Marathon have lost their appeal in the First Tier Tribunal for their claim for relief for expenditure incurred under an “acceleration” scheme which they entered into in 2008 under the special decommissioning relief provisions in s163/s164 CAA 2010 as they applied at that time.

Marathon Oil U.K., LLC (“MOUK”), was the licence holder for a number of the group’s North Sea assets. They entered into an arrangement to secure relief in advance of decommissioning work actually being carried out in the North Sea in respect of the Brae area.

The case is to some extent of historical interest as the law governing the special relief available for decommissioning was changed in 2009, once HMRC became aware of these arrangements, to tighten the conditions for relief.

It is this tighter scheme that applies today, and under the current rules it is clear that relief is not available until decommissioning work is carried out.

Facts 

Marathon identified that, as relief for decommissioning was not expected to arise until the end of field life, this was likely to interfere with their double tax relief position in the US. In particular the carry back of losses generated by such expenditure and consequent repayments of UK taxes could adversely affect the US group’s foreign tax credit planning.

EY provided Marathon with a proposal to accelerate the relief and therefore provide a greater degree of certainty on the foreign tax credit planning position.

Marathon established a special purpose group decommissioning services company in December 2007, MODS. This company contracted with MOUK to undertake its decommissioning work in respect of the Brae area. The service contract provided for an upfront payment of $300m which was intended to meet a substantial portion of MOUK’s forecast decommissioning liability. The categories of work to be covered by the payment were carefully defined to ensure the work related to expenditures which were expected to fall within the special allowance provisions of s163/164.

The upfront payment was made in 2008 and not repayable. MOUK claimed a 100% P&M allowances for the $300m in the period in which the contractual liability arose and in which it was paid.

The first actual decommissioning work, the costs of which were set against the upfront payment, arose in 2012, and as at the date of writing the Brae area continues to produce and the major part of the decommissioning work is still to be carried out.

Decision 

The Tribunal accepted that the main reason for MOUK entering into the arrangements were to control the group’s tax credit position in the United States.  However, it also found, as a matter of fact, that an important element of the arrangement was to obtain an accelerated UK tax deduction. Marathon accepted that there was no operational reason for entering into the relevant transactions.  The Tribunal also noted that there was no net cash outlay to the Marathon group as a result of the initial arrangement.

The Tribunal was unimpressed by the relevance of the expert witness put forward by Marathon to provide details of the reasons behind the arrangements, given they had no contemporaneous knowledge of the facts or circumstances.

However, despite these issues it is clear that the decision in the case turned on a narrow point; was the payment made by MOUK to MODS “expenditure…incurred on decommissioning of plant or machinery” within section 163.

The Tribunal rejected the contention that incurring expenditure “on” decommissioning meant  incurring expenditure for “the purpose of decommissioning”. They noted that the legislation granted the special allowance only if various conditions were satisfied in respect of specific plant and machinery. HMRC contended that it simply was not possible for MOUK or HMRC to know whether those conditions would in fact be satisfied in relation to the actual decommissioning work.

HMRC’s view was that in order to qualify for the special allowance the legislation required that specific amounts of expenditure must be identified and spent on specific decommissioning activities in relation to specific items of plant and machinery.

This view was accepted by the Tribunal.

The finding was that, adopting a purposive approach to statutory interpretation in the real world and in a meaningful sense, the payment made to MODS was not incurred “on” decommissioning but on putting funds aside within the Marathon group to meet future costs of decommissioning.

It is not known whether Marathon intend to appeal this decision.

Comment: 

The decision is a useful summary of the current principles of statutory construction and in particular the requirement to adopt a purposive approach in this type of case. The Tribunal established that the purpose of the legislation was to provide for relief for actual work carried out in connection with actual plant and machinery, and it was in this context that the meaning of the phrase “on decommissioning” needed to be determined.  

In order to understand the case it is useful to review some of the history behind the special relief provisions.

When originally introduced the main conditions for the special relief were that the 

“Expenditure had to be incurred for the purposes of, or in connection with, the closing down of an oil field or of any part of an oil field” and 

“The decommissioning of the plant or machinery must be carried out, wholly or substantially, to comply with– 

(a) an abandonment programme, or 
(b) any condition to which the approval of an abandonment programme is subject.

Industry identified that the original wording would not allow for the special relief to apply to mid-life decommissioning. Following lobbying by industry the rules were modified and in particular this condition surrounding the requirement to have an abandonment programme in place was deleted.

We believe it was the removal of this compliance with an abandonment programme condition which paved the way for the “acceleration idea” to be adopted.  What seems to have been missed by Marathon is that the new legislation also moved away from a “purpose” test and introduced the narrower concept that the expenditure in question must be “on decommissioning”. 

As soon as HMRC became aware of this transaction the law was changed once again to ensure that relief was only available in a period to the extent that actual work was carried out by the end of that period. However although the “comply with” test was reintroduced this was in a wider form which was intended to allow for mid-life decommissioning.  

There were discussions between industry and HMRC a number of years ago under the post 2009 scheme as to what “on decommissioning” meant in the context of studies expenditure.  HMRC published guidance which reflects the view that expenditure on such studies is indeed expenditure on decommissioning.

The precise extent of the special relief in s163/164 is currently being discussed between industry and government. The main issue which HMRC seem to have raised was to question if the special relief could be obtained in advance of an abandonment programme being put in place. We do not believe there is such a requirement, but the work needs to be undertaken in accordance with some form of Government agreement. It is nevertheless hoped that this decision will clear the way to a common position being established.  We understand that HMRC have, in fact, already accepted that in certain circumstances expenditure incurred before the abandonment plan has been agreed can indeed qualify.   

CW Energy LLP
November 2017

Philip Hammond presented his Budget today.

This note sets out the main announcements that are targeted at oil and gas companies operating in the UK and UKCS.

TTH for late life assets

The main item directly affecting the oil and gas industry was the announcement regarding the proposed introduction of transferable tax history (TTH). The intent of the proposals is to facilitate the transfer of mature field interests to companies which would otherwise be unable to obtain effective relief for decommissioning costs either because they had not paid much if any corporation tax in the past, or were not expected to have sufficient tax capacity in the future to enable effective relief for decommissioning costs to be available.

Draft clauses are to be published for consultation in spring 2018 with a view to legislation being introduced as part of Finance Act 2018/2019 to apply retrospectively to deals approved by the OGA on or after 1 November 2018.. An outline of the proposals was published as part of the Budget package and can be accessed here .

Comment:

The Government appears to have taken on board most, but not all, of the suggestions of the expert panel (of which CWE was a member), which was set up earlier this year and sat over the summer. The proposed change will not operate as a panacea for all of the taxation difficulties that can arise on the transfer of late life assets, and alternative strategies may still need to be followed, but the measure  is to be welcomed as an additional tool for facilitating transactions with  particular fact patterns. 

 It is interesting to note that government have estimated that this measure will actually raise £70m of taxes in the years up to 2022-23, as a result of extended investment and production in mature fields. 

PRT in respect of retained decommissioning liabilities

There are difficulties in obtaining PRT relief where decommissioning obligations are retained on a field transfer. In order for the seller to secure relief it must be a participator in the field at the time the expenditure is incurred. If the buyer is to obtain relief for costs which are economically funded by the seller the PRT subsidy rules need to be managed. These issues were  also addressed in the expert panel discussions and a technical consultation document dealing with possible ways of removing these hurdles is also to be published in the spring 2018.

Comment:

One of the current approaches adopted is for sellers to remain on the license or perhaps to come back on the licence at the time of decommissioning. This may be commercially unattractive for the seller.  

It has been noted that the current methods for a seller to retain the tax benefit of retained decommissioning costs arguably leave the Treasury exposed to larger PRT repayments that might otherwise be expected and it is assumed that any proposed changes of law will seek to deal with this. The two potential ideas discussed to date involve a change to the PRT subsidy rules or the introduction of deemed field transfers.  

Losses on change of ownership

The industry has been lobbying for a number of years for more clarity on when the major change in the nature or conduct of a trade (MCINOCOT) rules might apply to the transfer of companies with ring fence trades. HMRC has now committed to give clearances on such transactions in certain cases, and to publish some further guidance in the Oil Taxation Manuals. This latter commitment is reiterated in the document published by Treasury today on TTH.

Comment:

While the progress on this issue to date has been slow we already have some experience of the clearance process which has been a helpful development. The commitment to providing  further clarity is much welcomed. 

It is hoped that the publication of further guidance will further assist in enabling companies to invest with more certainty about their future tax affairs. It is hoped that the new guidance will not only give examples of what HMRC believe would not amount to a MCINOCOT, but also examples of what would.   

Taxation of tariff income

The next Finance Bill is to include provisions to clarify whether tariff income should be included, for corporation tax purposes, within ring fence profits or not. This clarification will help facilitate the introduction of an improvement in the investment and cluster area allowance regimes to enable the allowances to be activated by tariff income. It is understood that a draft Statutory Instrument will be published for consultation early in 2018, although it has not yet been decided from when any change will be effective.

Comment:

When PRT was abolished for new fields in 1993 the corporation tax provisions dealing with tariff income were not amended to reflect this. Most, but not all, North Sea players have continued to take the view that all tariff income, from assets which are also used in the company’s ring fence trade, falls within the ring fence. It is understood that the proposed change in the law will confirm this position. It is assumed that the change will not apply retrospectively for companies that have treated such tariffs as being outside the ring fence. We understand that draft legislation will issued on 1 December 2017. 

CW Energy LLP
November 22 2017

CW Energy is pleased to announce that it has become part of legal and professional services group Gordon Dadds Group plc, a fast growing legal and professional services business headquartered in London with a significant back office and technology platform based in Cardiff.

Joining the Group will give our clients access to a wider range of legal and professional services as well as enhancing the long term sustainability of the firm.

Commenting on the acquisition Adrian Biles, Chief Executive Officer of Gordon Dadds Group plc, said: “I am delighted to have completed our first acquisition after Gordon Dadds’ successful IPO in August. CW Energy LLP is a highly regarded and highly profitable business which will enhance the Group’s activities and will provide further opportunities for cross-selling services within the Group. Such acquisitions ensure that Gordon Dadds is always providing a premium service which caters to all our clients’ needs.”

Phil Greatrex, Managing Partner of CWE, added:

“We are delighted to join the Gordon Dadds group. We are excited to be working with Adrian and his team to broaden our client base and develop new commercial opportunities.”

Issue

Although IAS 12 requires one to take into account uncertainties when accounting for tax there is no specific guidance of the approach to be taken.

IFRIC 23 is being introduced to clarify the accounting approach that is required to be taken.

IFRIC 23 interpretation in assessing uncertainty

The IFRIC deals with 4 areas relevant for recognition and measurement

1. Whether tax treatments should be considered singly or collectively

In deciding whether a tax treatment should be considered independently or together with other tax treatments an entity will be required to take the approach that is considered to provide the best prediction of the resolution of the uncertainty.

2.  Assumptions to be made regarding taxation authorities’ examinations

An entity is required to assume that a tax authority will examine those reported values which it has a right to examine and will have full knowledge of all relevant information.

3. Determination of taxable profit (tax loss), tax bases, unused tax losses and credits, and tax rates

In considering the treatments that an entity is using in tax filings, the entity must consider whether it is probable that the tax authority will accept a given tax treatment, or collectively a number of tax treatments considered together.

• If the entity judges that it is probable that the tax treatment will be accepted it will determine the taxable profit/loss, tax bases, unused tax losses and credits or tax rates consistently with that tax treatment as reflected in its tax returns.
• However, If the entity judges that a tax treatment is unlikely to be accepted then in calculating the taxable profit/loss, tax bases, unused tax losses and credits and tax rates it will have to use the most likely amount or the expected value of the tax treatment once resolved. The entity will use whichever method provides the best prediction of the expected outcome.

4. Effect of changes in facts and circumstances

Changes in facts and circumstances mean that the calculated values will have to be reassessed.

 Effective date

IFRIC 23 is effective for annual reporting periods beginning on or after 1 January 2019. Earlier application is permitted.

Transition

The cumulative effect of initially applying these new rules will be reflected in retained earnings, or in other elements of equity, at the start of the accounting period in which the entity first applies the rules and without adjusting comparative information. Full retrospective application is also allowed if it can be done without using hindsight.

Comment

The US introduced a codified approach to this issue a number of years ago. The approach adopted in the IFRIC is not as prescriptive as the US approach but will introduce additional rigour to this area.  

The assumption of prefect knowledge for the tax authority is likely to lead to more conservative positions being taken.  

Interestingly the IFRIC does not add any new disclosure requirements although the requirements of IAS 1 and IAS 37 will continue to apply. We suspect that companies are likely to be encouraged by their auditors to increase the level of disclosure. 

We want to draw your attention to the implementation of the rules in the Criminal Finances Act 2017 creating an offence of corporate failure to prevent the facilitation of tax evasion.

The rules were set out in the Act, but were only to take effect once secondary legislation was passed. This has now been done. The Criminal Finances Act 2017 (Commencement No 1) Regulations, SI 2017/739, implements the rules from 30 September 2017.

The rules introduce a new offence. The offence is committed by a company where a person acting in the capacity of an associated person (e.g. an employee) facilitates an offence of fraudulent tax evasion or cheating the public revenue in relation to UK tax or foreign tax. In relation to foreign taxes the action must be criminal in both the UK and the relevant foreign jurisdiction.

A company may be able to resist any charge if it can show it had in place reasonable preventative procedures.

Importantly the Act requires the Chancellor of the Exchequer to publish guidance about the procedures that relevant bodies might put in place. This has now been published here (external site).

The guidance is careful to explain that it does not provide a ‘safe harbour’; “compliance with the guidance will not render a relevant body immune from prosecution”, and it also states that it should not be used as a check list. Nevertheless, given that having reasonable preventative procedures in place provides a potential defence, the guidance is important in deciding what measures are appropriate. The guidance identifies 6 Guiding Principles;

• Risk assessment
• Proportionality of risk-based prevention procedures
• Top level commitment
• Due diligence (in respect of persons who perform services on behalf of the organisation)
• Communication (including training)
• Monitoring and review

Overall, companies should assess their exposure in the expectation of implementation and consider whether their preventative procedures can be shown to be reasonable. Staff awareness of the obligations forms a vital part of this even if the company may have very little risk.

Corporation Tax loss reforms

Impact on ring fence losses  

Readers will be aware that the Government is proposing some quite significant changes to the rules dealing with the use of carried forward losses. Draft clauses were included in the Finance Bill published earlier this year. These provisions were however pulled from the truncated Bill which has passed into law, but revised legislation to be included in the Finance Bill to be published after the summer recess, has recently been reissued. These revised draft clauses are substantially the same as those included in the original Finance Bill, but government has taken the opportunity of the delay to correct some of the anomalies in the previous draft which related to the use of ring fence losses.

We reported In April on a number of potential anomalies to the ring fence loss rules. In particular, we viewed several items as inconsistent with the principle which we thought had been proposed by government, that the offset of ring fence losses against ring fence profits would not be impacted by the reforms. The changes that have been made are as follows

1. The RFES rules have been amended such that pools can include post 1/4/2017 losses. A number of other changes to these rules are included to cope with the new loss carry forward rules.

2. The transfer of trade rules which allow trade losses to be transferred from the predecessor to the successor company are to be preserved not just for pre 1/4/2017 losses but also for ring fence losses arising after this date, including decommissioning losses.

1. The extension of the review period from 3 to 5 years included in the previous draft is to be applied to the ring fence when considering whether there has been a major change in the nature or conduct of a ring fence trade.

Decommissioning losses have however been carved out from this extended period in the latest version of the legislation recognising presumably that the Finance Act 2013 legislation needs to be preserved to prevent potential claims under Decommissioning Relief Deeds.

The fact that the ring fence has not been completely carved out from this change is particularly disappointing given the representations that have been made by industry on the adverse effect these rules have. To now make them worse seems perverse. The application of the rules in general continues to be discussed with HMRC as they are seen as a major impediment to getting the dwindling North Sea resources in the right hands to assist with the government objective of maximising economic recovery (MER) and this issue is currently being dealt with as part of the ongoing consultation on late life assets. It seems unlikely that a blanket exclusion will be introduced but its hoped that some helpful guidance will come out of these discussions.

There are a number of further changes to the original draft wording with restrictions introduced which apply to the offset of ring fence losses against non ring fence profits, essentially to bring these rules in line with the non-ring fence loss rules. These are however thought to have limited practical application.

We will continue to review the changes and will update readers in due course

The Finance Bill as originally introduced has been dramatically reduced in scope in order to pass into law prior to the general election.

For companies the key points are the omission of;

• the new loss relief rules (for brought forward losses),
• the interest deduction restrictions, and
• the amendments to the Substantial Shareholding Exemption rules.

In addition, the legislation dealing with the relaxation of the PRT opt-out rules is to be omitted.

The Government minister stated in the relevant Finance Bill debate that the withdrawal of all of these provisions should not be taken as a change of policy and it is expected that all these measures will be enacted in legislation to be introduced after the election, regardless of which party forms the next government.

As a reminder, the proposed new rules for loss relief largely reflected the stated policy intention that the treatment of Ring Fence trade losses should be preserved, although we identified a number of anomalies in the loss rules. The interest restriction rules were drafted to exclude interest taken into account in computing Ring Fence profits and would only therefore impact non-ring fence profits.

The decision not to force through the loss rules as drafted is welcome as it will permit our representations to be considered properly.

In the original Bill the operative date for the first three sets of measures was 1/4/17, and we would expect any reintroduced legislation to apply from this date. However, the possibility of a later operative date, or indeed the possibility that one or other measures is not brought in, should not be discounted.

Please contact us to discuss any concerns you have.

HMRC have already accepted elections made under the proposed amended PRT opt out rules and we assume that they will continue to honour these until the legislative position is finalised.

In the meantime, the reduced Bill maintains the machinery for income tax and corporation tax, indirect tax rates, and retains some non-controversial anti- avoidance measures with regard to personal and employee taxes; for example, rules combatting the tax savings hitherto enjoyed by the use of salary sacrifice schemes and foreign pensions as alternatives to paid remuneration and UK pensions.

Possible unwelcome changes for Upstream groups 

The proposals for the changes to the loss rules were published on 20 March.

The draft legislation runs to over 100 pages.  These new rules are intended to increase flexibility in the use of losses whilst introducing restrictions to prevent the relief from brought forward losses/deficits from exceeding 50% of the profits of a period.

These rules will also apply to the use of ring fence losses against non-ring fence profits (subject to some carve outs to prevent claims by companies against the government under Decommissioning Relief Deeds in respect of decommissioning losses).

As expected the rules for the use of ring fence losses against ring fenced profits are to be broadly maintained, with no 50% restriction on the use of losses against profits and no additional flexibility to set off ring fence trading losses on a non current basis against non-trading ring fence profits or as group relief. It appears that a number of the new restrictions will impact the ring fence. We do not know whether this is intended or not and will be making representations on these aspects.

Ring fence trade anomalies

Because of the way in which the ring fence has been carved out a number of changes will impact the ring fence

1. The draft legislation extends the period in which a major change in the nature or conduct of the trade following a change of ownership that occurs on or after 1/4/17 could trigger the disallowance of losses from a 3 year to  a 5 year period that includes the change in ownership and which begins at the earliest 3 years prior to that change.

It seems that ring fence losses in general including decommissioning losses are within the scope of this change as currently drafted, although we have received an indication that decommissioning losses are intended to be outside the scope (presumably as companies would have a claim under a Deed).

2.     Further; the transfer of trade rules do not appear to allow post 1/4/2017 ring fence losses to be transferred to the successor.

3.      Finally it appears that the pool of losses for RFES will only include pre 1/4/2017 losses.

We are hoping that all of these anomalies are simply drafting errors that will be corrected before the bill is passed into law.

We continue to review the effect of the new rules and shall be discussing these items with HMRC. We will keep you informed on the progress and passage of the legislation.

Non ring fence profits 

Subject to the points mentioned above in most cases the new rules should not impact upstream groups except of course where they have significant non-ring fence profits. Such profits could arise from group service activities or as a result of interest and foreign exchange gains on lending arrangements.

One area which groups need to consider very carefully is their exposure to significant non-ring fence exchange gains and losses. The 50% restriction rules could mean for example that tax is paid on a gain in a period even though overall no gain or loss arises on the particular item.

It is even more important following these changes that groups try to manage the tax risk of exchange gains and losses. Groups with large non-ring fence losses carried forward who have never had to look too closely at the position could suddenly find themselves in a tax paying position if there was a large movement in exchange rates over a year.

The Chancellor delivered the last ever Spring Budget today. There were very few specific oil and gas measures in the announcements. Those having an impact on the regime are set out below.

Late life assets

The main new Budget announcement is that there is to be a further review of late life assets. A Treasury discussion document is to be issued on 20 March and it is anticipated that further consultation with interested parties will take place over the following months.

An advisory panel of experts is to be set up which is to be tasked with reporting, by the time of the Autumn Budget their conclusions on any  measures that they believe need to be taken at in the future   to break down perceived barriers to transfers of assets in the UKCS. This is following on from the work Treasury has done canvassing views on what was needed to be done regarding late life assets to ensure MER, in which many readers will have participated.

Comment:

There will be many different views on what will best help achieve MER, but one of the key points that it is understood will be debated is the transfer of CT capacity on asset sales, to assist new players to acquire assets without sellers having to retain decommissioning obligations.  Although HMRC confirmed at the time of last year’s Budget that from a CT point of view it is not necessary to stay on a licence for relief for abandonment to be available, and it is clear that a number of transactions have been carried out which intend to take advantage of this, the ability to transfer capacity would provide additional commercial options.

It is understood that there is no specific timetable for introducing any changes as a result of the review, and that this will depend in part on the responses received, but any measures which will facilitate the transfer of assets are to be welcomed. 

In addition to the CT issues it is hoped that the current restrictive rules for PRT relief will also be addressed.

Investment allowances

The long awaited Statutory Instrument (SI) extending the investment and cluster (but not the onshore) allowance regimes to cover certain operating and leasing costs has finally been laid before Parliament today.

The SI is understood to be broadly the same as the draft last seen by Industry over a year ago, and does provide for the changes to be backdated to 8 October 2015 as had previously been understood. The SI does not deal with tariffing income.

Comment:

The introduction of these rules is to be welcomed and companies that have incurred relevant costs in 2015 will need to file revised returns if they have not already assumed the relief in filing their 2015 returns. It is understood that Treasury are still committed to extending the categories of income that can activate the scope of the allowance to cover tariffing  and that they are publish a draft SI in the near future, which should contain a provision for any new rules to be backdated to the 8 October 2015 date.

PRT administration

As previously announced, the Finance Bill will contain provisions amending the PRT opt out rules such that fields no longer have to satisfy the requirement that they are not expected to have taxable profits. The provision will apply to chargeable periods beginning on or after 1 January 2017 but only if an opt out election has been made by the responsible person before the start of the chargeable period. The legislation will reply retrospectively such that provided an election was made before January 1 2017 the opt out can apply for CP 1 2017. These rules are being introduced in conjunction with the reduction in the reporting requirements for those fields remaining within the regime that were previously introduced (and did not require legislative change).

Comment:

Going forward it is likely that only fields where the partners agree that there is no possibility of any future PRT repayments or the creation of a UFL will opt out. Others will continue to file returns and the simplifications introduced are welcome. 

Research and Development

 
It has been announced that the RDEC rules are to be simplified.

Comment:

Whether this will be of much benefit to oil & gas companies remains to be seen. 

CW Energy LLP

8 March 2017

Contact a member of our team

Ian Hack, Director

We are pleased to announce that Ian Hack, who joined CW Energy in 2012 after a long career with HMRC, has been made a Director of CW Energy LLP. This promotion recognises Ian’s increasingly strong contribution to the business since joining the firm.

Janusz Cetnarowicz, Partner

We are also pleased to announce that Janusz Cetnarowicz, who was a director and founder member of CW Energy Tax Consultants Ltd in 1990 has been appointed a partner of CW Energy LLP with effect from 1 January 2017.

Finally we record that after over 26 years with CW Energy Stewart Norman has retired from the business. Stewart was a founder member and has been an integral part of CW Energy since inception and we wish Stewart and his family a long and happy retirement.

With the changes announced today we believe that CW Energy continues to be in a strong position to offer clients the very best advice and support.