Cats North Sea Limited v The Commissioners for HMRC

Section 270 provides an overview of Part 8 CTA 2010 explaining at s270(1) that “This Part is about the corporation tax treatment of oil activities”.

The section proceeds to explain that Chapter 2 “contains basic definitions used in this Part” (ss2), that Chapter 3 “treats oil-related activities as a separate trade” (ss3), that “Chapter 3A makes provision about the rates at which corporation tax is charged on ring fence profits” (ss3A), and that Chapter 4 makes provision about the calculation of profits from oil activities (ss4). The remaining chapters 5 to 9 are explained to relate to a supplementary charge in respect of ring fence trades and provisions concerning the reduction of that charge.

The meaning of “oil-related activities” is given in s274 which provides:

“Section 274 “Oil related activities”

In this Part “oil-related activities” means–

(a)

oil extraction activities, and

(b)

any activities consisting of the acquisition, enjoyment or exploitation of oil rights.”

Section 272 contains the definition of “Oil extraction activities” and provides as relevant as follows:

“(1)

In this Part “oil extraction activities” means activities within any of subsections (2) to (5) (but see also section 291(6)) [set out below at [24]].

…

(3)

Activities of a company in extracting, or causing to be extracted for it, oil at any place in the United Kingdom or a designated area under rights which—

(a)

authorise the extraction, and

(b)

are held by it or by a company associated with it.

(4)

Activities of a company in transporting, or causing to be transported for it, oil extracted at any such place not on dry land under rights which—

(a)

authorise the extraction, and

(b)

are held as mentioned in subsection (3)(b),

if the transportation meets condition A or B (see subsections (6) and (7))[conditions concerning place where oil transported to]”

Section 279, whose scope is central to the issues in this appeal, provides as follows:

“279 Oil-related activities treated as separate trade

If a company carries on any oil-related activities as part of a trade, those activities are treated for the purposes of the charge to corporation tax on income as a separate trade, distinct from all other activities carried on by the company as part of the trade.”

As will be seen a key feature driving the different tax treatment of the CATS Pipeline interest in the hands of Amoco as compared with the treatment in the hands of CNSL is that Amoco is deemed to be a “participator” in an oilfield. To understand how that deeming arises, and its effects, it is necessary to piece together several different legislative provisions from different Acts.

Section 278 defines a “participator” by reference to s12 of the Oil Taxation Act 1975. In simple terms that will include a person with an interest in the field and the right to extract oil/gas from it.

The concept of “participator” then becomes relevant under CTA 2010 in the following provision which provides for the circumstances in which sums are treated as receipts of the separate trade mentioned in s279 above.

Section 291 provides:

For the purposes of the above section, s291(9) provides that “tariff receipt” and “tax-exempt tariff receipt” have the same meaning as in the Oil Taxation Act 1983. The definition of “participator” is enlarged, for the purposes of the relevant oil taxation legislation by the provisions of s98(1) and (2) Finance Act 1999 (“FA 1999”). Those subsections provide that someone who has ceased to be participator is nevertheless treated as if they continued to be a participator in the oil field provided certain conditions are met.

“98 Qualifying assets.

(1)Subsection (2) below applies where—

(a)

an asset which is not a mobile asset is a qualifying asset for the purposes of the Oil Taxation Act 1983 in relation to a person (“the taxpayer”) who is a participator in an oil field (“the field”);

(b)

tariff receipts, tax-exempt tariffing receipts or disposal receipts of the taxpayer which are referable to the asset are attributable to the field for a chargeable period (“the earlier period”);

(c)

receipts of the taxpayer which are referable to the asset for a subsequent chargeable period (“the later period”) would not, apart from this section, be tariff receipts , tax-exempt tariffing receipts or disposal receipts attributable to the field for that period as a result of—

(i)

the taxpayer’s ceasing to be a participator in the field; or

(ii)

his becoming a participator in another oil field; and

(d)

not more than two chargeable periods intervene between the earlier period and the later period.

(2)

The Oil Taxation Acts shall have effect, in relation to the later period and any subsequent chargeable period, as if—

(a)

receipts of the taxpayer which are referable to the asset for the period concerned were tariff receipts, tax-exempt tariffing receipts, or disposal receipts attributable to the field for that period; and

(b)

in a case falling within subsection (1)(c)(i) above, the taxpayer continued to be a participator in the field.”

In high-level terms the effect of these provisions is that a person who is no longer an oil field licensee but who, as Amoco did, continued to earn income from charging others for the use of its pipeline, will still be regarded as a participator such that the pipeline income is classified as income within the oil trade ring fence.

Part 22 concerns miscellaneous provisions including in Chapter 1 “Transfers of trade without a change of ownership”.

Section 940A provides an Overview of that chapter as follows:

“940A Overview of Chapter

(1)

This Chapter contains rules for cases where a trade is transferred between companies within the charge to tax and certain conditions as to common ownership of the trade are met.

(2)

Section 940B explains when there is a transfer of a trade for the purposes of this Chapter.

(3)

Sections 940C to 943 contain provision about when this Chapter applies to a transfer of a trade.

(4)

Sections 944 to 950 set out the effects of this Chapter in relation to a transfer to which it applies.

(5)

Sections 951 to 953 contain supplementary provision.”

Section 940B provides:

“940B Meaning of “transfer of a trade” and related expressions

(1)

This section applies for the purposes of this Chapter.

(2)

If, on a company ceasing to carry on a trade, another company begins to carry it on, there is a transfer of a trade.

(3)

The trade that is transferred is referred to in this Chapter as “the transferred trade”.

(4)

In relation to a transfer of a trade—

“the predecessor” means the company which ceases to carry on the trade, and

“the successor” means the company which begins to carry on the trade.

(5)

In this Chapter, except in so far as the context otherwise requires—

(a)

references to a trade include an office, and

(b)

references to carrying on a trade include holding an office.”

Section 948 provides:

“948 Modified application of CAA 2001

(1)

If this Chapter applies to a transfer of a trade, CAA 2001 has effect subject to subsections (2) to (4).

(2)

Any allowances or charges are to be made to or on the successor if such allowances or charges would have been made to or on the predecessor had the predecessor continued to carry on the transferred trade.

(3)

A transfer of assets from the predecessor to the successor does not of itself give rise to any allowances or charges if—

(a)

the transfer of the assets is made on the transfer of the transferred trade, and

“(b)

the assets are in use for the purposes of that trade.

(4)

For the purpose of determining the amount of the allowances or charges mentioned in subsection (2) to be made to the successor—

(a)

the successor is to be treated as if it has been carrying on the transferred trade since the predecessor began to do so, and

(b)

anything done to or by the predecessor is to be treated as having been done to or by the successor.”

Section 951 CTA 2010 provides for certain transfers to be treated as a transfer of a trade. Along with s279 CTA 2010, this is the other provision whose interpretation is central to the appeal:

There was no dispute between the parties before the FTT as to the underlying facts which can be summarised as follows.

CNSL (CATS North Sea Limited) was incorporated on 6 October 2014 as a wholly owned subsidiary of Amoco (U.K.) Exploration Company LLC, part of the BP group. CNSL was dormant until 1 October 2015. Amoco was a member of the BP group at all relevant times (FTT [7]).

The CATS Pipeline was built to transport hydrocarbons from the Everest/Lomond fields in the North Sea to mainland UK. Throughput began in May 1993. BP had first incurred capital expenditure on the CATS Pipeline in 1990 (FTT [8]). Immediately prior to the Hive-Down (to which we refer below), Amoco held a c36.2% interest in the CATS Pipeline, operated as a contractual joint venture (FTT [8]).The majority interest (c.63.8%) was held by BG Group until its disposal to Kellas (a company ultimately controlled by Antin Infrastructure Partners Luxembourg II SARL (“Antin”)) in 2014 (FTT [9]).

In July 2014, Antin (via Kellas) offered to buy Amoco’s interest in the CATS Pipeline (FTT [10]).

The disposal occurred in two stages:

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 CTA 2010. On completion of the Share Sale on 17 December 2015: (1) CNSL ceased to be a member of the BP group (and, consequently, the remaining members of that group ceased to be “associated companies” of CNSL for the purposes of s271 CTA 2010); and (2) CNSL became a member of a group of companies ultimately controlled by Antin (none of which were companies holding rights authorising the extraction of oil at any place in the United Kingdom or any designated area, for the purposes of s272 CTA 2010) (FTT [12]).

In the remainder of this decision, we will use the IRF and ORF, in line with the parties’ submissions, and the FTT Decision, to denote “Inside Ring Fence” and “Outside Ring fence”. As HMRC’s written submissions correctly emphasise, the reference to inside the ring fence means a trade which consists of “oil-related activities” (as defined) and which is treated by s279 as a separate trade. Where the short-hand term ORF trade is used this refers to activities which are not “oil-related activities” and which are not therefore treated as distinct from other activities carried on by the company as part of its trade.

Before the Hive-Down, Amoco treated all CATS Pipeline activities as part of its single ring fence trade (IRF) for corporation tax purposes, including transportation of BP and non-BP hydrocarbons. This was based on CTA 2010 ss272(4), 274 and 291(6) (FTT [13-14]). Amoco claimed capital allowances at IRF rates on qualifying expenditure of £167,467,319.35 on CATS plant and machinery (FTT [14]).

After the Hive-Down CNSL was not a participator in the Everest oil and gas field, but it was associated with a person (Amoco) who was a participator in the field. As a result, the transportation of BP group hydrocarbons by CNSL was still an “oil-related activity” (an IRF trade) whereas the transportation of non-BP hydrocarbons by CNSL was not an “oil-related activity” (and so was an ORF trade) (FTT [5]).

The following explanation is helpful to understand this point. As explained by the Appellant, in contrast to Amoco, CNSL was not an actual or deemed participator in the Everest field and accordingly, the rule in s291(6) CTA 2010 (see above) did not apply to CNSL. So applying the rules set out in CTA 2010 ss272(4) and 274, CNSL’s activities in transporting non-BP group hydrocarbons through the CATS Pipeline formed its ORF trade, whilst its activities transporting BP group hydrocarbons through the CATS Pipeline formed its IRF trade.

In other words, as a participator, all of Amoco’s transportation activities were treated under 291(6)(a) as oil extraction activities and therefore oil-related activities. That provision could not apply to CNSL, who was not a participator in an oil-field with the effect that some transportation was oil-related and other transportation not. Under 272(4), CNSL’s transportation of hydrocarbons, where extraction rights were held by an associated company (i.e. the BP group) were oil extraction activities and therefore oil related. In contrast, transportation of non-BP group / third party hydrocarbons was not covered by this provision (because the hydrocarbons were extracted under the rights of a third party, not the rights of CNSL or a related company). Those transportation activities were therefore ORF.

At the time of the Hive-Down, CNSL anticipated 13.55% of future tariff income would be IRF and 86.45% ORF. In fact, between Hive-Down and Share Sale, 11% of CNSL’s tariff income was IRF and 89% ORF (FTT [16] - [17]).

After the Share Sale, CNSL’s activities were entirely ORF ([17]-[18]).

Amoco filed its return on the basis of a wholly IRF trade. CNSL filed on the basis of mixed IRF/ORF trades post-Hive-Down ([14-15]). CNSL returned an IRF balancing charge of c.£23m on cessation of its IRF trade at the Share Sale ([18]).

Following an enquiry, HMRC issued a closure notice in respect of CNSL’s accounting period ended 31 December 2015 on 30 March 2021. The closure notice concluded a balancing charge of £169,197,035 arose on the hive-down, or in the alternative, if Part 22 did not apply, a balancing charge of £166,094,888 when CNSL left the BP group upon the share sale. CNSL appealed against the conclusions in the closure notice.

We address the detail of the FTT’s reasoning as appropriate in our discussion of the grounds and issues. In high-level terms the FTT decided as follows.

On the issue of whether Part 22 applied (FTT [69] –[102]), the FTT set out the purpose of Part 22, namely that it was intended 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”. There was no reason, the FTT considered, why the split into two trades (especially where that was a matter of “tax legislation deeming” under s279) should offend that underlying purpose (FTT [79]). Having considered Falmer Jeans, a case relied on by HMRC, and agreeing with HMRC that the focus was on the activities, the FTT noted that CNSL in fact provided the CATS Pipeline for the transportation of BP group and non BP group hydrocarbons just as Amoco did and noted that the difference was the “effect of the corporation tax oil rules on the charging of those two parts of the activity”.

Section 279’s effect was confined to the computation of ring-fence profits. Where, as a matter of fact, the activities carried out by the transferor and transferee were the same, there was then under s279 a separate process of considering which specific charging regime applied (FTT [95]–[100]). Applying s951, the FTT found that CNSL began to carry on the activities of part of Amoco’s trade and that the deeming provisions allow this to be treated as a transfer of a trade even though CNSL carried on two trades by virtue of s279 (FTT [78], [81], [102]).

Having found Part 22 applied, the FTT held that CNSL inherited Amoco’s tax written down value under s948 and was treated as having carried on the transferred trade since Amoco began to do so (FTT [104]–[105]). The FTT rejected CNSL’s argument that no balancing charge could arise, concluding that the transfer itself did not trigger a charge (as section 948(3) prevents this), but that CNSL’s subsequent use of the CATS Pipeline partly for ORF purposes constituted a disposal event under s61(1)(e) CAA 2001 (FTT [106]–[108]). The disposal value was the market value capped at historic cost (£167m), resulting in a balancing charge of £169,197,035 (Footnote: ²) (FTT [112]). The FTT added that this interpretation avoided anomalous results and aligned with the structure of the capital allowances code, preventing the “perverse result” that allowances claimed by Amoco would escape clawback merely because of an intra-group transfer (FTT [113]–[116]).

Although obiter, the FTT addressed a dispute between the parties as to the correct method for pooling qualifying expenditure going on to reject CNSL’s approach of up-front apportionment of the $1 acquisition cost between pools, finding no statutory basis for such apportionment at the allocation stage (FTT [122]–[124]). Instead, the FTT accepted HMRC’s interpretation that the full amount should be allocated to each single-asset pool, supported by ss206(3) and 57, which require an amount equal to the disposal value to be treated as qualifying expenditure when an asset begins to be used partly for other purposes (FTT [125]). Relief was then adjusted by s207 through “just and reasonable” adjustments to allowances and charges, ensuring no double counting. The FTT illustrated this with a worked example and concluded that HMRC’s approach reflected the statutory scheme (FTT [126]–[129]).

CNSL’s appeal, in summary, raises the following grounds and issues.

As explained in CNSL’s skeleton, the following issues may also arise depending on how the grounds are resolved. These are not formally advanced as a ground of appeal as the FTT’s reasoning on the first issue was obiter, and the case of the second issue would have been obiter if the FTT had decided it):

The parties’ cases before us and before the FTT raised a number of arguments in the alternative dependent on the particular permutation of how the issues described above were resolved. These were referred to as the parties’ primary, secondary and tertiary cases. We address the detailed arguments made under these cases as appropriate when dealing with the respective grounds, however at this stage it is convenient to map out the outline of those issues below to appreciate how they fit together and see the various financial impact of each.

It was not disputed that in general terms at least, Part 22 of CTA 2010 provides rules for transfers of a trade (or part of a trade) between companies under common ownership, so that such transfers do not trigger capital allowance charges and continuity of tax treatment is preserved. Both parties agree that the ownership and tax conditions in Part 22 were met on the hive-down and that (leaving aside the ring-fence rules in Part 8, the scope of which is at the heart of this case), the hive down transaction would have fallen within Part 22. The parties also agree that Amoco transferred activities forming part of its IRF trade to CNSL.

As regards Part 22 and ss940B and 951, which set out the relevant tests for determining whether a transfer of a trade occurs, including deeming provisions for part-trade transfers, both parties also accept that the simple “whole-trade” succession case in s940B and the “whole-to-part” case in s951(1) are not engaged on these facts. Section 940B requires cessation of a whole trade and commencement of that trade by the successor. That did not happen on the facts here because Amoco’s wider IRF trade continued after the hive-down. Subsection 951(1) applies where a whole trade of the transferor becomes part of the transferee’s trade. Again, that did not happen here because Amoco did not cease its entire IRF trade, only part of it (the CATS Pipeline).

The debate thus focussed on s951(3) (which engaged the question of transfers of a part of a trade) and in particular how that was to be interpreted in the light of s279 in Part 8, a provision which deemed there to be a separate trade in respect of oil-related activities.

CNSL argue s279 prevents there being a transfer of trade. That was because s279 requires oil-related activities to be treated as separate trades for all corporation tax purposes, including capital allowances. Accordingly, whereas Amoco carried on a single IRF trade before the hive-down, CNSL, by statutory deeming under section 279, carried on two distinct trades, IRF (in respect of transportation of BP group hydrocarbons) and ORF (in respect of transportation of non-BP group hydrocarbons), immediately after the transfer. In view of that separation CNSL did not (and could not) carry on Amoco’s (wholly IRF) trade or any part of its trade.

HMRC’s case is that, for a number of reasons, s279 does not prevent there being a transfer of trade under s951(3).

In agreement with HMRC, the FTT concluded that Part 22 applied to the hive-down, rejecting CNSL’s submission that s279 prevented its operation.

We turn then to address the central issue of whether, and if so how, s279, is taken account of when interpreting the transfer of trade provisions, in particular s951(3).

HMRC’s argument that s279 limited to charging / calculation and not relevant to Part 22

HMRC’s first line of argument focuses on the function of s279. Noting the formulation, “for the purposes of the charge to corporation tax on income” the section directs that the oil-related component of a trade is to be treated as a separate trade solely to compute the appropriate ring-fence rate of tax. In oral submissions, Mr Bremner KC emphasised that the function of s 279 is simply to carve out a measure of profit, so that the correct ring-fence rate and other charging consequences can be applied; it is not designed to determine whether, as a matter of corporation tax structure, a transfer of a trade or part-trade has occurred under Part 22, nor to control whether the predecessor/successor machinery in ss 948–951 applies. Thus, s 279 determines how profits are taxed, whereas Part 22 determines whether a trade has been transferred.

CNSL submits that HMRC’s attempt to confine s 279 to matters of “charge” purely for the application of a rate is untenable because the provision does far more than identify a computational slice of income: it mandates that oil-related activities are “treated as a separate trade”. That represents a structural reorganisation of the taxpayer’s trading position for all corporation tax purposes, not merely for applying the ring-fence rate.

We start by noting that both s279 and s951(3) are deeming rules in that s279 deems the carrying on of oil-related activities to constitute a separate trade for the purposes of the charge to corporation tax, and s951(3) is a part of a suite of provisions which expand the meaning of what is considered as a “transfer of trade” under the basic definition provided at s940B.

It is common ground that in that respect the principles set out by the Supreme Court in Fowler v HMRC [2020] UKSC 22 (at [27]) are relevant. There it was explained in summary that:

As regards construction of the statute, as we explain below, we consider the structure and framing of the legislation in which s279 sits, points against HMRC’s case that s279 has a limited function of demarcating a stream of profits to which a different rate is then applied. We prefer the competing view of Mr Peacock KC that, as he put it, Part 8 is a “comprehensive mini-corporation tax code to deal with oil-related activities”.

Having said that, the further point to note at the outset as regards construction of s279 is that the deeming is limited to activities within a company which is carrying on both activities which are “oil-related” and those which are not. It does not apply – and does not need to apply – where a company is carrying on entirely oil-related activities. Nor does it, as CNSL suggested, extend to preventing there being an identity of trade between two different parties for the purposes of Part 22.

Another feature that is apparent from the outset in relation to the statutory scheme is that the question of who it is that carries on the activity, and their relationship to others and to oil fields is integral to whether an activity is “oil-related” and thus whether it falls within the ring-fence. Thus ring-fence consequences hinge on the status of a “participator” (defined by reference to rights and interests under petroleum licences). Whether a company is a participator dictates the treatment of its field-related activities (OTA 1975 s12). That the concept of “oil-related activities” is influenced by the company’s legal relationship to the field and other parties is readily apparent when the legislation is applied to the facts here. As Mr Peacock explained: Amoco’s pipeline operations were wholly within the ring-fence because Amoco’s status made those activities ring-fence activities, whereas CNSL, which lacked that status necessarily carried on some of the same physical operations outside the ring-fence.We return to this point when dealing with HMRC’s arguments on purpose / absurd consequences if CNSL’s interpretation is correct.

The statutory context for Part 8 of CTA 2010, in which s279 sits, is helpfully signposted by the introductory provision to that Part, s270, which states that the Part concerns the “corporation tax treatment of oil activities”. The provision explains that Chapter 2 sets out the basic definitions and that Chapter 3 (the chapter which contains s279) treats oil-related activities as a separate trade.

The remaining chapters concern not only rates (Chapter 3A), but also calculation of profits from oil activities (Chapter 4), with Chapters 5 to 9 dealing with ring fence expenditure supplement, supplementary charges and reductions to that in respect of ring fence trades. All of those subsequent chapters are against the backdrop of Chapter 3 having first treated oil related activities as a separate trade. That framing is, in our view, more consistent with Parliament intending a comprehensive regime governing how oil-related activities are to be recognised, computed, and charged, rather than a set of provisions confined to identifying the rate of tax ultimately applied.

By defining the trade “for the purposes of the charge”, s279 governs the identification, computation and allocation of the profits to be charged, not merely the rate at which an already computed amount is taxed. As a matter of ordinary interpretation that phrase encompasses not only the rate of tax but also the calculation of profits and allowances. Although HMRC place emphasis on the use of the term “charge”, it is in our view consistent with all the rules going to calculation of amount to which a rate is then applied. It is moreover consistent with s270 telling us the chapter is about the corporation tax treatment of oil related activities. It is notable also that s279 is not restricted to the purposes of particular provisions unique to the oil ring fence rate, or for the purposes of the Part, but is expressed to apply more generally to the corporation tax charge (without limitation). Another way of understanding this is that insofar as it matters within the corporation tax legislation whether what is being carried on is a separate trade, then this provision tells one that the oil related activities partly carried on within a company are to be considered a separate trade.

We thus agree with CNSL that s279 is part of a wider code that adapts the corporation tax regime to treat oil-related activities as separate and distinct from other activities of the company. The purpose of that wider code is to “ring fence” oil and gas production activity and tax profits from those activities separately from other trades/activities. The purpose of designating certain activities as a separate trade must be to determine the way in which the corporation tax code as a whole applies to them. The main effect of the deeming is in relation to the deductibility of expenditure, the availability of allowances and the use of losses and reliefs. The change of ownership provisions are part of that code - they tell you what losses and allowances are available to the successor.

At the level of this argument, there is nothing on the face of it in this interpretation (whereby separation of oil related activities is taken account of just as much when it comes to provisions outside of the Part) which is contrary to the purpose of Part 8 (i.e. of explaining the regime that applies for oil related activities).

It also might be queried what the purpose of the “separate trade” provision would be if HMRC’s concept of the provision having limited scope were correct. It would on their view be enough simply to demarcate profit by reference to demarcated income and expenditure (in other words just refer to income and expenditure arising from the oil-related activities) to derive a figure to which the rate could be applied. The provision does not do that however but goes to the trouble of stipulating that the activities constitute a separate trade for corporation tax purposes. The reference to there being a separate “trade” must be given meaning. It is also notable that the concept of “oil-related activities” is used to define ring-fenced tradeprovisions for capital gains tax purposes (addressed in Part VI Taxation of Chargeable Gains Act 1992) with s198 in that Part (concerning replacement of business assets used in connection with oil fields) defining “ring fence trade” as consisting of activities falling within the definition of “oil-related activities” in legislative provisions which include mention of s274 CTA 2010.

Accordingly, s279 in our view is doing more than apportioning profits (already calculated) for the purpose of applying a separate rate. Rather it is saying that one should calculate profits on the basis oil-related activities are a separate trade.

It is also helpful to test the issue of scope of s279 from the perspective of Part 22 and check whether CNSL’s broader role for s279 offends the purpose of Part 22. The purpose of Part 22 (including s951) is to treat trades and activities carried on by a successor as the same as trades and activities carried on by a predecessor in certain circumstances. We agree with CNSL that it is not a general tax neutrality rule (in other words a rule to preserve the tax attributes following an intra group transaction). Rather it is a scheme whereby the predecessor and successor are only subject to the same tax treatment in certain prescribed circumstances. This is consistent with Millet J’s reasoning in Falmer Jeans which we come on to below. In that light, there is no issue here about the purpose of Part 22 being undermined by CNSL’s interpretation of s279.

By way of support for their interpretation CNSL also rely on s949 CTA 2010, which removes the s948 deeming where the transferee is a dual-resident investment company (“DRIC”) and instead forces a market-value result. As they put it, this shows that Parliament did not intend tax-neutral treatment under Part 22 where the transferor and transferee sit in different tax regimes: in the DRIC case, neutrality is switched off and a market-value rule applies. CNSL say that this policy choice is relevant when testing the rival submissions: it demonstrates that s948 is not designed to override structural differences of regime, and the same principle should apply where Amoco’s trade is statutorily a single IRF trade, but CNSL’s activities are, by s279 and CAA s162, split into IRF and ORF trades from the outset. Mr Bremner’s response is that this point detracts from rather than assists CNSL’s case: Parliament made an express carve-out only for DRICs, and the absence of any similar express exception for Part 8 ring-fence cases shows that Part 22 should operate without regard to IRF/ORF differences.

We do not consider the existence of these provisions helps either way in interpreting the scope of Part 22 vis a vis s279 in that there did not appear to be any analogue in the DRIC regime to the separate trade provision of s279. The provision simply illustrates that there are boundaries to the tax neutralising effect of s948 but it is not possible to discern a wider point of principle from that as CNSL invite, or conversely consider, as HMRC suggest, that because no similar provision was made for oil trade ring fenced trade that must thereby fall within the provision.

Mr Peacock also referred to sections 944D and 944E. These provisions, appearing in Part 22, made modifications to certain provisions in Part 8 (s303B and s303D) in relation to the treatment of certain losses (termed “non-decommissioning loss”). The modifications were stated in subsection (1) of each provision to apply in circumstances where “this Chapter” (i.e. Chapter 1 of Part 22) applied to a transfer of trade and the trade was a “ring fence trade” (i.e. under Part 8). HMRC point out these sections were enacted by Finance (No.2) Act 2017 (later legislation) and that therefore they could not bear on the correct interpretation of Part 22 when it was originally enacted.

In reply Mr Peacock argued that he was not inviting us to construe s948 or 951 by reference to s944D and s944E, the point was simply that Parliament had assumed in 2017 that the ring fence rules were capable of operating / having effect when read in the context with Part 22 of tax neutral transfer rules (but only) because it had made specific provision in 2017 for oil-related losses where there has been a Part 22 transfer.

It was not clear to us though how that helped. Either Parliament’s assumptions in 2017 were being prayed in aid of the construction of the earlier provisions (which it was accepted was not permissible) or they were not, in which case the point did not assist. But in any case, we agree with HMRC’s point that even putting aside the cautions against reliance on later legislation the provision would not advance CNSL’s case in so far as CNSL argued that s279 meant that an IRF trade in the predecessor had to be seen as a different trade to an IRF trade (comprising the same activity) in the successor. That is because the amendments inserting s944D and s944E clearly contemplated that Part 22 would apply without any difficulty in circumstances where the ring fence provisions pursuant to Part 8 were engaged.

To the extent any reliance is placed on subsequent legislation then we also note that the Finance (No. 2) Act 2017 also introduced new sections 951(7) and (8) which assume that a Part 8 ring fence trade could be subject to these provisions (see reference to “by reason of this Chapter an amount of a loss made in trade Z is carried forward under s303B(2) or 303D(3) to an accounting period”). The point can similarly be made that such provisions do not envisage that s279’s remit would require that an IRF trade in the transferor had to be viewed as separate to an IRF trade in the successor.

s951 test engages factual question of activities carried out not how those are then viewed for tax purposes?

HMRC contends that the hive-down from Amoco to CNSL is a transfer of a trade/part-trade within Chapter 1 of Part 22 CTA 2010, as expanded by s951. The statutory focus in s.951(3)–(4) is on the activities transferred (the “Part Y” activities) and whether the transferee begins to carry on those activities as its trade or part of its trade (which CNSL plainly did). The deeming in CTA s279 (oil-related activities treated as a separate trade for the charge to corporation tax on income) does not alter that analysis: under Part 22, in HMRC’s submission, first one identifies the trade/activities as a matter of fact. It is only after carrying out that factual analysis that the ring-fence deeming of a separate trade operates for the purpose of working out the charge to corporation tax. Emphasising the fact-based nature of such analysis, HMRC argue there is no good reason that the scope of the provision should vary by reference to the tax treatment of activities. Parliament had already set out a condition which dealt with tax, namely the tax condition stipulated in s943. That required only that the transferred trade be carried on by companies within the charge to corporation tax. It did not require that trade in the transferor must be classified for tax purposesin the same way as that of the transferee. The distinction between IRF and ORF which was about different tax treatment was not therefore relevant.

That submission overlooks, in our view that Parliament has enacted a mandatory framework in s279 CTA 2010 which requires oil-related activities to be treated as a separate trade, with s162 CAA then giving that separation direct effect within the capital-allowances regime by treating each ring-fence trade as a distinct qualifying activity. In agreement with Mr Peacock, we consider the result is that Amoco’s activities were, by force of statute, a single IRF trade, whereas CNSL’s identical physical operations necessarily constituted two trades, IRF and ORF, from the moment CNSL acquired the pipeline.

HMRC’s argument that the question of what constitutes a trade is a matter of fact does not in any case, as Mr Peacock submitted, help answer the question as to the construction of s279. It is simply another way of expressing HMRC’s argument that s279 ought to be construed as having limited scope, that being the very question in contention. By the same token, a similar criticism can be made of CNSL’s argument that HMRC’s case amounts to an impermissible “switching on and off” of s279 to suit HMRC’s case. CNSL say that while HMRC correctly treat Amoco as having a single IRF trade before the hive-down, and treat CNSL as having two trades (IRF and ORF) afterwards, they then wrongly invite the tribunal to disapply that same statutory separation at the transfer moment so that CNSL can, for an instant, be regarded as carrying on Amoco’s single IRF trade. HMRC contend there is no switching on and off, because the tribunal should identify the trade “as a matter of fact” and Part 22’s deeming allows any momentary mismatch to be ignored. Both positions however presuppose the answer to the question in issue.

As explained above, there is no reason to suppose that the straightforward reading of s279 (that it applies in all respects as regards the charge to corporation tax) should be ignored and one would expect clear words if that was the intention. The rules in Part 22 on transfers of trade do not exist in the abstract but for the purposes, ultimately, of establishing an amount of corporation tax (in particular by disregarding, where the provisions are engaged, the application of balancing charges where certain conditions are met on certain transfers of trade or parts of trade).

Regarding HMRC’s reliance on the fact there was already a tax condition in s943 but one which did not mention anything about the distinctions between IRF and ORF in s279, we agree with Mr Peacock’s point that this reliance is misplaced. Section 943 ensures simply that tax neutral treatment can only apply where the successor continues a trade within the UK tax net.

HMRC further argue that, if CNSL is right about the general effect of s279 CTA 2010, then it is difficult to see why s162 CAA 2001 needs to be there at all. However, for the reasons explained by Mr Peacock, we do not consider any difficulty with the redundancy of s162 arises. Section 279 and s162 operate in different statutory codes and perform distinct functions. Section 279 CTA 2010 determines, for the purposes of the charge to corporation tax on income, that defined oil-related activities are to be treated as a separate trade (the ring-fence trade). Section 162 CAA 2001 then gives that separation effect within the capital-allowances code by providing that a ring-fence trade is a separate “qualifying activity” for pooling, allocation and disposal computations. If CNSL’s interpretation were correct there is still a function for s162 because while it would be clear that there was a ring fence for the purposes of corporation tax on income uncertainty would remain as to whether that ring fence was implemented in the capital allowances code.

HMRC also relies on its own oil taxation guidance (HMRC’s Oil Taxation Manual at OT20251) which it submits reflects the longstanding practice of HMRC and of industry that a company carrying on a business of exploring for and producing oil in various parts of the world is carrying on one single trade. Thus, Mr Bremner submitted, where a company has a petroliferous trade overseas, UK exploration within the ring-fence is part of that trade and therefore relief for UK exploration expenditure is available as IRF trade losses. The guidance and practice were consistent with HMRC’s case in that s279 does not operate in such a case to treat UK exploration activities as pre-commencement activities. The guidance and practice recognised that there was a single trade which has already commenced, and only later are the oil-related activities separated into a notional inside the ring fence (IRF) trade.

Mr Bremner rightly acknowledged the limitations of guidance as an interpretative tool for the interpretation of statute. But in any case, we do not consider the manual assists. As we explain at [67] above s279 only applies when a company is carrying on partly oil related activities and something else. To the extent the company was only carrying out oil related activities, s279 would not apply, and would not appear to undermine any single trade analysis across the multi-national. In any case even if the UK company were carrying out a mixture of oil-related activities and other activities, it is difficult to see how the guidance and practice would be inconsistent with what is in our view the correct interpretation based on the surrounding legislative provisions namely that s279 has an impact throughout the computational provisions.

CNSL interpretation goes against statutory purpose and results in anomalies / absurd consequences

Finally, we consider HMRC’s reliance on statutory purpose does not justify taking a different more limited interpretation of s279. HMRC make an essentially purpose based argument further submitting that s279’s deeming is limited and cannot be pushed to anomalous results that switch off Part 22. Invoking the Fowler principles on deeming (discussed above at [65]), HMRC argues the fiction in s279 must be applied only so far as its purpose requires (the charge to corporation tax on income), not to produce unjust or absurd anomalies that would disable Part 22 in ordinary intragroup successions. As a matter of practice (as set out in HMRC’s oil manual approach to worldwide oil trades) there can be one factual trade, later notionally split for ring-fence charging; that practice underscores that s279 presupposes an underlying trade and is not a condition which is taken account of at the outset that precludes s951.

HMRC highlight that the CATS Pipeline would have gone from being used entirely IRF to being used entirely ORF (after the Share Sale) but with a markedly smaller balancing charge than one would expect to apply on such a change of use, simply as a result of the interposition of the Hive-Down and of CNSL having a small percentage of IRF use for a brief period of time. HMRC highlight that on CNSL’s analysis only 13.55% of capital allowances previously claimed inside the ring fence would be recovered. That is despite the fact that £167m of allowances have been given IRF for the CATS Pipeline which did not depreciate during the period of use but actually left the ring fence at a market value higher than historic cost. The purpose of Part 8 CTA 2010 is to ensure only costs properly attributable to IRF trade are allowable against IRF income. The result, that insertion of the intermediate step of the hive-down to CNSL for $1 should have the effect of leading to a considerably lower tax liability than would have otherwise arisen on a straightforward sale of the CATS assets to Antin is, HMRC say, perverse.

In our view CNSL’s interpretation does not lead to anomalous or perverse results, when the particular design of the statutory regime is taken into account – although it may suggest that there is some other lacuna in the code. While we agree that in broad terms Part 22 aims to preserve continuity of treatment in certain circumstances, that purpose (as highlighted by CNSL’s submission acknowledged by Millett J’s depiction of the purpose of the predecessor provision, which we come on to discuss below) is not all encompassing. Section 951 sets out specific circumstances where tax-neutral transfers are permitted; it is not a general neutrality rule. The situation where the trade to which CNSL succeeds (IRF and ORF) is different from that which Amoco undertook (wholly IRF) is not one to which on the face of it one would expect Part 22 to apply. We acknowledge HMRC’s broader point that in the absence of Part 22 applying, one might expect a disposal event to occur which allows any excess allowances to be recaptured by a balancing charge. Two points mean that broader point should not force a rejection of CNSL’s statutory interpretation. First, as CNSL emphasise one would expect the balancing charge to fall on the transferor (Amoco) in such cases, not on the transferee (CNSL). Second, where Part 22 does not apply, it might be expected that the relevant disposal event would give rise to a disposal value that would permit any excess allowances to be recaptured. No such rule is provided for. (Instead the disposal value in respect of a s61(1)(a) event (sale of plant or machinery) as specified under s61(2) is the net proceeds of sale (see [12] above). The outcome in this case cannot be described as anomalous or perverse. It is simply a function of the unusual circumstances here where, on the one hand, Amoco has the status of a deemed participator (which has resulted in an IRF trade in the hands of the transferor becoming ORF, by virtue of the different status of transferee with the result that Part 22 does not apply) and on the other the rule specifying the disposal value on the hive down is the proceeds of sale. The fact Amoco’s allowances are not fully recaptured on the hive-down is thus a consequence of features embedded or absent from the legislative regime’s design. Amoco’s participator status and the absence of a market value disposal rule is not a reason to narrow the scope of s279.

In conclusion we reject HMRC’s first line argument that s279 is only relevant once the transfer of trade provisions have first been applied. In agreement with CNSL, Part 22 needs, when its application is being considered, to take due account of the separate trade mandate in s279.

That does not mean however that we go as far as agreeing with CNSL’s primary submission that Part 22 does not apply at all on the facts because CNSL’s IRF and ORF trade, by virtue of being an IRF and ORF trade is not the same trade as Amoco’s wholly IRF trade and because that situation is not amongst the permutations catered for in the prescriptive set of scenarios envisaged by s951(3). It is convenient to address the reasons for that once we have first considered HMRC’s fallback argument that, even if the separate trade provision in s279 is taken account of, then s951(3) is still triggered such that there is a deemed transfer of a trade.

HMRC’s fallback argument emphasises s951(3)’s reference to activities and Millett J’s analysis in the High Court decision Falmer Jeans Ltd v Rodin [1990] STC 270 (Ch) of the predecessor provision (which HMRC rely on as similarly highlighting the need to focus in on the activities carried out by the predecessor and successor).

The FTT agreed with HMRC’s approach of adopting Millett J’s direction to “concentrate on the trading activities and not the trade” and to treat those activities “as if they were a separate trade” when applying s951 (FTT [84]). On the question of whether the same activities were factually carried on by Amoco pre-transfer and by CNSL post-transfer, the FTT concluded that they were, and thus that Part 22 applied (FTT [89]–[90]). CNSL consider HMRC’s and the FTT’s reliance on the case as wrong and that the reasoning is actually supportive of CNSL’s case. We therefore turn to look at the case in some detail.

Falmer Jeans concerned the application of s252 of the Income and Corporation Taxes Act 1970 (a statutory predecessor to Part 22 CTA 2010). Section 252(1) provided for the simple case of one company ceasing a trade and another under common interest carrying it on and contained provisions analogous to those now found in section 940B CTA 2010 (meaning of transfer of a trade), and section 941 (the ownership condition). It was in the following form:

The issues in the case did not concern capital allowances but whether the successor could benefit from certain loss relief (under subsection (3), the successor was entitled to carry forward of loss relief as the predecessor would have been entitled to claim if it had continued the trade).

Central to the disputed issues was s252(7) and its relationship with subsection (1). Subsection (7) enlarged the scope of s252(1) by deeming it to have effect as follows (emphasis added):

Also relevant to the case was subsection (8) which provided that:

“Where under subsection (7) above any activities of a company's trade fall, on the company ceasing or beginning to carry them on, to be treated as a separate trade, the accounting periods of the company shall be adjusted accordingly, and any necessary apportionment shall be made [or] receipts or expenses ...'”

The facts of the case concerned an intra-group reorganisation of a jeans business carried on by two companies in the same group, Falmer Jeans Ltd (“Falmer Jeans”) and Falmer Manufacturing Ltd. (“Falmer Manufacturing”). Prior to the reorganisation, Falmer Manufacturing took cloth given to it by Falmer Jeans and manufactured jeans, for which it was paid on a cost-plus basis. Falmer Jeans sold the jeans to customers. In the reorganisation, Falmer Manufacturing transferred its trade to Falmer Jeans. The question was whether Falmer Jeans obtained the benefit of losses incurred by Falmer Manufacturing prior to the reorganisation.

Falmer Jeans contended that subsections (7) and (8) of s252 applied so that losses incurred by Falmer Manufacturing could be carried forward and set off against the part of the subsequent profits earned by Falmer Jeans from the manufacturing operations previously carried on by Falmer Manufacturing. HMRC contended that s252 could not apply because the transfer was not of a trade but of “bare” activities (not activities turned to account) so Falmer Manufacturing’s trade had not been taken over by Falmer Jeans.

In the High Court, Millett J opened his analysis with these preliminary observations on the target of the section:

“Even a relatively cursory reading of s 252 shows that there are four situations in which accrued losses of the predecessor's trade may be carried forward and set off against profits of its successor's trade: (1) Where the predecessor has ceased to carry on a trade and the successor has begun to carry it on (sub-s (1)). (2) Where the predecessor has ceased to carry on a trade and the successor has begun to carry onthe activities of that trade as part of its trade (sub-s (7) first limb). (3) Where the predecessor has ceased to carry on part of a trade and the successor has begun to carry on the activities of that part as its trade (sub-s (7) second limb). (4) Where the predecessor has ceased to carry on part of a trade and the successor has begun to carry on the activities of that part as part of its trade (sub-s (7) second limb.) A closer examination yields a very detailed and carefully drawn scheme, deliberately constructed in the light of the decisions on succession to a trade to which I have referred.”

That last reference to “a detailed and carefully drawn scheme” was used by Mr Peacock to support his submission that Part 22 by analogy and in particular s 951(3) CTA 2010, is an extension with strict limits, not a universal, open-ended transfer of trade rule.

Millett J considered it helpful to understand the case-law context for subsection (7). He referred to Laycock (Inspector of Taxes) v Freeman Hardy and Willis Ltd [1939] 2 KB 1, a case concerning earlier legislation, which did not include the equivalent of section 252(7).That case concerned a similar scenario of “vertical integration” within a supply chain where the business of a wholesale subsidiary earning wholesale profits was transferred to the retail company which effectively earned that profit as part of its retail profit. There it had been concluded that the wholesale trade had ceased. Millett J highlighted how the analysis (had for no apparent fiscal justification) turned on how the trade was described so for instance that if the trade had been described as “manufacturing for reward” the result would have been different. He considered subsection (7) had been introduced, at least in part, to sidestep the vagaries of how the trade might be described explaining at 282h-i that it covered situations:

“where (i) the trading activities formerly carried on by the predecessor are carried on by the successor but would be differently described when the successor’s trade is described as a whole and ii) where the profits from those activities are realised in the form of global receipts which do not distinguish between the different activities by which they are earned”.

Millett J considered the scope of the deeming. That meant asking the question what situation did subsection (7) cover that would not have been caught by subsection (1). The situation in his view was on analysis one:

“…dealing with a situation where (a) the successor has begun to carry on 'the activities of the trade' of the predecessor as part of its trade but has not begun to carry on'the trade' of the predecessor as part of its trade (or sub-s (1) would cover it); and (b) the case can be brought within sub-s (1) by treating that part of the successor's trade as a separate trade. This alone shows that 'the activities of the trade' is not merely a synonym for 'the trade'.”

He continued:

“…a major purpose of the subsection is to deal with the situation where the carrying on of the former does not constitute the carrying on of the latter. That was the situation in Laycock v Freeman Hardy and Willis, where all the physical activities of the predecessor were carried on by the successor, but the absorption of a manufacturing wholesale business into a retail operation affected the description of the trade and prevented a succession. Whereas the application of sub-s (1) is or may be affected by the way in which the relevant trade is described, sub-s (7) by contrast directs attention to the trading activities themselves. Under sub-s (7), they are to be identified, not described.

“… A major purpose of the sub-section is to carry forward relief in situations not covered by subs (1); specifically in situations where (i) the trading activities formerly carried on by the predecessor are carried on by the successor but would be differently described when the successor’s trade is described as a whole …”

Thus, while subsection (1) of s252 was subject to the vagaries of how a trade was described, a central proposition in Millett J’s reasoning was that the inquiry under s252(7) must focus on activities rather than on formal descriptions of trades:

“The solution adopted by subsection (7) is to concentrate on the trading activities and not the trade: to treat the trading activities which the successor begins to carry on as if they were a separate trade ; to apportion part of the successor's receipts to the notional separate trade which it has begun to carry on, and then to apply subs (1) with any semantic considerations which may be involved in that application to that notional separate trade”

Millett J went on to explain the following (underlining added):

“The first limb of the subsection must, on analysis, be dealing with a situation where (a) the successor has begun to carry on ‘the activities of the trade’ of the predecessor as part of its trade but has not begun to carry on ‘the trade’ of the predecessor as part of its trade (or sub-s (1) would cover it); and (b) the case can be brought within sub-s (1) by treating that part of the successor’s a trade as a separate trade. This alone shows that ‘the activities of the trade’ is not merely a synonym for ‘the trade’. … Under sub-s (7), they are to be identified, not described.

The Crown submitted that ‘the activities of the trade’ means ‘all the activities of the trade’. I disagree. It means sufficient of them (a) to be capable of being treated as a separate trade and (b) to satisfy the commissioners that, if so treated, that separate trade is the same trade as that formerly carried on by the predecessor.

… the deeming provision has effect ‘for the purposes of this section’ … to require sub-s (1) to be applied, not to the whole of the successor’s trade, but to the notional new separate trade. (Footnote: ³)”

Applying those principles, Millett J held that the manufacturing activities transferred from Falmer Manufacturing to Falmer Jeans constituted an identifiable and coherent part of the composite trade. Those activities were capable of being treated as a separate trade for the limited purpose of s252(7), thereby allowing the continuity provisions to apply. (It did not matter for these purposes that Falmer Jeans was not turning those to account by charging a fee for manufacturing as Falmer Manufacturing had been). Once that step was taken, the statute required Falmer Jeans to be treated as stepping into the shoes of Falmer Manufacturing in relation to the carry forward of losses.

HMRC relies on Falmer Jeans to emphasise the statute’s focus on activities and treatment of those as a notional separate trade. Theobject of scrutiny, HMRC submits, for the purposes of s951 is the activities transferred and the relevant question is whether the activities are capable of amounting to a trade or part of a trade. If they do, then s951 works on the basis the activities formed a separate trade carried on by both companies distinct from anything else they carried on. There is therefore a transfer of this separate trade between the companies. In essence where the activities done by the transferor can be matched to those done by the transferee a deemed transfer of trade is established.

For his part Mr Peacock argues that, interpreted properly, FalmerJeans supports a prescriptive, non-universal application of s 951(3): where the facts do not fit one of the enumerated succession patterns, as here, given the statutory split into IRF and ORF trades in CNSL, Part 22 does not apply. Parliament deliberately recast succession in four defined situations (“whole to whole” under s 940B; and “whole to part”, “part to part”, “part to whole” under s 951(3)), thereby conferring relief only in the specified cases. What it did not do was authorise a fifth, unprovided for route, in which a part of a trade in the transferor emerges as two trades in the transferee. On that basis, the Tribunal must apply the statute as written: s 951(3) cannot be read via the Interpretation Act 1978 to expand “trade” to “trades”, nor can the activity-based lens adopted by Millet J in Falmer Jeans be used to sidestep the ring-fence deeming in s 279, which itself requires the successor’s activities to comprise legally distinct trades.

On close analysis of the reasoning in Falmer Jeans we disagree that HMRC’s analysis is borne out. Before doing that, it is worth noting, as Mr Peacock pointed out, that as s279 tells you certain activities are a separate trade, any insight that one should focus on activities does not help resolve the issue over the scope of s279’s deeming.

It is correct that Millett J emphasised that the inquiry under section 252(7) must concentrate on the activities rather than the formal description of the trade: “to treat the trading activities which the successor begins to carry on as if they were a separate trade” (at p282). However, he also made clear that this statutory fiction is conditional. It requires that the activities transferred are capable of constituting a separate trade and that, if so treated, that separate trade is the same trade as that formerly carried on by the predecessor (see extract from 282c-d set out above at [110]). (In passing we note that does not mean, as can be seen when it came to application of that approach to the facts, that the trades should be absolutely identical. There was some margin of broadness to it because on the facts Millett J was satisfied the trade was the same despite there being some difference between how the Falmer Jeans, the successor, was carrying it out as compared with how Falmer Manufacturing was carrying it out (see [111] above).)

As regards the interpretation of s951(3) CTA 2010, the above two stage analysis, with first the activities being compared in respect of the putative transferor and transferee, and secondly the question of whether those activities constitute the same trade from the perspective of such transferor and transferee, is in effect reflected more explicitly in the structure of s951(3) which splits out subparagraphs (a) and (b).

On close analysis it can be seen that there are in effect three steps entailed by subsections a) and b):

HMRC’s fallback argument (that an activities-focus means 951(3) applies even if s279 applies) is that: 1) upon the hive-down Amoco ceased to carry on “part of a trade” for purposes of s951(3)(a) (“Part Y”); 2) CNSL began to carry on “the activities of Part Y as its trade or as part of its trade” within the meaning of s951(3)(b); and accordingly, 3) there would have been a transfer of trade from Amoco to CNSL had Amoco been carrying on Part Y as a separate trade (s951(3)(b)).

We agree propositions 1) and 2) are made out on the facts. (Although the activities are in two trades: IRF and ORF in CNSL, because terms in the singular also cover the plural unless the context requires otherwise, under the Interpretation Act 1978, the reference to “Part Y as its trade…” may be read as “Part Y as its trade or trades”. To that extent we disagree with Mr Peacock’s submission that the “pluralising” provision of the IA 1978 was inapplicable).

It is at proposition 3) where HMRC’s argument breaks down because, in our judgment, there would not have been a transfer of trade from Amoco to CNSL had Amoco been carrying on Part Y as a separate trade. When due recognition is given to s279 as we have held (HMRC having lost on their first line of argument for the reasons already discussed) when the transportation activities are considered in CNSL they must be separated, to oil related (IRF) and non-oil related (ORF) and treated as different trades. There could not be said to be a transfer if the IRF activities in Amoco are (in line with the hypothesis required by s279) regarded as a separate trade because that IRF trade is not the same trade (or trades) as the notional trade carried out by CNSL. That is because CNSL is carrying on an IRF trade and an ORF trade. The effect of section 279 and the ring-fence provisions is to determine the nature of a trade for the purposes of Part 22 such that an IRF trade is not the same trade as an ORF trade for the purpose of Part 22.

Contrary to HMRC’s analysis (which proceeds on the basis that even if s279 applies in the way CNSL say it does) the fact that there is simply an identity of activity carried out between what the transferor does and what the transferee does (step 1) (and that those activities could be capable of constituting a separate trade under step 2) does not mean all of s951(3) is satisfied. It is plain that although subsection (a) of s951(3) is satisfied, subsection (b) is not.

HMRC’s point that CNSL carried on similar transportation activities does not thus answer the statutory question whether the same trade was transferred. Thus, when proper regard is had to s279 in applying Part 22 it accordingly does matter to the nature of the activity who is doing the activity (given as we have noted above the question of company relationship and participator status is built into the definition of what constitutes “oil-related” activity).

As foreshadowed above that does not mean we can accept CNSL’s argument that Part 22 does not have any role to play on the facts here (CNSL argue that there is no role at all because Amoco’s wholly IRF trade is not the same trade as CNSL’s trades which are IRF and ORF).

Further to our explanation of the three steps s951(3) entails above, under step 1) and under s951(3)(a), the process of activity matching on both sides of the putative transfer will reveal an identity between the transportation of BP group hydrocarbons IRF activity on the Amoco side with that same activity which also appears on the CNSL side as an IRF activity. As that bundle of IRF activity is capable of constituting a trade, it will also satisfy step 2). It can also satisfy 3) because it is plainly the case that such IRF part trade in Amoco would indeed have been transferred (if, as the legislation hypothesises, it were deemed a separate trade in Amoco). In other words, it is not correct to say that Part 22 cannot apply at all because it can apply to the subset of Amoco’s IRF activities (the BP group hydrocarbon transportation activity that Amoco carries out and which CNSL then carries out).

What s279 does not however go as far as doing ([see [67] above) is requiring that CNSL’s IRF trade be regarded as separate (for the purposes of Part 22) from Amoco’s IRF trade. As discussed above, the provision is only concerned with the situation where oil-related activities are partly carried on in the same company.

An alternative strand to HMRC’s primary case is that the reference to a company’s “trade” in s951 can be read (in accordance with s6(c) Interpretation Act 1978 as a reference to “trade or trades” (in other words including the plural) there being no contrary intention implied.

Under this argument HMRC argue that, prior to Hive-Down, Amoco conducted a trade IRF. As a result of Hive-Down, CNSL conducted one trade IRF and one trade ORF. There were accordingly two transfers of trade under Part 22: 1) regarding CNSL’s IRF trade (transportation of BP hydrocarbons) Amoco has ceased part of its IRF trade and CNSL has begun to carry on the activities of that part trade as its own IRF trade; 2) as for CNSL’s ORF trade (third party transportation), Amoco ceased part of this IRF trade and CNSL began to carry on those activities as its ORF trade. HMRC argue both situations are squarely within s951(3). The s952 just and reasonable apportionment would be 13.55% intragroup, and 86.45% third party. When the CATS Pipeline began to be used other than for purposes of IRF qualifying activity (as to 86.45%) there is then a disposal event under s61(1)(e) CAA 2001. The IRF part in Amoco can, in the legislative terminology of s951(3), be seen as one Part Y (a “Part Y1 (Footnote: ⁴)” as the parties referred to it to distinguish it from the other part trade), the IRF part which became ORF when carried out by CNSL can be seen as another Part Y (termed “Part Y2”).

CNSL reject this analysis in what was referred to in the hearing before us as “Scenario D” (Scenario A being no transfer of trade, Scenario B, the transfer of a single trade and Scenario C the transfer of two trades (on the premise that there was transferred one IRF trade in Amoco which ended up as two separate trades in CNSL)).

Under CNSL’s Scenario D, the analysis is that there were two IRF part trades being carried out by Amoco (BP transportation and non-BP transportation). It can be seen this alternative analysis is very similar to HMRC’s secondary case (that there is a transfer of two part trades) but with the difference: 1) that on the Amoco side of the hive-down transaction the legislation is applied to two part trades rather than one part trade and 2) crucially, a disagreement as to the outcome of the analysis on the IRF to ORF part (Part Y2) (whereas HMRC say s951(3) is triggered, in addition to 951(3) being triggered on the IRF to IRF part, CNSL say it is only triggered on Part Y1 – the IRF to IRF part). CNSL’s preferred analysis is of course that there is no transfer even if the legislation is viewed (contrary to its submission per the Interpretation Act 1978) as permitting a transfer of trades (plural instead of a trade singular).

In their post-hearing reply, HMRC highlight their secondary case does not rely on any of their submissions concerning the role of s279 CTA 2010 and/or the scope of the deeming effected by s279 which are relevant to aspects of HMRC’s primary case. In this part of the argument, the premise is that s279 does have a deeming effect such that it is necessary to examine two potential transfers of trade Part Y1 and Part Y2. Where HMRC differ is that s951(3) is triggered on both parts (as opposed to just Y1 as CNSL argue).

Although HMRC raised a procedural objection to CNSL advancing the above “Scenario D” we agree with CNSL there is no procedural fairness difficulty with us considering Scenario D. It is effectively an amalgam of earlier scenarios (with, on CNSL’s case, the IRF to ORF part going down the decision pathway for Scenario A (i.e. that Part 22 did not apply in relation to that part) and the IRF to IRF part going down the decision pathway that the parties had already explored in Scenario B (i.e. that Part 22 did apply)). The parties have each, in any case, had the opportunity to make full written representations on their position on Scenario D.

As to whether CNSL’s outcome as set out in Scenario D is consistent with the legislation, we consider it is. This is for essentially the same reasons why HMRC’s fallback argument made as part of its primary case does not work (i.e. the argument discussed above that even if s279 is relevant to Part 22, Part 22 does not apply). Applying the subsections of s951(3), Scenario D, in our view reflects the correct analysis when the law is applied to facts:

It can be seen the stumbling block for HMRC’s case is, as above, step 3 (under subsection (b)) namely the issue of whether there “would have been a transfer of trade” had Amoco been carrying on Part Y2 as a separate trade. There would not be such a transfer because the nature of the trade has changed. The trade is not simply transportation of hydrocarbons but changes from an oil-related activities trade to a non-oil related activities trade (because as we have held above s279 does apply to Part 22).

HMRC’s post-hearing written submissions argue that the strength of their case can be tested by considering the scenario where Amoco had only transported oil on behalf of third parties. CNSL would continue those exact same activities yet on CNSL’s analysis there would have been no transfer of trade. HMRC also argues s279 does all the work it needs to in that s279 focusses on separation within one company into separate trades. Relationships between different companies were addressed by other provisions. There was no reason to expect s279 to distinguish between activities being carried on in different companies.

As already explained above, we agree s279 does not operate as between different companies but only within one company. Nevertheless, we do not consider the example HMRC posits takes the question of statutory interpretation before us further. As CNSL point out, it presumes the issue in question which is whether it matters that a trade is IRF in one entity and ORF in the other when analysing the question of whether the same trade is carried out in both. We agree with CNSL that the result is neither surprising nor unprincipled because it arises from the different statutory status of Amoco as deemed participator. CNSL is not able to step into the shoes of Amoco in respect of Part Y2. As mentioned, it is a feature of the regime that company relationships matter and are built into the definition of “oil-related activities”. HMRC’s example effectively rehearses an activity based argument which we have rejected above on the basis that while analysis of activities, consistent with Falmer Jeans is a question to be considered it is not determinative in that there is still a question of whether the same trade is being carried out such that it can be said that there would have been a transfer of trade.

Thus, the fact there is no transfer arises because Amoco is a deemed participator in an oil field and CNSL is not. The characterisation of trade as IRF or ORF in the hands of each party should matter in determining whether Part 22 applies. Against that backdrop, the purpose of the provision, which is to prevent balancing charges on certain transfers of trades, is not compromised.

While HMRC suggest this would create avoidance opportunities, in agreement with CNSL, there is nothing to suggest from the fact pattern that would be required to achieve such result that CNSL’s argument exposes any lacuna that could be widely exploited. The facts would need to engage the specific circumstances of the transferor being a deemed participator and the activity concerning third party transportation that is at play here.

Scenario D accordingly in our view best reflects the proper analysis.

Similarly for the reasons already discussed recourse to the purpose of the provisions does not stand in the way of a conclusion that Scenario D is the correct analysis. The circumstances in which Part 22 deems a transfer of trade are exhaustive. The different treatment is a function of the oil activity ring-fence going to the nature of the trade carried out, and the fact that the demarcation of that ring-fence incorporates not simply what is being carried out but questions regarding the identity of the entity carrying it out.

In conclusion we consider Scenario D is the correct analysis.

Having reached the above conclusion, we revisit the FTT reasoning to consider whether it erred in law.

The FTT concluded, in agreement with HMRC (at FTT [102]) that Part 22 applied. This was on the basis there was a transfer of part of a trade carried out by Amoco which after being transferred was then conducted as two trades by CNSL. (It had found earlier (at FTT [78) that pursuant to the Interpretation Act 1978 the reference to trade singular included plural trade, thus there was no issue with CNSL carrying out more than one trade.)

The FTT also held (again at FTT [102]) that s279 deeming of a separate trade did not affect the conclusion that there had been a transfer of part of a trade to which Part 22 applies. It had explained (at FTT [79]) the underlying purpose of Part 22 was to facilitate intra group reorganisations and there was no reason a split into two trades offended that.

CNSL also argue the FTT did not make clear on what basis Part 22 applied i.e., whether on a single-trade succession or a two-part-trade analysis (FTT [102]), whereas HMRC’s position is that the FTT did make this clear by finding that a notional trade was transferred and acquired by CNSL (thereby identifying the basis on which Part 22 applied) (FTT [104] [105]).

We consider the basis for the FTT’s decision was that, taking account of the activities focus, s951(3) CTA 2010 could apply because the activities were the same, and that on that basis it did not matter that what was one part trade for Amoco ended up as two separate trades. Section 279 did not stand in the way because it only became relevant to separate the trades after the transfer.

The issue before the FTT was a pure point of statutory interpretation. It follows from our analyses in the preceding paragraphs that we prefer the contrary view that s279 is taken into account in determining whether Part 22 can apply and accordingly the FTT erred in considering that s279 did not apply so as to prevent Part 22 applying.

That error was clearly material, and we should therefore set aside the FTT Decision. In that light we can therefore deal very briefly with some of the other criticisms CNSL made of the FTT Decision, which as we explain below were not in our view well-founded.

CNSL criticise the FTT for “high level theorising” by relying on hypothetical facts which attributed to CNSL a trade (wholly IRF) which it simply could not carry on in respect of the non-BP transportation because (unlike Amoco) it was not a deemed participator. CNSL say the FTT was wrong to take comfort from a transaction that was not entered into and which could not have been entered into because CNSL could not carry out a wholly IRF trade. As to the FTT’s approach, we agree with HMRC that testing such examples is a conventional tool of construction. The difficulty here however was the limits to the usefulness of the example picked because it assumed the proposition that was in issue, which was that s279 did not operate as we have found it does. It was not a scenario that was possible on the law. What it highlighted was a difference in view as to the significance in treatment given to Amoco being a deemed participator and how that affected the nature of the activities. (i.e. the point that the who of carrying out the activities mattered).

Neither party, correctly in our view, suggested we should remit the issue of statutory interpretation on which the appeal turned to the FTT. Given we have received full submissions, which are largely in agreement as to the consequences if CNSL’s Scenario D is correct we see no purpose in remitting the matter to the FTT but will exercise our discretion to remake the decision in the UT.

As set out below we remake the decision correcting the error of interpretation and in line with our analysis under Scenario D (that there were two parts trades in Amoco (Y1 and Y2) that needed to be considered vis a vis two parts (Y1 and Y2) in CNSL).

On the footing of “Scenario D”, the parties proceed on the hypothesis that Amoco’s CATS business is divisible into two “part trades”: Part Y1 (transportation of BP Group hydrocarbons) and Part Y2 (transportation of non-BP Group hydrocarbons). Part Y1 is an IRF to IRF case; Part Y2 is IRF in Amoco’s hands but ORF in CNSL’s hands because CNSL never had Amoco’s deemed participator status. Against that hypothesis, the overall computational consequences are broadly aligned (though not, as will be seen, the route to getting there), and it is convenient to set them out here as they inform what follows.

For Part Y1 (IRF to IRF), it is agreed that Part 22 applies on the hive-down and that s948(3)CTA 2010 prevents any balancing allowance/charge for either Amoco or CNSL at that point. For the onward computation, ss948(2) and (4) operate so that CNSL’s position is determined as if Amoco had continued Part Y1, with actions to or by Amoco treated as to or by CNSL; and CTA 2010 s952(1) requires just and reasonable apportionments, which the parties adopt at 13.55% for Part Y1.

On the share sale, it is common ground that CNSL’s IRF qualifying activity in respect of Part Y1 ceases, generating a CAA 2001 s61(1)(f) disposal event in CNSL. The disposal value is market value capped at Amoco’s historic cost (CAA 2001 ss.61(2) Item 7, s62). Because the asset position for Part Y1 has been apportioned under s952, the parties’ modelling apportions 13.55% of the disposal value correspondingly to Part Y1 which produces an IRF balancing charge in CNSL of about £23 million; that amount is then brought into CNSL’s ORF pool as qualifying expenditure.

Although the £23 million figure and the 13.55% apportionment at the share sale are not in dispute on Scenario D, the statutory route to that figure is set out differently. CNSL emphasises that both the market value and historic cost must be apportioned between Part Y1 and Part Y2 to reflect the reality of what is disposed of out of the relevant pool and to avoid duplication. CNSL’s quantification case for Part Y1 in Amoco rests on CAA 2001 s61(2) (“net proceeds of sale”) requiring apportionment of both the $1 and the negative pool between Y1 and Y2 by anticipated use at hive-down (13.55% to Y1).

On Part Y1, CNSL further submits that, as a result of s948(2) read with a s952 apportionment, CNSL inherits 13.55% of Amoco’s negative TWDV for that part; the share-sale calculation must allocate to Part Y1 the same proportion ofboth the total market value and Amoco’s total historic cost; and on that basis the £23 million balancing charge reflects the difference between 13.55% of historic cost and the inherited negative TWDV. HMRC maintain their approach of allocating the sum to both pools (and argue that this does not involve duplication) but agree on the quantum and the 13.55% disposal-value apportionment in consequence of s952.

The premise advanced by CNSL under Scenario D is that for Part Y2 (IRF to ORF), Part 22 does not apply on the hive-down and accordingly s948 CTA 2010 is not engaged. HMRC accept that, if contrary to their primary case, we agree with that premise (which we do for the reasons explained), the hive-down is a s61(1)(a)CAA 2001 disposal event in Amoco (cessation of ownership). There remains however a dispute whether the $1 consideration (and the negative pool balance) must be apportioned between Parts Y1 and Y2 or left un-apportioned.

HMRC’s position is that there is no basis for apportioning the $1: the disposal value in Amoco on the hive-down is $1, which, given Amoco’s negative TWDV on the CATS assets, produces an Amoco balancing charge of c. £2 million. CNSL disagrees: on its case CAA 2001 s.61(2) (“net proceeds of sale”) requires apportionment of (i) the $1 consideration and (ii) the negative balance between Part Y1 and Part Y2 by reference to anticipated IRF/ORF throughput at the time of hive-down, leading to a Part Y2 balancing charge of approximately £2 million × 86.45% for Amoco. This difference (c.£2 million vs. £2 million x 86.45%) concerns Amoco not CNSL and therefore has no material impact on the outcome of the present appeal by CNSL.

As regards CNSL’s treatment of Part Y2 at hive-down, HMRC contends that CNSL has qualifying expenditure of $1 on the CATS Pipeline which must be placed into a single-asset pool, with any allowances reduced on a just and reasonable basis under CAA 2001 s.207; HMRC therefore rejects any apportionment on the basis that the $1 is qualifying expenditure of both qualifying activities. CNSL on the other hand treats the amount recognised for Part Y2 simply as ORF qualifying expenditure in CNSL, and argues that no later Part Y2 disposal event arises. The parties are content that, whichever approach is taken, no disposal event for Part Y2 arises in CNSL on the share sale because ownership is retained and Part Y2 is ORF both before and after that sale. Because there is no disposal event in respect of the share sale the competing views on apportionment approach have only a de minimis impact for the present appeal (Footnote: ⁵).

Lastly, HMRC reiterate what they suggest represents a peculiar outcome on CNSL’s Scenario D analysis: the CATS Pipeline would move from wholly IRF use (pre-transaction, in Amoco) to wholly ORF use (post share-sale, in CNSL) yet with a markedly smaller balancing charge than would be expected on a direct change of use, said to result from the interposition of the hive-down and a brief period of modest IRF use in CNSL. In agreement with CNSL, the answer lies in the point we have already made above. We consider that any such effect is inherent in the statutory scheme and in the particular facts of this case, notably Amoco’s deemed-participator status (which CNSL did not have) and the absence of a disposal event that imposed a market-value disposal value at hive-down.

This means the debate around the capital allowances effects (whether the hive-down generated a s61(1)(e) balancing charge in CNSL, which was contrary to s948(3), the subject of Ground 2 – see [52(2)]) is obiter. On CNSL’s Scenario D analysis, the key premise is that Part 22 does not apply to the IRF-to-ORF part. Once that premise is accepted (as it is by us), the arguments regarding capital allowances consequences (which CNSL had advanced in the event it was unsuccessful on its case that Part 22 did not apply) fall away. In respect of the IRF to IRF part, which we have referred to as Part Y1, where Part 22 does apply, as set out in the parties’ post-hearing submissions on the capital allowances effects, if Scenario D is accepted, both parties agree there is no disposal event on hive-down and that the share sale gives rise to a s61(1)(f) disposal event producing an IRF balancing charge in CNSL of about £23 million (see [153] above).

HMRC’s tertiary case (disputed by CNSL) is that even if the hive-down was not within Part 22 whether as a transfer of one trade or two trades that balancing charge adjustment arose when CNSL left the BP Group (on share sale). In our view that tertiary case remains relevant. We recognise that under the parties’ respective cases there is only 6 pence difference in the competing computations as regards CNSL. Even if that is considered de minimis we consider we ought, when giving our reasoning on remaking the decision, to resolve what we consider is the correct legal basis on which the calculation is made.

HMRC’s tertiary case is that the entire $1 expenditure should be allocated under s206 to a single asset IRF pool and also a separate single asset ORF pool. Section 207 then applies to reduce, on a just and reasonable basis, any writing down allowance or balancing adjustment. When CNSL leaves the group there will be a balancing charge equal to disposal value or historic cost less the $1 acquisition cost. The just and reasonable reduction should reflect the historic usage of the asset within the group for the purpose of the IRF activity. The CATS assets were used by Amoco 100% IRF throughout their lifetime from May 1993 until 1 October 2015, and then 11% IRF within CNSL from that date until 17 December 2015. This represents 99.18% IRF use overall by time. HMRC has therefore applied a 0.82% just and reasonable reduction under section 207 CAA.

The result is a balancing charge of £166,094,888, an increased ring fence trading profit of £166,714,624 and a chargeable ring fence profit of £166,342,782 after group relief is claimed.

CNSL’s submissions in outline are that:

HMRC’s case in outline is that:

In agreement with HMRC’s approach, the FTT held that the pooling rules do not authorise up-front apportionment of the historic cost between IRF and ORF; instead, the full amount is brought into each single-asset pool (one per qualifying activity) and s207 then adjusts allowances/charges justly and reasonably to reflect use. The FTT pointed to s207 as the mechanism that prevents any over-relief: once the full amounts sit in the respective single-asset pools, s207 requires “just and reasonable” reductions of writing-down allowances andbalancing charges having regard to how the asset was used in the chargeable period. To demonstrate there is no double counting of allowances, the FTT set out a simple two-year example: even though the same nominal amount appears in each pool, the allowances are adjusted by s207 to track actual (or mixed) use, so the overall relief mirrors economic use rather than the book entries at pooling. On that basis, the FTT concluded HMRC’s approach matched the statute’s sequence (full allocation under s206(3)/s57, then s207 adjustment), while CNSL’s up-front apportionment lacked a statutory basis in the pooling provisions (the FTT rejecting CNSL’s submission that s11(4) and s53(2) provided that) ([FTT[122]–[129]]).

The parties’ dispute on these provisions starts with their diametrically opposing views on the effect of s53(2). CNSL say it is breached, HMRC say it is not (the relevant amount is partly one activity and partly another). In his oral submissions Mr Bremner reiterated that HMRC’s case did not involve putting an amount of expenditure into the same pool but into two pools.

As we observed at the hearing, both parties’ cases proceed on the basis that there must be separate pools for the two activities. The true dispute concerns how much expenditure should go into which pool. In that regard, there is a tension between on the one hand qualifying expenditure encompassing expenditure even if it is partly for the qualifying activity and the wording of s53(2).

Standing back, it is helpful to begin by reminding ourselves what the function of pooling and s53 is. Section 53 is a provision stipulating that qualifying expenditure has to be pooled for the purposes of determining any entitlement to a writing down allowance or a balancing allowance and any liability to a balancing charge. There are different types of pools to which the expenditure is to be allocated: “single asset pools”, “class pools” and the “main pool”. Different rates of allowances apply to each pool, hence the need to know what expenditure goes into each pool.

Looking first at whether s53(2) is infringed (as CNSL submit it is by HMRC’s approach) we struggle to reconcile HMRC’s approach with the statutory wording that appears there. If we ask does the expenditure which is partly relating to one qualifying activity (“QA1”) and partly relating to another qualifying activity (“QA2”) count as (under the wording of s53(2)) “expenditure relating to the different activities” (i.e. QA1 and QA2) then it plainly does.

Section 53(2) tells us in no uncertain terms that expenditure relating to different activities cannot be allocated to the same pool. In other words, it is impermissible to put all of that $1 (which relates to both activities) in the same pool. To respect the provision, only the expenditure that relates to QA1 can be put in the QA1 pool and similarly only the expenditure that relates to QA2 in the QA2 pool. In his oral submissions Mr Bremner emphasised that vis a vis a particular dollar of expenditure on the pipeline it was wrong to think of some element of that relating to one activity and the remainder to another, when every cent related to both. We do not agree. If we ask the question does each one cent of expenditure fall within the wording expenditure “relating to the different activities” then the answer is clearly yes because it relates in part to both.

HMRC’s interpretation effectively entails reading in a carve out from the concept of “different activities” to say that it only means a situation where a sum is wholly related to QA1 with the effect that it is only sums which wholly relate to another activity (QA2) that cannot be put into the pool for any qualifying activity. In other words, a sum which is partly QA1 and QA2 does not count as “expenditure relating to the different activities”. That does not appear a sustainable interpretation to us on the natural reading of the words. Moreover, noting the precise way the early provisions in CAA 2001 refer in s11(4)(a) to “wholly or partly” when that term is sought to be used, the omission of that precision in s53(2) is a further indicator, beyond the straightforward reading of s53(2), that HMRC’s interpretation is not correct.

Our preliminary view, on the basis of giving the statutory words their straightforward natural reading is that CNSL’s case is to be preferred and there will therefore need to be an apportionment of the expenditure upfront in order to ensure that the prohibition set out in s53(2) is not breached.

The question which then arises is whether there is anything which suggests that interpretation must be wrong in view of how the other provisions fit together. We will therefore revisit this preliminary view in the light of our conclusions on the other issues of interpretation in contention between the parties.

HMRC challenge CNSL’s apportionment upfront approach as flawed because there is no statutory basis for the apportionment. HMRC also point out that further down the calculations required, the upfront apportionment approach also encounters the difficulty that CNSL’s calculation must apportion the disposal value under s61, yet there is similarly no statutory backing for that apportionment. Section 61 provides that “a person who has incurred qualifying expenditure is required to bring the disposal value of the plant or machinery into account”. That means the whole disposal value. In addition, s62(1) limits “the amount of any disposal value required to be brought into account” to “the qualifying expenditure incurred by the person on its provision”. Neither provision instructs the calculation of any apportioned figure.

CNSL’s answer is that there is a legislative backing for up-front apportionment, and it lies in the combined effect of CAA 2001 ss11(3)–(4) and s53(2). Section 11 requires allowances to be calculated separately for each qualifying activity, and s53(2) prohibits expenditure relating to different qualifying activities from being allocated to the same pool. CNSL argues that this prohibition bites at the allocation stage: if a single amount of expenditure relates to two qualifying activities (IRF and ORF), one cannot put the whole amount into both pools without breaching the principle that each pool should contain only expenditure for its own activity. The logical consequence, CNSL says, is that the amount must be splitbetween the pools by a rational method (anticipated or actual throughput), so that each pool reflects only the expenditure for that qualifying activity.

We prefer CNSL’s view that the upfront apportionment is carried through to also having to apportion a disposal value and a historic cost. It is inherent in the structure of Part 2 CAA 2001 that it requires that disposal value follows the pooling which the statute mandates for separate qualifying activities. Sections 11(3) and 53(2) require allowances to be calculated separately by activity and prohibit expenditure relating to different activities being placed in the same pool. It follows that when a disposal event occurs under s 61, the disposal value must be brought into the same pool(s) and in the same proportions as the underlying expenditure/TWDV were allocated, rather than importing the full disposal value into a single pool and attempting a subsequent correction under s 207. As Mr Peacock submitted, reading s 61 and the historic-cost cap in s 62 through the lens of s 11(3)/s 53(2) supplies the statutory authority for apportioning both market value (s 61(2) Item 7) and historic cost (s 62) between the relevant IRF and ORF pools, and avoids duplication and over-recovery. The lack of a specific provision requiring apportionment does not stand in the way of CNSL’s analysis as it is inherent in the setting up and maintenance of the pools.

Under HMRC’s case it is s207 which provides the means of apportioning balancing allowances and charges as between qualifying activities, whereas CNSL argue the scope of those provisions is confined to addressing the situation where expenditure relates to both qualifying and non-qualifying use.

The particular issue of statutory interpretation here is whether the words “other purposes” in s 206(2)(b) are engaged only where the plant is used partly for a qualifying activity and partly for a non-qualifying purpose (for example private or non-business use), leaving cases where the same plant serves two qualifying activities (here IRF and ORF) to be dealt with by the separate-pooling regime in ss 11(3) and 53(2); or whether, as HMRC contends, “other purposes” means any purpose other than that of the particular qualifying activity under consideration, so that even dual-qualifying-activity use falls within ss 206–207.

CNSL’s case is that Part 2 draws a deliberate line: ss 11(3) and 53(2) require allowances to be calculated separately for each qualifying activity and prohibit mixing expenditure across activities, so the two qualifying activities, QA1 and QA2, must be addressed by separate pools and proportionate allocation, whereas ss 206–207 form the special code for qualifying/non-qualifying cases (single-asset pool with s 207 reductions). CNSL also rely on the rewrite history in relation to the legislative predecessor the Capital Allowances Act 1990 (“CAA 1990”) and the Explanatory Note to s 11 which states that:

“Subsection (4) gives the general rule for qualifying expenditure. Subsection (4)(a) uses “wholly or partly” for the purposes of the qualifying activity instead of “wholly and exclusively” used by sections 22(1)(a) and 24(1)(b) of CAA 1990. The use of that term at the start of Part II is potentially misleading. Readers may conclude they are not entitled to plant and machinery allowances if they use an asset partly for other purposes. Yet section 79 of CAA 1990 makes explicit provision for allowances for plant or machinery provided or used partly for a qualifying activity and partly for other purposes. This subsection flags this at the start.”

CNSL explain that the previous legislation operated by reference to different trades rather than qualifying activity pools (the pooling provisions of s53 were new). Against that backdrop the above Explanatory Note confirms that “wholly or partly” was adopted to flag that an asset used partly for other purposes (the successor to CAA 1990 s 79) may still attract allowances. In CNSL’s submission, that shows that “other purposes” in s 206 is non-qualifying use, not a second qualifying activity.

HMRC’s submission is that read with s 11(3), “other purposes” captures all purposes other than those of the particular qualifying activity, so the entire $1 is qualifying expenditure of each activity and the entire disposal value too. The entire $1 must be taken to a single-asset pool for IRF and to a single-asset pool for ORF, with s 207 then reducing allowances or charges on a just and reasonable basis. HMRC says s 54(3) is only a signposting, and that applying R (Derry) v HMRC [2019] UKSC 19, the rewrite is to be read as a coherent code without narrowing it by earlier law. In any event, CAA 1990 s 79 was not limited to private use and did not mandate CNSL’s upfront attribution.

We prefer CNSL’s construction of CAA 2001 s 206(2)(b). Read in its statutory setting, “other purposes” addresses the case where expenditure is for a qualifying activity and a non-qualifying purpose, leaving use across two qualifying activities (here, IRF and ORF) to be dealt with by the separate-pooling envisaged in ss 11(3) and 53(2) and, for ring-fence trade, s 162.

That division of labour is evident from the structure of Part 2: ss 11(3)/53(2) require separate calculation and a prohibition on mixing across qualifying activities, whereas ss 206–207 provide a single-asset pool with just-and-reasonable reductions for mixed qualifying/non-qualifying use.

The rewrite materials are consistent with that reading: the Explanatory Note to s 11 explains why the provision now says “wholly or partly”, namely to “flag” that allowances remain available even if the asset is used partly for other (non-qualifying) purposes, because the predecessor (CAA 1990 s 79) already catered for that case thus confirming that “other purposes” speaks to the distinction between qualifying and non-qualifying activities, not to a second qualifying activity to be split by s 206.

HMRC’s other points (see above at [182]) do not persuade us this analysis is incorrect. First, our conclusion turns on the internal architecture of the rewritten provisions themselves (ss 11/53 vs ss 206/207), not on the Explanatory Note (where the point is simply that such note is consistent with CNSL’s interpretation). Second, even if s 79 CAA 1990 was not limited to private use, it was not an upfront pooling rule for QA1/QA2, which the rewrite introduced through ss 11(3)/53(2). Although not relevant to the construction of the provision, we also note in passing that CNSL’s construction is consistent with HMRC’s guidance on the provision in that all of the examples given concern situations of qualifying and non-qualifying activity and make no reference to situations involving two qualifying activities.

In reaching the above conclusion we do not rely on CNSL’s arguments that HMRC’s approach would risk falling foul of provisions on s7 (no double allowances) or s8 (No double relief through pooling under Part 2 (plant and machinery allowances). While it is clear that those evince a policy of preventing double-counting they do not help because HMRC’s case would not (because of the application of a fair and just apportionment) result in double-counting. The reason that we do not agree with HMRC’s approach is because it does not comply with the wording of s53(2) and s206(2)(b).

In conclusion we prefer CNSL’s approach to pooling. We therefore disagree with the FTT’s (obiter) views which had preferred HMRC’s approach and remake the FTT Decision on the basis that an apportioned amount is allocated to each pool.

Given our conclusion is in favour of CNSL’s approach we do not address the parties’ disputed views on the proper approach to the just and reasonable calculation under s207 (see [53(2)] above).

CNSL’s appeal is accordingly allowed and the decision remade on the basis set out above.