In the recent case of CATS North Sea Limited v HMRC, the Upper Tribunal overturned the First-tier Tribunal's decision that a balancing charge of c.£167m arose on the intra-group transfer of a North Sea pipeline interest, holding instead that the correct charge was c. £23m. The Upper Tribunal's decision turned on the interaction between the rule in section 279 of the Corporation Tax Act 2010 (CTA 2010) that deems oil-related activities to form a separate trade and the transfer of trade provisions in Chapter 1 of Part 22 of CTA 2010.
The decision has implications for groups restructuring oil and gas assets.
Background
CATS North Sea Limited (CATS) was incorporated in October 2014 as a wholly owned subsidiary of Amoco (U.K.) Exploration Company LLC (Amoco), part of the BP group. Amoco held a minority interest in the Central Area Transmission System North Sea Oil and Gas pipeline, which transports hydrocarbons from certain fields in the North Sea to the UK mainland.
In July 2014, a third party offered to acquire Amoco's minority interest in the pipeline, which Amoco agreed to. The sale of the pipeline interest took place in two phases: (1) Amoco hived down its pipeline interest to CATS for $1; (2) Amoco sold its shares in CATS to the third party for c. $388m.
Before the hive-down from Amoco to CATS, Amco treated all of its pipeline activities as part of a single ring fence trade, as it was entitled to do so under certain sections of CTA 2010. As a deemed participator in the North Sea fields, Amoco's tariff receipts from transporting both its own group's hydrocarbons and third-party hydrocarbons fell within the ring fence and were subject to the higher rates of corporation tax and the supplementary charge. The position was different in relation to CATS following the hive down. As CATS was not itself a deemed participator in the North Sea fields (because it did not hold an interest in the field), the CTA 2010 split its activities into two:
(1) transportation of BP group hydrocarbons remained inside the ring fence trade (IRF) due to the connection between CATS and Amoco; and
(2) transportation of third-party hydrocarbons fell outside the ring fence trade (ORF) because there was no connection between CATS and those third-parties.
At the time of the hive-down, CATS anticipated that only c. 13.5% of future tariff income would be IRF, with the remainder being ORF. Following the share sale, all of CATS activities were entirely ORF.
The Dispute
HMRC and CATS had opposing views of the capital allowances consequences of the hive down and share sale.
CATS advanced the argument that:
- Chapter 1 of Part 22 CTA 2010 did not apply at all to the hive-down because section 279 CTA 2010 requires CATS' oil-related activities to be treated as a separate trade for all corporation tax purposes, meaning that CATS carried on two distinct trades from day one. Since Amoco's single IRF trade could not be the same trade as CATS' two trades (one IRF, one ORF), the statutory conditions for a transfer of trade were not met. This is because, on a plain reading, Chapter 1 of Part 22 only applies to the following types of transfer: (1) whole-to-whole transfers; (2) whole-to-part transfers; (3) part-to-whole transfers; and (4) part-to-part transfers, not part-to-two-part transfers.
- On this view, only when CATS' trade ceased on the share sale did a balancing charge of c. £23m arise (on the basis that, after the share sale, CATS would cease to use the pipeline for qualifying activity).
HMRC advanced the argument that:
- Section 279 CTA 2010 is confined to the computation of ring-fence profits and should not be taken into account when applying Chapter 1 of Part 22 CTA 2010.
- Chapter 1 of Part 22 CTA 2010 applied to the hive-down as a transfer of one trade, the effect of which was that CATS inherited Amoco's tax written-down value and no disposal event for capital allowances purposes arose on the hive-down.
- CATS's subsequent use of the pipeline partly for ORF purposes constituted a disposal event for capital allowances purposes, triggering a balancing charge of c. £167m.
Decision of the Upper Tribunal
The Upper Tribunal rejected HMRC's argument that section 279 CTA 2010 is merely a computational rule for applying the ring fence rate of corporation tax. Instead, the Upper Tribunal found preferred CATS' view that 279 CTA 2010 forms part of a "comprehensive mini-corporation tax code to deal with oil-related activities", and that section 279 CTA 2010 must therefore be taken into account when applying Chapter 1 of Part 22 CTA 2010.
However, the Upper Tribunal did not accept CATS' primary case that Chapter 1 of Part 22 CTA 2010 was entirely inapplicable. Instead, the Upper Tribunal found that Amoco's pipeline business should be divided into two part trades: (1) the transportation of BP group hydrocarbons, which remained IRF in CATS' hands; (2) transportation of non-BP hydrocarbons, which became ORF in CATS' hands. The Upper Tribunal held that Chapter 1 of Part 22 CTA 2010 applied to the transfer of part trade (1) (the IRF to IRF transfer) because it was a transfer of the same type of trade, but that it did not apply to part trade (2) (IRF to ORF transfer), because the nature of the trade changed (an IRF trade in Amoco could not be said to be the same trade as an ORF trade in CATS, given the effect of section 279). On this analysis, no balancing charge arose on the hive down. Rather, on the share sale, CATS' IRF activity ceased, generating a balancing charge of approximately £23m (reflecting the difference between the 13.5% of the market value capped at historic cost of the pipeline of c. £167m and the inherited tax written-down value of negative c. £2m).
The Upper Tribunal was unpersuaded by HMRC's argument that this outcome was anomalous or perverse. Whilst acknowledging that the pipeline had moved from wholly IRF use to wholly ORF use with a significant reduced balancing charge, the Upper Tribunal considered this to be a function of the statutory regime's design rather than a reason to limit the scope of section 279 CTA 2010. The Upper Tribunal observed that there may be a lacuna in Part 22 CTA 2010, but that did not justify narrowing the scope of the 279 CTA 2010 deeming provision.
Implications for the oil and gas sector
This case is important in understanding the reach of the deemed separate trade rule in section 279 CTA 2010. The Upper Tribunal's conclusion that the deeming provision should be applied across the corporation tax code, rather than just for the purposes of applying the ring fence trade, has resulted in a narrow application of the transfer of trade provisions.
As the North Sea matures and infrastructure owners undertake transactions that may result in assets moving outside the ring fence, the decision may have wider relevance for groups undertaking similar restructurings. In particular, where a (deemed) participator hives down a pipeline or infrastructure interest to a subsidiary that lacks that (deemed) participator status, the ring fence characterisation of the subsidiary's activities will be critical to determining whether Chapter 1 of Part 22 CTA 2010 applies and what balancing charges arise, if any.
Other authors: Wilfrid Spencer, Solicitor
