Yearly Archives: 2011

11 Feb 2011

Office of Tax Simplification (OTS)

Readers may be aware that the Government has set up an Office of Tax Simplification (OTS) to review the UK tax system with a view simplifying and streamlining the regime.

The OTS initially identified all of the reliefs that they thought existed in the UK tax regime, some 1,042 of them!

The OTS has then published an initial report setting out its conclusions in respect of 13 specific reliefs affecting different taxes, types of taxpayer, and different sizes, together with a list of 75 further reliefs (Annex A), that they are going to review and include in their final report, plus a second list of another 75 reliefs (Annex B) that they will review if they have time.

Included in Annex B are a number of reliefs of direct relevance to upstream oil and gas activities.  These are primarily 100% FYAs for ring fence expenditure (Ref 137); Mineral extraction capital allowances (Ref 526); Capital Allowances – mining & oil industry (Ref 527) which covers, inter-alia, the special reliefs for offshore decommissioning; and Research and Development capital allowances (Ref 529).

The fact that a relief is reviewed does not mean that it is necessarily the case that there will be a recommendation that it should be amended or changed; indeed of the 13 initially reviewed the initial conclusion is that 3 of them should remain unchanged.


Given the integrated nature of the overall oil and gas tax regime and the regular consultations between industry and Government and whether the regime is fit for purposes it is thought unlikely that the review, even if it does extend to the reliefs referred to above will lead to any change in the law.  However, it is perhaps surprising, given the significance of the industry to the Exchequer and the economy as a whole, that any oil and gas reliefs have been targeted at all for review, and clients may want to make representations to this effect.

08 Feb 2011

Branch Profits Exemption

Further to our December 2010 Newsletter, draft clauses setting out the detailed proposals for a branch profits exemption regime, which has been under discussion for some time, have now been published.  These proposed changes are part of the Government’s “road map” to make the UK an attractive place to do business and are designed to help eliminate most of the differences between carrying on non UK activities through a branch or a subsidiary.

The exemption, which will apply to all large and medium sized companies and to small companies with branches in jurisdictions with a “full” UK treaty, will apply on an elective company by company basis. The operative date has not been announced yet but for December year end companies the earliest period to which the rules will apply will probably be the year ended 31 December 2012.

If an election is made the aggregate profits and losses attributable to all the company’s non UK branches will be left out of account for the purposes of calculating the company’s UK tax liability. The attributable profits or losses, including capital gains and losses and investment income, of each branch have to be computed on treaty principles. An election is irrevocable following the filing date for the first returns applying the election, and applies to all future accounting periods of the company. If no election is made the company will continue to be taxed under the existing credit relief system.


It will be possible for groups to make the election in respect of some companies but not others such that the group’s non UK branches can be organised into appropriate companies, with some remaining within the UK tax net, and the others electing to be treated as exempt. There also doesn’t appear to be anything to stop a group moving non UK branch assets out of a company which has made an election into one that hasn’t, and vice versa, with the result that the branch profits and losses could come in and out of the scope of UK tax. If not amended through the consultation phase this may present planning opportunities, although there will, of course, be local jurisdiction consequences to take into account before moving assets between corporate entities.  

There are however transitional rules dealing with losses. If, in aggregate, a company electing into the new regime has non UK branch accumulated losses (ignoring any capital gains and losses, and, if relevant, that any of those losses have been utilised for UK tax purposes, for example by offset against other income or by way of group relief), from the six years prior to the first year in which the election is made, or since 2005 if the losses are more than £50 million, any net profits from non UK branches will not be excluded until such time as the post election aggregate profits (ignoring any post election net losses, or post election capital gains or losses) exceed these accumulated losses. During this time credit will be available for any non UK tax paid on these profits.


This deferral of the effective date could mean that it may not be possible to protect capital gains on non UK branch assets if the company is trading but there is no income in the non UK branches. As with the comment above it would however appear to be possible to move assets from one UK company to another, subject to there not being any non UK tax cost, before making the election in the transferee, such that the transferee would have no past losses to absorb before the exemption applies. 

There are a number of exclusions from the election. As noted above the exemption does not apply to any profits or losses of “small” companies (i.e. those with fewer than 50 employees, and with both turnover and a balance sheet total of less than €10 million) attributable to jurisdictions which do not have a “full” double tax treaty with the UK containing a non discrimination clause. The exemption is not available to investment companies, in respect of capital gains of close companies, nor in respect of profits which would be subject to a CFC apportionment if held in a non UK subsidiary. Further, the exclusion is not available if profits which have been diverted to a “low tax” jurisdiction exceed certain de-minimus levels, and the diversion had as one of its main purposes the reduction in UK tax.


We would expect that most oil and gas companies, even in the exploration phase, are unlikely to be “small”, but if they are, this exclusion could mean that, for example, capital gains made on licences in oil provinces where the UK does not have a treaty may still not be  exempt, even if an election has been made.

As the reason for oil and gas companies conducting upstream operations outside the UK will be because that is where the licences are located, it is not thought that the diverted profits exclusion could apply. However groups with other activities outside the UK will need to review these rules to determine whether an election will be effective.  

As noted above the potentially exempt profits attributable to a non UK branch are computed in accordance with treaty principles. The initial requirement is that the branch profits must be those which would have arisen if the branch had been an independent entity. This is then caveated that it should be assumed that the branch has the same credit rating as the company and that equity and loan capital is allocated on a just and reasonable basis.


It is not clear how this rule should work if, for example, a company had a producing interest in the UK which gave it capacity to take on third party bank debt, but had only exploration interests in the non UK branch, or vice versa.

The introduction of these rules should make tax compliance easier for UK resident companies with non UK activities. The flexibility of an elective regime ensures that all upstream oil and gas players should be pleased with the new regime which also, as drafted, appears to offer a significant amount of planning opportunities.  Any clients wanting CWE to carry out a review of their position, and the potential opportunities open to them, should speak to their usual CWE contact.

27 Jan 2011

Draft Finance Bill 2011 proposals and clauses – Abolition of capital gains degrouping charge

At present, if a company leaves a group owning an asset which it has acquired from another member of the group within the previous 6 years under a transfer which was tax free at the time, there is a deemed capital gains disposal event in the company, whereby the company is deemed to have disposed and reacquired the asset at its market value as at the date it acquired it.  This is so even though the disposal of the shares themselves may be exempt as a result of the application of the substantial shareholding exemption (SSE).

Although there are provisions to allow any such gain to be transferred intra group, or rolled over in the company or any other seller group company, it is often difficult to avoid a tax charge arising and careful planning is required to avoid this situation.

The draft FB 2011 clauses contain provisions which significantly reduce the impact of such a degrouping charge.  The effect of the proposed legislation will be that if the company elects, the gain arising on the deemed disposal as a result of leaving the group will be treated as additional consideration for the disposal of the relevant shares; thus, if the disposal of the shares qualifies for the SSE, the whole of the gain, both actual, on the sale of the shares, and deemed, arising as a result of the degrouping charge, will be exempt.

If such an election is made the deemed market value tax basis of the asset is reduced by the amount by which the consideration for the disposal is increased.  Thus in most cases the basis for the asset will continue to be the group historic cost.

If a number of companies leave the group at the same time as the result of the sale of a company which itself holds shares in other group companies and there is a degrouping charge in one or more of them, if the election is made for all the companies, these gains will be added to the proceeds for sale of the shares in the company sold.

The existing provisions which allow companies the ability to roll over the degrouping gain or to reallocate the gain within the group will be repealed and in their place changes will be made to section 171A to allow for a degrouping gain to be reallocated under those provisions.

However if a company leaves a group otherwise that as a result of a sale of shares e.g. by means of a new issue of shares, the degrouping charge will remain within the company.


Industry have lobbied for some time for this charging provision to be abolished and the FB 2011 provisions effectively mean that in most cases there will no longer be a chargeable gain arising in the company being sold.  Care would need to be taken however with structures that involves issuing new shares to third parties who could cause the issuing company or any affiliate to leave the group.

There are also provisions amending the SSE rules to allow SSE to be available for the sale of the shares in a newly incorporated company if a trade is transferred into it from another group company; previously it was necessary for the seller’s group to have owned the shares in the target company for at least 12 months and for the company to have been a trading company for at least this period of time.  The new provisions achieve this by deeming the period of ownership of the transferee company to extend to the time the transferred assets have been used for a trade within the group.  In these circumstances the transferee company will also be treated as having carried on the trade for this same period.

Assuming these provisions become law as drafted, they will be effective for share disposals from the date that FB 2011 receives Royal Assent i.e. sometime around late July 2011, regardless of when the intra group asset transfers occurred.


The effect of these rules is that a newly incorporated company can be used to sell trading assets providing those assets have been used as trading assets within the group for at least 12 months.

Therefore, when assets are to be sold there is now a clear choice as to how this can be done.  The assets can either be sold by way of an asset sale (if for example it was expected that reinvestment relief can be claimed to exempt a ring fence gain) or they can be transferred to a fellow subsidiary and the shares in that company sold, without generating any capital gains charge, providing the conditions for the election are satisfied.

Once enacted, this will mean that there will be no need to keep assets in separate companies, and all a group’s interests can be amalgamated in fewer appropriate companies.

This greatly simplifies group structuring for assets and will also mean, for example, that there is no need to retain dormant companies from which assets have been transferred in order to avoid the de-grouping charge.  Once these provisions become law these companies can be liquidated if required.

25 Jan 2011

Capital Gains Tax Value Shifting

Draft legislation was published last month to amend the value shifting rules for inclusion in Finance Act 2011 as part of a number of simplification measures for Capital Gains Tax.

The existing regime, which provides for a general measure with specific exclusions for certain types of transactions, is to be replaced by a new targeted anti avoidance rule.

The new rule will apply where there is a disposal of shares or securities by a company, arrangements have been entered whereby the value of those share or securities is materially reduced, and the main purpose or one of the main purposes of those arrangements is to obtain a tax advantage.  In these circumstances any gain or loss on disposal of the shares or securities will be computed as if the consideration for the sale was increased by such an amount as is “just and reasonable” having regard to the value shift.

Where the disposal of shares qualifies for the substantial shareholdings exemption the value shifting rules will have no effect.  However, there are a number of circumstances where disposals might not fall within the substantial shareholding exemption and care will be needed to ensure that the new rules do not create an unexpected tax charge.

The depreciatory transaction rules, which limit the amount of an allowable capital loss on a disposal where value has been stripped out of a company, are also being amended such that any depreciatory transactions that occur more than 6 years before the disposal can be ignored.

The rewritten provisions are to apply for disposals of shares and securities after Royal Assent of Finance Act 2011 (probably July 2011).


Although the new rules are billed as a simplification, the reality is that they are likely to be of much wider application, and the introduction of a sole or main benefit test will lead to more uncertainty.

One potential area for difficulty is where transactions have already been entered into to reduce the value of a company prior to disposal where the SSE might no longer apply, for example a disposal as part of the liquidation of a company.  Although there is a specific exemption in the case of a value shift attributable to an exempt distribution, exempt distribution for these purposes is extremely narrowly drawn, such that, for example, a dividend of profits created via a capital reduction is unlikely to fall within the exemption.

Clients who are in the process of reorganising groups need to review any potential liquidation disposals in the light of the new rules and where necessary aim to ensure that any disposals occur before the new rules become effective.

06 Jan 2011

VAT Changes in 2011

A number of changes occurred at the start of 2011, which are likely to be of potential interest to clients.

 VAT on the import (and sale) of natural gas

 All imported natural gas (including liquefied natural gas imported by tanker) will be zero-rated from 1 January 2011.  We advised companies of these proposals in August and July last year.  Briefly, their main effect was to be that Companies are relieved of the need to pay VAT on import.  They must still, however, complete the C88 import declarations as these are used for controlling the actual movement of goods into the UK from outside the EU (and vice-versa).  The procedures for doing this have, however, changed.

 The ability to send manual gas import entries to Salford for processing ceases after the entry for December 2010 imports is submitted in early January; and

 Import entries for gas physically imported from 1 January 2011 on must be entered directly into CHIEF. 

CHIEF is a Government system giving direct trader access to electronic processing of imports and exports.  Although gas importers will still be able to send entries to Salford for input to CHIEF by HMRC, this may not be the most satisfactory solution and is unlikely to be available indefinitely.  As an alternative to inputting data into CHIEF themselves, companies might wish, therefore, to consider using a third party with access to CHIEF – their forwarding agent, for example – to submit the import entries on their behalf.

It is understood that importers of gas are likely to be contacted by Salford at some stage.  However, companies considering sending in manual entries would be advised to write to the NCH at Salford to ask what the procedures are.

The place of supply rules for services

The rules on the place of supply of most business-to-business services changed from 1 January 2010.  Not all business-to-business services were immediately affected, however, and supplies of cultural, artistic, sporting, scientific, educational, entertainment and similar services remained, for the time being, treated as supplied where performed.  

This now no longer applies and, from 1 January 2011, these types of business-to-business services will be treated as supplied where the customer is established – i.e. under the general rule for business-to-business services. For companies in the upstream oil and gas sector, however, the practical effect of this may not always be material. 

It will not necessarily mean, for example, that services to an Operator will be subject to VAT as work classified as scientific services can often be treated in the alternative as services related to land.  Thus, where the licence area concerned is outside the UK or UK territorial waters, the supply could then be regarded as taking place where the land is situated – and outside the scope.   

This is likely to equally apply to charges for exploration or exploitation at the wellhead or balancing payments on Unitisations.

Change in the standard rate of VAT to 20 per cent

The standard rate of VAT went up from 17.5 per cent to 20 per cent on 4 January 2011.  This should not be of major concern to our Oil Industry clients as the normal rule is that you use the new 20 per cent rate for all VAT invoices issued on or after 4 January. 

The change will also mean, however, that there will be a consequential impact on the VAT Payment on Account thresholds, where a business is required to make monthly VAT payments.  The entry and exit thresholds will go up from £1.6m and £2m to £1.8m and £2.3m and will change on 1 June 2011 for quarterly reviews and on 1 December 2011 for annual reviews.

Anyone wishing to discuss any of these issues may contact Peter Landon or their usual CWE contact.