Upper Tribunal rules in taxpayer favour in oil and gas succession dispute

The case involved two companies that were historically part of the BP group that were involved in the operation of the CATS pipeline in the North Sea.

Prior to the transaction in question, one of the companies, Amoco, was in a contractual joint venture with a third party to operate the pipeline. It then ‘hived down’ – a term referring to a corporate asset restructure – its interest in the pipeline to its subsidiary, CNSL, and subsequently sold off its shares in CNSL to a third-party buyer, Antin.

Before the hive down, Amoco treated all of its CATS pipeline activities as ‘inside ring fence’ (IRF) – that is, a single ring-fenced trade for corporation tax purposes. This trade included transportation of hydrocarbons through the pipeline, some of which belonged to the holding group and some did not – in other words it belonged to third parties. Amoco was a “participator” in the relevant oil field, meaning that it had interests and the right to extract oil from the field, which is why transporting hydrocarbons that belonged to other parties sill remained IRF.

Following the hive down, CNSL treated its CATS pipeline activities as two trades: the transportation of group owned hydrocarbons as IRF and the transportation of third-party hydrocarbons as outside the ringfence (ORF). Unlike Amoco, CNSL was not an actual or deemed participator in the relevant oil field.

When the CNSL shares were disposed of, CNSL’s IRF trade ceased altogether as it was no longer part of the group that held the extraction licence for the oil fields. Antin – the purchaser – did not conduct any oil-related activities. This triggered a balancing charge under the capital allowances regime.

CNSL argued that this balancing charge related only to the proportion of the capital allowances related to the IRF trade – approximately £23 million. However, HMRC argued that this balancing charge should capture all of the capital allowances related to the CATS pipeline that had been inherited by CNSL as a result of the hive down, totalling £169m.

At the core of the dispute was whether a provision that deems the ring-fence activities to be a separate trade should have effect to prevent the relevant transfer of the trade tax provisions in part 22 of the Corporation Tax Act 2010 (CTA 2010) from applying.

The ring fence deeming provision, in section 279 of CTA 2010, states that 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.”

Part 22 of the CTA 2010 stipulates the rules regarding company reconstructions and successions in the UK. It provides that where a trade, or part of a trade, is transferred between companies under common ownership – in other words, within a group – the person to whom the trade is transferred ‘stands in the shoes’ of the transferor from a tax perspective. This includes not triggering balancing charges for capital allowance purposes.

CNSL argued that because Amoco transferred a trade to it that was wholly IRF, and that CNSL did not and could not carry on a wholly IRF trade – because it was not a participator in the oil field – that part 22 could not apply to the hive down.

In 2024, the First-tier Tax tribunal (FTT) decided that part 22 did apply to the hive down and that CNSL inherited Amoco’s tax written down value in the whole transferred trade. In the FTT’s view, the deeming provision that treated the IRF activities as a separate trade was confined to the computation of ring-fence profits. It duly upheld HMRC’s conclusion that the full £169m was the appropriate balancing charge.

However, the UT reached a different conclusion and determined that s279 of the CTA 2010 forms “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”.  It went on to say that the very purpose of this wider code is to “ring fence” oil and gas production activity and tax profits from those activities separately from other trades/activities. “The change of ownership provisions are part of that code - they tell you what losses and allowances are available to the successor.”

The UT commented that “it may suggest that there is some other lacuna in the code”. HMRC had sought to suggest that the conclusion being put forward by CNSL could create avoidance opportunities, but the UT considered that any lacuna could not be widely exploited because the facts here including the combination of the classification of the operator and the relevant activities including transportation of hydrocarbons are not that common.

The UT therefore overturned the FTT’s decision on the basis that part 22 applies to the IRF part of Amoco’s trade that was transferred to CNSL, meaning that the hive down is not a disposal event for balancing charge purposes, but the share sale was, producing an IRF balancing charge in CNSL of approximately £23m.

Commenting on the case, Jake Landman, a tax disputes specialist at Pinsent Masons, said:
“The decision is another useful illustration of the extent to which a deeming provision can impact across various aspects of the tax code.”

HMRC had also argued that it would be absurd to allow £167m of capital allowances to be brought inside the ring fence but then not have it brought into charge when the asset was disposed of. The UT found that, while the purpose of part 22 is to preserve continuity of treatment in certain circumstances, that purpose is not all-encompassing but rather sets out specific circumstances in which it will apply. It said the fact that Amoco’s allowances were not fully recaptured on the hive down is a consequence of features embedded in the existing legislative regime.

The UT also rejected HMRC’s argument based on the nature of the activities: that Amoco and CNSL were both carrying on the same activities of transporting the same hydrocarbons through the CATS pipeline and therefore part 22 must apply to all of those activities. The UT disagreed and stated that the question of who was carrying out the activities, i.e. whether that person was a participator in the oil field, was part of the question of what the activities were because this was built into the definition of “oil-related activities”.