughtsman has made that clear. “Oil Tax Acts” are defined as “Parts I and III of the principal Act, the 1983 Act and any other enactment relating to petroleum revenue tax.” As explained above, “the Principal Act” is the Oil Taxation Act 1975 in which Part 1 sets out the core provisions of PRT and Part III sets out miscellaneous and general provisions dealing with PRT. The OTA is also an act dealing with PRT. The draughtsman limits other references to enactments relating to PRT. Consequently, the draftsman has specifically narrowed the application of the FA 1994 provisions via these references to PRT.

Mr Bremner also submitted that references should be made to the fact that the election provisions were contained in Chapter 5 FA 1994 all of which dealt with PRT/oil tax and not in the corporation tax part of FA 1994. I agree that this is also informative.

For these reasons I therefore conclude that the provisions introduced in FA 1994 were focused entirely on PRT. There was no reference to provisions dealing with corporation tax on ring fence trades and I see no basis to interpret the election provisions as having a purpose beyond PRT.

I would note that Mr Bremner sought to address the Press Release accompanying the FA 1994 provisions as context rather than as an aid to interpretation of the wording, but I consider that there is no need to stray into consideration of a press release. I agree with Mr Peacock on this point that doing so is likely to stray beyond the limits of authorities to which reference should be made in construing legislation.

Mr Peacock submitted that the interaction between the Finance Act 1994 provisions and the ring fence trade provisions was only clear following the rewrite in CTA 2010. I note the submission made by Mr Bremner relying upon the explanatory notes to the rewrite that the definition “tariff receipt” had been included as an aid to users of the legislation. As is accepted by both parties the tax law rewrite was not designed to alter the substance of the rewritten provisions and there is nothing to suggest that the definition of tariff receipts in section 291(9) CTA seeks to make any alteration to the scope of the corporation tax ring fence.

I therefore conclude that:

As a result the Appellant’s appeal is dismissed and the Closure Notice is confirmed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.