Yearly Archives: 2021

27 Oct 2021

Autumn Budget and Spending Review 2021

The Chancellor delivered the Autumn Budget and Spending Review 2021 today.  We set out below the key announcements that apply to the corporate sector, although no new measures are of direct relevance to the oil and gas sector.

Ring fence and supplementary charge to corporation tax rates

Despite the rise in the main tax rate as discussed below, there was no specific announcement on any changes to the oil tax rates.  Therefore, the rates will continue to be those currently enacted being 30% for ring fence corporation tax and 10% for the supplementary charge to corporation tax.


It would have been easy, with the upcoming Glasgow COP 26 meeting, for the Government to be persuaded that the current high oil and gas prices should lead to a rise in ring-fenced tax rates.  It is therefore welcome that the Chancellor has once again allowed a stable regime to remain in place.  This can be seen as a strong signal that the need for tax stability has been heard by the Chancellor. 

Research & Development expenditure

The announcement included two main changes to the R&D tax relief rules.  These changes have been made following a consultation exercise that commenced in 2020.

First, as had been trailed, the scope of expenditure that can attract relief is to be extended to include data and cloud computing costs.

Second, the Government has announced that they will look to “refocus the reliefs towards innovation in the UK”.  We expect this will mean that where R&D activities are conducted outside of the UK those expenditures will be prevented from attracting UK R&D relief.

The Chancellor announced in his speech that these changes are expected to be effective from April 2023.


The changes to the R&D relief rules may have some effect on UK oil and gas companies as some companies claim R&D relief for R&D activities that are conducted outside of the UK.

There was no announcement on combining the RDEC rules (that apply to larger businesses) with the R&D SME scheme.  There had been concerns that the rules could be merged which may have been to the detriment for smaller companies claiming under the higher value SME scheme.

Capital allowances – Annual Investment Allowance

The AIA allows certain qualifying expenditures to qualify for immediate 100% relief.  The current allowance was due to end on 31 December 2021.  However, the £1,000,000 per annum allowance is to be extended to 31 March 2023.

Notification of uncertain tax treatments for larger businesses

Alongside the Autumn Budget 2021 documents, an HMRC policy paper was published that outlined the notification of uncertain tax treatment rules that will be introduced with effect from April 2021.  The policy paper did not include any new proposals or further guidance on how the rules will be interpreted by HMRC.

Repeal of cross border group relief

In the continuing effort to remove EU-inspired legislation from the UK tax rules, the abolition of cross border group relief was announced with immediate effect.  These rules allowed, in limited circumstances, losses of EEA operations to be used to reduce UK corporation tax profits.

CW Energy LLP
October 27 2021

11 Aug 2021

Notification of uncertain tax treatments – draft legislation published

The Government is moving ahead with the introduction of new rules which require “large” businesses to report uncertain tax treatments. Draft legislation has been included within the recently published Finance Bill 2021-22.  In this newsletter we summarise and comment on the proposed notification rules.


The draft legislation was published alongside the summary of responses to the previous further consultation that opened in April.  Draft HMRC guidance is expected in the “coming weeks”.

In overview, the rules apply to corporation tax, VAT and PAYE.  Only large businesses are in the scope of the rules being defined as those that have UK turnover of more than £200 million or a UK balance sheet total of more than £2 billion.

For further background to the provision please see our April article

Requirement to notify – the “triggers”

The major concern with the proposals as previously communicated were the largely subjective tests (the “triggers”) that were to be applied to determine whether a tax treatment may need to be notified to HMRC.  Some of these tests have now been dropped and the original seven triggers have been reduced to three triggers in the draft legislation.  Notification may be required where:

  • provision has been recognised in the accounts, in accordance with generally accepted accounting practice, to reflect the probability that a different tax treatment will be applied. It would appear that this could be a provision against a deferred tax asset as well as current tax.
  • the tax treatment applied relies (wholly or in part) on an interpretation or application of the law that is not in accordance with the known way that HMRC interprets or applies the law. The “known way” must be apparent from:
    • guidance, statements or other material of HMRC that is of general application and in the public domain; or
    • direct company dealings with HMRC (whether or not they concern the actual amount or transaction).
  • it is reasonable to conclude that, if a tribunal or court were to consider the tax treatment, there is a substantial possibility that the treatment would be found to be incorrect in one or more material respects (whether or not HMRC or anyone else is likely to make a challenge).

Tax amount at stake must be over £5m

For the uncertain tax treatment to be notifiable there must be more than £5m of tax at stake (which includes SCT) in the year ended on the last day of the period covered by the return.  In order to calculate whether the threshold has been exceeded in any year all related uncertain amounts that follow substantially the same tax treatment must be aggregated.  For each uncertain amount an “expected amount” must then be calculated.  This expected amount is the amount of the alternative treatment on which the accounting provision is based, following the HMRC known position, or the position the tribunal or court would find correct (depending on which trigger was satisfied).

Where the uncertain tax treatment satisfies more than one of the triggers then all expected amounts must be calculated with the largest difference between uncertain amount and expected amounts being used in determining whether the threshold has been met.

The summary of responses to the consultation notes that guidance will include examples of how to calculate the tax impact in different scenarios.

General exclusion where HMRC already know of the treatment

There is an exemption from notification if it is reasonable for the company to conclude that HMRC already have available to them all, or substantially all, of the information relating to a notification.

Transfer pricing and branch exclusions

There is an exemption from the notification requirements where the uncertain treatment relates to transfer pricing.  The treatment does not need to be reported where it satisfies only the substantial possibility trigger and the uncertainty relates to the application or adoption of a transfer pricing method (i.e. a pricing matter).

There is a similar exclusion for attribution of profits to a UK permanent establishment of a non UK resident company where only the substantial possibility trigger applies to the treatment.

Penalty regime

A penalty for failure to notify is to be charged on the business.  For a first failure to report there is a penalty of £5,000.  If the business has had a failure in respect of the same relevant tax (e.g. failure to report a corporation tax uncertain tax treatment) in the three years prior to the current year then this counts as a second failure with a penalty of £25,000.  If there is more than one failure in respect of the same relevant tax in the three years prior then a penalty of £50,000 may be charged.

A penalty will not apply where the business has a reasonable excuse for a failure to notify.  The legislation notes that an insufficiency of funds is not a reasonable excuse unless attributable to events outside the business’s control.  It also states that where the business relies on another person to do anything, that cannot be a reasonable excuse unless the business took reasonable care to avoid the failure.


The notification rules are to apply to corporation tax returns that are required to be made on after 1 April 2022.  Therefore all corporation tax returns for companies with years ending after 31 March 2021 will come within the new rules with respect to corporation tax.

Any corporation tax notification must be made on or before the date on which the corporation tax return is required to be made i.e. 12 months after the year end.  Therefore corporation tax returns could be submitted earlier than the due date and any notification would still be in time as long as it was filed on or before the due date.

The exact form and method of notification has not been finalised with the draft legislation stating that notification must be given by such means, and in such form, and include such information, as is specified in a notice to be published by HMRC.


The draft legislation published provides a framework for the rules and how they will apply.  It leaves a lot of detail to be filled in by HMRC.  There are a number of areas that cause concern in the draft legislation and we highlight some of them here:

  • This is a new concept but there has been no indication that HMRC will implement these rules with a similar initial “light-touch” approach that was deployed with the introduction of the Senior Accounting Officer rules;
  • HMRC guidance is given almost a law like status by these provisions. Anyone who has worked with HMRC guidance knows the comments are often very general in nature.  Using the guidance to seek to understand whether HMRC has provided a view on the correct tax treatment of a given transaction will therefore be difficult;
  • Where the guidance provides a clear view on the interpretation of a particular piece of law this would appear to result in a requirement to notify the transaction (if the facts of the transaction cannot be sufficiently distinguished) even if that guidance is not considered correct by the business (due to recent case law or otherwise);
  • In order to determine whether the £5m threshold is reached may require an assessment of what HMRC or a court may think is the correct treatment. Applying this threshold where a tax treatment has consequences across a number of tax years will be challenging;
  • Seeking to understand what HMRC believes is the correct treatment when HMRC guidance stretches to thousands of pages of information is very onerous;
  • Potentially a business will need to search for a HMRC tax treatment in the public domain. With no definition of public domain, that seems potentially very widely drawn and very difficult to say with any certainty that the entire public domain has been investigated;
  • And perhaps the most opaque of all is what constitutes a “substantial possibility”. It is possible that this could be triggered with say a 20% or 30% likelihood that the treatment used is incorrect.  We expect this will have to be further defined as such a hair-trigger would have many businesses notifying a very significant number of tax treatments.

When the guidance is published we shall provide a further update.  In the meantime, businesses should start considering tax treatments that may need to be notified and develop a process for managing this obligation.

CW Energy LLP

August 2021

26 Jul 2021

PRT subsidy rules

The recent First-tier Tribunal case of Perenco UK Ltd v HMRC determined that payments made by the user field owners under a transportation and processing agreement (TPA), in respect of the user field’s share of the owner’s capital expenditure did not amount to a subsidy for PRT purposes under Paragraph 8(1) of Schedule 3 OTA 1975.

The case concerned payments made to Perenco, as the owner of the Dimlington terminal, by a number of user fields under various TPAs in respect of a share of the Freon cooling system replacement costs that Perenco had had to incur. Perenco treated the receipts as either taxable tariffs or tax-exempt tariff receipts (TETRs) in their PRT returns and had claimed all of the expenditure attributable to those receipts, other than sums equal to 50% of the TETR amounts in accordance with the so-called modified approach for cost allocations involving TETRs. HMRC argued that the receipts were not tariffs or TETRs, but were “subsidies” which reduced the amount of allowable expenditure.

The reason the parties were in dispute is that under Perenco’s interpretation the receipts which were TETRs did not have to be brought into charge but some of the related costs were still deductible under the modified approach, whereas under the HMRC interpretation the receipt, while not taxable,  reduced the allowable costs by the full amount of the receipt. Similarly, some receipts that were treated as tariffs would have been wholly or partly covered by a Tariff Receipts Allowance under Perenco’s interpretation with the full cost being deductible.    

The Tribunal determined that the receipts were tariff receipts or TETRs. They concluded that on the proper construction of the contract they were part of the consideration for the services, even though the wording of the TPA did not specifically state that the sums were payable in respect of the services being provided. On this basis, it determined that it did not need to address all of the arguments that had been presented by the parties as to what constituted a subsidy for the purposes of Paragraph 8. As the words used in Paragraph 8 are more or less identical to those in the corresponding capital allowance provisions, for which there is little relevant case law precedent, an analysis of the subsidy rule would have been of more general interest. 

While the decision is based very much on the facts of the case, and could still be appealed, there are a number of interesting statements made by the Tribunal judge.

Firstly it was stated that any payment which met the definition of a tariff receipt in s6(2) OTA 1983 could not be a subsidy under paragraph 8, although there was not much detailed analysis as to why.  This is helpful as on a plain reading of the words there would appear to be some overlap. The decision also makes it clear that receipts under cost-share arrangements, which many tariff agreements migrate to overtime, will still normally constitute tariff receipts (or TETRs). 

The use of the term “in respect of” in s6(2) is to be interpreted widely, so it seems likely that in most situations receipts under TPAs are unlikely to be treated as subsidies. The Tribunal did, however, postulate certain circumstances where the subsidy provision might apply, such as when the agreement giving rise to the receipt was entered into at a different time to when the TPA was entered into, or where the payor was not already a recipient of services under the TPA. 

It is not uncommon to see situations where a new user field wishes to tie into some existing infrastructure, for which new kit is required. In that case, the new user will often be required to contribute to the cost of the new kit, and it is thought that provided the contract is appropriately worded, those payments would constitute a subsidy rather than a payment for services in a CT world. We do not believe the decision changes the analysis of such agreements which will be needed to conclude on the issue. If subsidy treatment were not available this may have an adverse effect on the timing of deductions and indeed the availability of Investment Allowance. 

Much of the HMRC case revolved around the wording of the contract, and the fact that while stipulating that some of the payments due by the user field owners were for the services being provided the payments in respect of the replacement cooling system were not. While the Tribunal saw through this and decided that, based on the contract as a whole, the payments in question were made for the services being provided, this is a timely reminder that when drafting contracts it is important to bear in mind the tax consequences that the parties hope will flow from the contract. 

CW Energy LLP

26 July 2021

21 Jul 2021

Potential changes to taxation of profits for multinational groups 

On 1 July 2021, a statement providing a framework for reform of the international tax rules was published by the OECD/G20. The statement has been approved by 132 countries. A comprehensive agreement is to be finalised by October 2021 with changes coming into effect in 2023.

The statement was short in detail (it was only 5 pages long), however, we set out below what is understood to be the current intention for how this reform (described as a two-pillar approach) is to be implemented.  

Pillar 1 – profit allocation

As business models have developed there has been increasing concern that existing tax rules on where to tax profits have become outdated.  This pillar seeks to adjust the profit allocation rules so that some profit associated with selling goods or services to consumers located in a jurisdiction may become taxable in that jurisdiction.  

This change will apply to groups with a global turnover of over Euro 20 billion with a net margin of over 10 per cent.  It is expected that this pillar will only impact around 100 businesses globally.  After 2030, following a review, groups with a turnover of over Euro 10 billion may also be included.

In addition, this pillar applies only to certain types of businesses, with extractives being specifically excluded.  While the statement does not define what constitutes an extractive business, earlier publications had made it clear that this exclusion would cover oil and gas exploration and production, and importantly also exempt midstream and downstream activities.

Therefore, while not 100 per cent clear from the statement, it would appear that oil and gas businesses will not be affected by pillar 1. 

Pillar 2 – global minimum tax rate

Changes to the international tax rules had already been made through other BEPS initiatives; however, it was perceived that there remains a need for a broader change to address the possibility that companies could still shift profits to low tax jurisdictions.  This pillar seeks to ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered, the jurisdictions they operate in, or where their profits are booked.

Where implemented it will apply to groups with a turnover of over Euro 750 million per annum (the same threshold as for country by country reporting in BEPS Action 13).  The statement states that countries are free to implement some of these rules that will also apply to smaller groups.  The principal rule in this pillar allows the jurisdiction of the parent company to charge an amount of tax where any of its 80% owned subsidiaries do not suffer an effective tax rate (ETR) of “at least 15 per cent”.

The ETR is to be calculated on a jurisdictional basis using a common definition of what constitutes tax and with taxable profits determined by reference to financial accounting income.  The statement notes that there will be “agreed adjustments consistent with the tax policy objectives” and “mechanisms to address timing differences”.  It is not clear how such timing differences will be addressed, and as for many oil and gas companies they will pay little or no tax early in the project life cycle, this will be important.

There are other rules, carve-outs, and exceptions, included in this pillar that are to be introduced to support the main aim of preventing profits arising in overly tax advantaged jurisdictions.


While pillar 1 seems not to apply to the upstream oil and gas industry many such companies will need to consider the pillar 2 changes. Although we would expect UK operations to meet the minimum ETR test, groups with operations outside the UK will need to look closely at the detailed rules once they are available. 

The timeline for implementation is tight with an expectation that details will be agreed at the G20 Finance Ministers and Central Bank Governors meeting in October 2021.  The concepts are novel and complex.  This will leave companies little time to understand how the rules may impact their existing tax burden, investment plans and prepare for what for many will be a significant increase in compliance burden.

What is particularly important is to understand how individual countries will react to these changes.  For countries that currently have a low corporate tax rate (often where they have a higher indirect tax take), they may feel the balance between direct tax and indirect tax take will need to shift in favour of higher direct taxes.  

For countries that have had no broad-based corporate income tax regime (e.g. many Gulf countries), this may mean that a swift introduction of corporate income tax is inevitable.

How E&P companies are to calculate their ETR on a jurisdictional basis, taking into account such matters as losses brought forward, tax refunds for decommissioning expenditures, accelerated capital allowances, other temporary differences (such as disregarded derivatives), the treatment of production-sharing arrangements, etc. will need to be addressed in the detailed implementation rules, and we will be reviewing the position once further detail is available.

CW Energy LLP

July 2021

12 May 2021

IAS 12 Changes in Accounting for Deferred Tax on Decommissioning Assets and Liabilities

On 7 May IASB published limited scope amendments to the application of the Initial recognition Exemption (IRE) to transactions which give rise to taxable and deductible temporary differences of the same amount. This is primarily aimed at deferred tax arising on decommissioning obligations and leases but is also relevant for other transactions.

In the past, there had been some uncertainty about whether the initial recognition exemption applied to transactions such as leases and decommissioning obligations, i.e. transactions for which companies recognise both an asset and a liability of the same amount. The amendments provide that the exemption will not apply. As a result, companies are required to recognise in full a deferred tax liability on all taxable temporary differences and a deferred tax asset on all deductible temporary differences to the extent that it is probable that taxable profit will be available against which these deductible temporary differences will be utilised.

The changes would also effectively outlaw the integrally linked approach that has also been widely adopted by oil and gas companies in respect of decommissioning. This provides for the netting off of the deferred tax asset and liability on decommissioning, with a DTA recognised on the net position based on its recoverability.

We have set out details of the final proposal in our news brief on 23 September 2020 (which can be found here – and the amendments to IAS 12 issued last week follow those proposals.

The normal rules will apply to determine the extent to which a DTA can be recognised on a decommissioning provision and so this new approach could result in a P&L charge if an entity restricts the recognition of a DTA on decommissioning obligations but recognises a DTL on the corresponding decommissioning asset in full.

Effective Date

The effective date for the application of the proposed changes is for periods beginning on or after 1 January 2023 with earlier application permitted. For leases and decommissioning, retrospective application is required. There is a requirement to apply the changes from the beginning of the earliest comparative period (in accordance with IAS 8 principles).

Under IAS 8 an entity is required to calculate and recognise the cumulative effect of initially applying the amendments as an adjustment to the opening balance of retained earnings. Any subsequent movements would go through the P&L in the normal way.

For any other transactions, the new rule will apply prospectively.


We would recommend that companies review their current approach to determine whether the implementation of these changes to IAS 12 could have an impact on their position.

Where the standard will result in a change in the accounting for decommissioning once adopted companies will now have to disclose the estimated effect in accordance with IAS 8.

If a reader would like to discuss an impact on their tax position please contact Paul Rogerson, Andrew Lister or their normal CWE contact.

27 Apr 2021

Substantial Shareholdings Exemption case – M Group Holdings Limited

The recent First-tier Tribunal (‘FTT’) decision in M Group Holdings Limited v HMRC is a salutary reminder that there are a number of detailed conditions that need to be met in order for the substantial shareholdings exemption (‘SSE’) to apply to the disposal of shares by a corporate shareholder.

SSE background

The chargeable gains tax regime was changed in 2011 to allow a group to reorganise its trading operations and qualify for a tax exemption under the SSE rules. For example, the extended rules allow SSE to apply where a group sets up a new company, transfers a trading asset to that company and sells the shares. Although there would potentially be a degrouping charge on the sale of the shares this is treated as increasing the sale consideration, such that provided SSE applies the degrouping charge is also exempted from tax. This strategy has been used in a number of cases in North Sea transactions.

The key conditions for SSE to apply are that the seller (investor) must have held a substantial shareholding in the company being sold (investee) for at least 12 months and that the investee must have been a trading company throughout that period.

If a trading asset has been transferred to the investee:

  • the investor is treated as holding the shares; and
  • the investee is treated as being a trading company;

at any time during the final 12 month period when that trading asset was previously used by a member of the group for trade purposes.

The problem

The taxpayer in M Group Holdings Limited v HMRC sought to rely on these extended SSE rules.  The taxpayer was a single company owned by an individual with no other subsidiaries.  This was the problem – the taxpayer was not a member of a group at that point in time.  The taxpayer became a member of a group on the establishment of the investee company as its subsidiary.  The investee company was established only 11 months before its sale.

HMRC contended that the rules would apply to extend the period of ownership of the investor but only to the extent that the investor was a member of a group.  As that extended the period of ownership for only 11 months, the SSE conditions were failed and HMRC asserted that SSE could not apply.  This interpretation of the rules follows HMRC’s published guidance.

The FTT agreed with HMRC that the application of the natural or ordinary meaning (i.e. literal interpretation) of the rules to the facts resulted in SSE not being available.  On review of the legislation itself, explanatory notes laid before Parliament when the law was enacted, and the relevant consultation documents, the FTT could not find anything that supported HMRC’s position as the documents did not consider the precise point.  However, that also meant that it did not assist the taxpayer’s position either.  As the FTT could not establish the intention of Parliament on this narrow point it could not use a purposive interpretation.

The FTT found that this resulted in “..the oddity or arbitrariness of SSE applying or not depending on whether there has been a separate, possibly dormant, subsidiary or other group company owned for the previous 12 months”.

The FTT went on to consider whether the interpretation produced an unjust or absurd result.  The FTT stated that “denial of SSE in the circumstances of this appeal appears odd” but it did not believe that there was sufficient clarity on Parliament’s policy intentions on this precise point to be able to conclude that this was a wholly unreasonable result.  Therefore the FTT considered that it was not permitted to allow a strained interpretation of the rules.  Furthermore, as an aside, the FTT noted that the wide interpretation of the enacted law required by the taxpayer to succeed would allow an investee to qualify if an asset was transferred to it from a trading company that had recently joined the group.  The FTT found that this would be contrary to the purpose of the legislation and therefore the wide interpretation could not be the correct interpretation of the law.


This problem in the legislation has been known for many years and it is perhaps therefore not a surprising decision.  Indeed the approach taken by the FTT is actually set out clearly in the HMRC manuals.

There seems to be no policy reason why SSE should not apply here and therefore this appears to represent a flaw in the drafting of the legislation.  However, the Courts have strict rules when interpreting legislation and as there was no clear purposive intent identified in the legislation or supporting papers the FTT did not feel able to follow anything other than a literal interpretation of the statutory provision.

Given the amounts involved, it is likely that the issue will be appealed by the taxpayer.

We have advised “single group” companies to ensure that they establish a dormant subsidiary if there is a possibility that they may wish to rely on the extended SSE rules for a future disposal.

In addition, although the facts, in this case, are perhaps unusual, particularly in the oil and gas world, there are other circumstances where the “assets used by a group condition” might need to be carefully looked at if SSE is to apply. For example where the purchaser of a company looks to on-sell assets in the acquired group within 12 months.

On a broader view, the case reinforces the point that detailed analysis of legislation is always required when seeking to understand the tax implications of any transaction.  The UK tax courts can find it difficult to interpret legislation in a way that perhaps taxpayers might expect or hope for, as opposed to what the legislation actually states.

CW Energy LLP

09 Apr 2021

Uncertain tax treatment by large businesses – second consultation opened

HMRC published a summary of responses to the first consultation and opened a second consultation to invite further views on the potential regime ahead of a proposed implementation from April 2022; any responses should be provided by 1 June 2021.


In March last year, HMRC published a consultation document asking for views on the introduction of a notification requirement in respect of uncertain tax treatments for large businesses (i.e. those businesses which are in scope of the Senior Accounting Officer (“SAO”) regime).

A number of respondents expressed concerns about certain aspects of the proposal. One of the main concerns was that the definition of uncertain tax positions, being one that HMRC may challenge or is likely to challenge, was not sufficiently clear and in particular was too subjective.

See our news brief on 17 November 2020

The new consultation reiterates the intention of the new regime:

“This measure is not intended to promote any assumption that HMRC’s interpretation is correct, nor that HMRC is a final arbiter of tax law. The measure aims to ensure that HMRC is aware of all cases where a large business has adopted a treatment that is contrary to HMRC’s known position and to accelerate the point at which discussions occur on uncertain treatment.”

The new consultation seeks taxpayers’ views on a number of proposed changes to deal with some of the concerns raised as part of the first consultation.

Changes proposed by the second consultation

A number of changes to the regime have now been suggested. These include:

  1. A number of suggested objective triggers where a notification will be required, such as:
    • A business adopts a tax treatment that is different from HMRC’s known position (eg. published in the tax manuals);
    • A tax treatment is not in accordance with known and established industry practice;
    • A business alters a previously used treatment, where that change is not due to a change in law or a change in HMRC’s known position;
    • A structure or transaction that is in some way novel has been adopted where there is no known HMRC position;
    • Where a provision has been made in the accounts in accordance with IFRIC 23 (or other relevant accounting standards);
    • Professional advice has not been followed.
  2. Proposals that the threshold for reporting is raised to a £5m tax outcome (from £1m).
  3. Taxes within the scope of the notification requirement are to only include Corporation Tax, VAT and Income Tax (which includes PAYE). This change removes Customs and Excise and PRT (amongst others) from the scope of the regime.
  4. A notification will be required separately for each of the relevant taxes on an annual basis.
  5. The proposal is to align the notification with the due date of the tax return’s submission.
  6. A penalty for failure to notify is to be charged on the large business rather than an individual as had been originally proposed.

The government intends that the notification requirement will apply to transactions in returns due to be filed after April 2022.


The business will not be required to make a notification if the tax treatment has already been disclosed under a different legislative requirement or HMRC is already aware of the uncertainty.

It has been suggested that businesses with a low-risk rating under the Business Risk Review process should be excluded from the notification requirement; HMRC has outlined certain reasons why this may not be achievable although HMRC said they would explore how the business risk review process could be used to limit the scope of the measure.

Certain matters relating to transfer pricing cases may be excluded.

CWE Comments

It is clear that HMRC intends to push ahead with the new requirement from April 2022.

Although the introduction of a number of objective tests will assist businesses to understand their obligations under the regime there continues to be a fundamental difference between the test in IFRIC 23, which requires a taxpayer to take a view on the ultimate outcome of a position, and that in the proposed regime, which focuses on the likelihood of HMRC challenge.

In addition, the “in some way novel transaction” test could be interpreted very widely so that a reporting obligation could be triggered for anything that is not a business as a usual transaction.

As we have previously outlined, given that it seems likely that this regime will be introduced we believe that it is important that taxpayers factor in the possibility of a wider notification requirement when assessing the efficacy of any tax planning that they may currently be considering.  For corporation tax, with the new regime expected to apply to tax returns filed after April 2022 most currently envisaged transactions will be subject to the new regime.

29 Mar 2021

Finance Bill 2021

The Finance Bill 2021 was published on 11 March 2021.  We set out below our comments on the key provisions that may affect oil and gas companies.



The Finance Bill includes amendments to clarify and expand the circumstances where expenditures on decommissioning plant and machinery may qualify for the special capital allowance relief for ring fence companies. The changes are aimed at expenditures incurred at a time where formal approval of an abandonment programme has not yet been received.

For decommissioning expenditure to qualify for the special allowance further conditions must also be met e.g. that the asset concerned has been used in the trade of the company incurring the costs.  These further conditions have not been amended.

There are three broad areas where the rules have been changed.

  1. Preparing an abandonment programme, condition or agreement

Costs incurred:

  • in preparing an abandonment programme for approval, or
  • preparing for the imposition of a condition or agreement imposed by or agreed with the Secretary of State

are treated as being general decommissioning expenditure.

When the claim is made, the abandonment programme, condition or agreement must be one that it was reasonable to anticipate would wholly or mainly relate to decommissioning of the relevant offshore plant or machinery.

  1. Preservation costs

The rules are amended so that costs incurred in preserving plant or machinery prior to the approval of an abandonment programme are accepted as being general decommissioning expenditure.  When the claim is made it must be reasonable to anticipate that the reuse or demolition of the plant or machinery will be:

  • authorised or required by or in connection with an approved abandonment programme, or
  • a condition to which the approval of such a programme will be subject, or
  • a condition or agreement imposed by or agreed with the Secretary of State.


  1. Costs complying with an expected decommissioning requirement

Conditions to make a claim

The rules are amended so that costs may be claimed as qualifying as general decommissioning expenditure where costs are incurred in “doing something else” which it is reasonable to anticipate will be authorised or required by:

  • an approved abandonment programme, or
  • a condition to which the approval of such a programme will be subject, or
  • a condition or agreement imposed by or agreed with the Secretary of State.

However, this “doing something else in advance of regulatory approval category of expenditure will be treated as never having qualified if the five-year clawback rule applies.

Five-year clawback rule

Unlike the “preparation and planning” costs set out above, the extension of the rules to cover costs incurred in “doing something else” in anticipation of regulatory approval is subject to a potential clawback.

The costs are treated as never having been general decommissioning expenditure unless either of the following conditions are satisfied:

  • an abandonment programme is approved and the programme, or a condition to which the approval of the programme was subject, authorises or requires the decommissioning of the plant or machinery to which the expenditure relates; or
  • a condition is imposed or an agreement is made with the Secretary of State before the approval of an abandonment programme and that condition or agreement authorises or requires the decommissioning of the plant or machinery to which the expenditure relates

within five years of the end of the accounting period in which the expenditure was incurred.


The exact scope of the “approval” requirements has been subject to discussion between industry and HMRC for a number of years and has led to a degree of uncertainty in this area.  The explicit clarification of this area of the law is welcome, particularly the reworking of the rules around planning and preservation costs.  However, the five-year clawback rule on “doing something else” expenditures could result in unwanted commercial behaviours (e.g. decommissioning being accelerated to guarantee tax relief where it would be cheaper to delay and decommission the plant with other assets). 

While the linking of the tax code to government sanction of decommissioning has been a feature of the tax code for many years, it leaves the taxpayer having to rely on the detail provided in the government approval or condition.  Linking individual expense items to those approvals, conditions or agreements can sometimes be difficult.

Companies should continue to consider carefully these rules to make sure claimed costs qualify, and that documentation is prepared and maintained as evidence to support claims.  The maintenance of records is particularly important here as the precise nature of costs incurred in say 2021 may only be supported by regulatory sanction in 2026.

HMRC have asked taxpayers to come forward where there are any difficulties in obtaining approval from BEIS in the format required to support a deduction for valid decommissioning costs.

Other Capital allowances

As announced in the Budget a temporary increase in capital allowances rates for qualifying expenditure on plant or machinery incurred from 1 April 2021 up to and including 31 March 2023 has been introduced.  The new rules apply to three separate categories of expenditure:

  • A “super deduction” at a rate of 130% of expenditure on new plant or machinery. This applies to expenditure that would previously have qualified for an 18% writing down allowance.  Any assets used wholly or partly for a ring-fence trade are excluded from these super deduction rules;
  • A first-year allowance of 50% on most new plant or machinery that is “special rate” expenditure. This applies to expenditure that would previously have qualified for the 6% special rate writing down allowance (for non-ring fence assets).  This allowance is not prevented from applying where the asset is used wholly or partly for a ring fence trade.  Therefore, where a company has special rate expenditure on new assets that are used partly for a ring-fence trade and partly for another qualifying activity these rules can allow a non-ring fence first-year allowance of 50% to be claimed (for both the ring-fence and non-ring fence elements).
  • A first-year allowance of 100% on any (i.e. not necessarily new) plant or machinery that is not special rate expenditure where the assets are used partly for a ring-fence trade and partly for another qualifying activity. The allowance provided by this change is to be allocated to the ring-fence and other qualifying activity on a just and reasonable basis. The rules had previously allowed a 25% writing down allowance for the ring-fence element and an 18% writing down allowance for the non-ring fence element of the asset.


For these rules to apply the cost needs to be incurred between 1 April 2021 and 31 March 2023.  For the first two categories above, for expenditure incurred under contracts entered into before 3 March 2021, the usual rules are switched off and expenditure is deemed to be incurred when the contract was entered into.  The usual rules for determining when expenditure is incurred apply to the third category.


While the super deduction is not available for ring fence traders, many companies may be able to take advantage of these new capital allowance rules. The interaction with the Annual Investment Allowance rule and the increase in the CT rate to 25% at the end of this period needs to however be analysed.  

Companies should do so with care as there are more conditions that need to be satisfied than is apparent from the headline.  The requirement for the asset to be new is not particularly helpful where oil companies are looking to reuse assets.

Temporary extension of trading loss carry-back rules

A temporary extension to the corporation tax loss relief rules will have an effect for company accounting periods ending in the period 1 April 2020 to 31 March 2022. For companies with a December year-end, this will affect losses generated in the periods ended 31 December 2020 and 31 December 2021. For these periods any trade loss carryback will be extended from the current one year carry back to a three year carry back. The additional two-year carry-back is limited to a maximum of £2m per group per 12 month loss period.

For ring fence companies it will mean that losses that are not attributable (wholly or partly) to decommissioning expenditure will be capable of carry-back to the two years prior to the 12 month period currently permitted. The effect of the current one-year carryback is unchanged (and not limited by the £2m group allowance).

The Finance Bill makes it clear that where there is a decommissioning loss being carried back (under Section 40 CTA 2010) that provision shall have priority and therefore none of the £2m group allowance is used up by a decommissioning loss carry-back claim.


The Finance Bill confirms that the ring-fence losses carried back that are attributable to decommissioning expenditure will not use the £2m group allowance. 

These rules may offer additional relief for companies with an appropriate tax profile.

Repeal of Interest and Royalties Directive

It was announced at Budget that the UK law that implemented the EU Interest and Royalties Directive would be repealed for payments made on or after 1 June 2021.

The Finance Bill also included an anti-forestalling measure that from 3 March 2021 disapplies a withholding tax exemption where a payment is made directly or indirectly in consequence of, or otherwise in connection with, any arrangements the main purpose, or one of the main purposes, of which is to secure that an exemption is secured.


While these rules were of generally limited application any companies that intend to use these rules from Budget to 31 May 2021 should consider whether they could potentially be caught by the anti-forestalling measure and look to see whether a double tax treaty claim could be made in its place. If no such treaty is available to offer full relief then they may want to look at recasting arrangements to reduce or eliminate the level of withholding.

Hybrid and other Mismatches

Hybrid entities and permanent establishments

The Hybrid and other Mismatches rules are to be amended to lessen the severity of the measures that counteract double deductions and deductions for which there is no reciprocal taxable income.

The Finance Bill 2021 contains particular provisions, applied by election, which must be made by the end of this year.  Where the election is made the effect applies retrospectively. The most relevant provisions are those involving hybrid entities and permanent establishments.

These rules may apply to a UK subsidiary of a US corporation that is ‘checked’ into the US entity for US tax purposes. The original rules denied such a UK company a tax deduction if the deduction was not counted against taxable income arising both in the UK and the US (“dual inclusion income”).  In some cases, for example, the US would not recognise a receipt (on the same transaction that gave rise to the UK company’s deduction) or the US would also recognise the same expenses as a deduction and there was, therefore, insufficient dual inclusion income. Whilst the original rules made some provision for counting income derived from the expenditure as dual inclusion income, the rules simply did not address the point that in these cases there was also taxed income (in the UK hybrid) for which no deduction was allowed, where the US made payments to the UK. This imbalance has now been recognised, and such income from the US company (in this example) would now be recognised as “dual inclusion income”.

The rules are complex, they apply to all UK resident hybrid entities and to transactions with non-UK resident hybrids and the example above is simplified.

There is to be a similar provision reflecting permanent establishment income from the host company, for which the host receives no tax deduction, but the receipt is taxed in the permanent establishment.

Another measure, that is not retrospective, will permit affected UK companies to ‘use’ other UK companies’ surplus dual inclusion income on making a claim.

Connected party debt

A further amendment to the rules removes the potential for UK companies released from debts owed to connected parties (and not taxed on the release) from being caught by the hybrid rules where the counterparty receives a deduction. The potential for this issue to arise is limited in the current rules, but the amendment will address certain circumstances where HMRC recognise that the current rules are not proportionate, or don’t work as intended.


The effect of the rules is particular to each case and relies upon identifying the transactions with hybrids. CW Energy can assist in evaluating the impact of the rules, but the new rules are welcome. 

Tax rates

As the Finance Bill contains a clause enacting the announced increase in the main rate of non-ring fence corporation tax to 25% with effect from 1 April 2023, this rate will have to be taken into account in book deferred tax calculations ending after the legislation is “substantively enacted”. A Bill is treated as substantively enacted for IFRS purposes following the third reading in the House of Commons. The Bill timetable is not currently known but if the third reading occurs before the end of June the new rate would have to be reflected in any half-year statements for companies with December year ends (or the final accounts of any companies with June year ends).

As announced in the Budget the rate of diverted profits tax is to be increased from 25% to 31% at the time the main non-ring fence corporation tax rate increases to 25%. The DPT rate applicable to ring-fence trades however remains unchanged at 55%.

CW Energy LLP
March 2021

03 Mar 2021

Budget 2021

The Chancellor delivered Budget 2021 today.  We set out below the key announcements that apply to the oil and gas sector.

Ring fence and supplementary charge to corporation tax rates

Despite the rise in the main tax rate as discussed below, there was no specific announcement on any changes to the oil tax rates.  Therefore, the rates will continue to be those currently enacted being 30% for ring fence corporation tax and 10% for the supplementary charge to corporation tax.

The Budget documents confirmed that the Diverted Profits Tax rate for ring fence profits remains at 55%.

Decommissioning expenditure

The Budget confirmed that changes are to be made to the decommissioning rules (with effect from 3 March 2021) to clarify that certain expenditure incurred by oil companies on decommissioning plant and machinery prior to the approval of an abandonment programme qualifies for decommissioning tax relief.

However, relief for such expenditure will be withdrawn if the asset on which it is incurred is not included in an approved abandonment programme, or covered by a specific agreement, within 5 years of the end of the accounting period in which the expenditure was incurred.

We would expect draft legislation to be published with the Finance Bill on 11 March 2021.

Comment: There has been uncertainty on the application of these rules for a number of years and so this change is generally welcome and should put beyond doubt the availability of relief in many cases. We believe that the requirement for the expenditure to be included within an approved abandonment programme, or covered by a specific agreement, within an arbitrary 5 years is unduly restrictive, however.  

Corporation tax main rate

Until 1 April 2023, the corporation tax main rate for non-ring fence profits remains at 19%.

From 1 April 2023, the Corporation Tax main rate for non-ring fence profits will be increased to 25%.  This rate will apply to profits of over £250,000.  A small profits rate of 19% will apply to companies with profits of £50,000   Companies with profits between £50,000 and £250,000 will be charged at a marginal rate. As with the small companies’ rate in the past, these limits operate on a group basis.

Capital allowances

A temporary increase in capital allowances rates will apply for qualifying expenditure on plant and machinery incurred from 1 April 2021 up to and including 31 March 2023.

The rates are 130% on new plant and machinery (the super-deduction) that would otherwise qualify for the current 18% writing down allowance and a first-year allowance of 50% on most new plant and machinery that would otherwise have qualified for the 6% special rate writing down allowances.


 This provision does not apply to expenditure on assets used wholly in a ring-fence trade which would generally qualify for a 100% FYA.

Temporary extension of trading loss carry-back rules

A temporary extension to the corporation tax loss relief rules will have an effect on company accounting periods ending in the period 1 April 2020 to 31 March 2022. For companies with a December year-end, this will affect losses generated in the periods ended 31 December 2020 and 31 December 2021. For these periods any trade loss carryback will be extended from the current one year carry back to a three year carry back. The additional two-year carry-back is limited to a maximum of £2m per group per 12 month loss period. For ring fence companies it will mean that losses that are not attributable (wholly or partly) to decommissioning expenditure will be capable of carry-back to the two years prior to the 12 month period currently permitted. The effect of the current one-year carry-back is unchanged (and not limited by the £2m group allowance).


The Finance Bill has not been released but we expect the new rule to take priority over the treatment of ring-fence losses attributable to decommissioning expenditure and thereby may offer additional relief for companies with an appropriate tax profile.

North Sea Transition Deal

The Chancellor made reference to the North Sea Transition Deal in the speech but there were no details other than the documents noting that a further £2 million was to be provided to “further develop industry proposals as part of the government’s support for the North Sea Transition Deal”.

UK Emissions Trading Scheme

The Budget announced that rules that were enacted to facilitate the potential introduction of a Carbon Emissions Tax will be repealed as those rules were not commenced due to the Government deciding to proceed with implementation of a UK Emissions Trading Scheme from 1 January 2021 instead.

Repeal of Interest and Royalties Directive

It was announced at Budget that legislation implementing the EU Interest and Royalties Directive which allowed payments of interest and royalties to be made without withholding tax will be repealed in respect of payments made on or after 1 June 2021.


Now that the UK has left the EU it is not surprising that the rules are to be repealed. They were generally of limited application due to the fact that they only applied to payments between a company that directly held another or was directly held by another.    

Other announcements

There were other announcements that included:

  • Confirmation that the ‘IR35’ off-payroll working rules to large and medium-sized businesses is to come in to force from 1 April 2021;
  • Changes to support the tax-advantaged status of Freeports;
  • Changes to hybrids, tax-loss utilisation and corporate interest restriction rules.

Overall comment:

It is welcome that the Chancellor has not sought to increase ring-fence tax rates.  This can be seen as a strong signal that the need for tax stability has been heard by the Chancellor.

The extension of the rules to the carry-back of losses may allow some to make claims but with the amount set at a maximum of £2 million per annum, the impact may be marginal.

We shall analyse the decommissioning changes and other key rule changes when the Finance Bill is published on 11 March 2021.

06 Jan 2021

DAC6 Mandatory reporting rules replaced

The Government announced last week that the UK will now not implement the EU Mandatory reporting rules (‘DAC6’) in full.  Instead the UK rules for the implementation of DAC 6 have been amended to require reporting of only a limited subset of the DAC6 list of reportable transactions. This subset broadly equates to the requirement in the OECD model for reporting, and HMRC have announced that the newly amended rules will, in due course, be superseded by a disclosure regime that fully complies with the OECD’s model Mandatory Disclosure Rules (MDR). The MDR rules are far less onerous than the DAC6 rules.


The DAC6 rules came into force on 1 July 2020 and required disclosure of certain transactions in 2021 and thereafter. The DAC6 rules had been criticised by many as creating an onerous administrative burden on businesses that was inconsistent with the additional information that tax authorities were expected to obtain.

The December 2020 Trade and Cooperation Agreement between the EU and the UK requires the UK to maintain a standard of reporting of transactions that is at least equivalent to OECD model reporting rules.

On 30 December 2020, the UK amended its DAC 6 domestic law so that, as an interim measure, only transactions that are of the type covered by the OECD model reporting rules will be subject to the UK DAC 6 reporting requirements.

The changes to the reporting requirements appear to apply to all transactions that are reportable under these rules and not merely to transactions that are implemented after 30 December 2020.

HMRC is expected to amend their guidance to set out their interpretation on this matter and the changes to these rules generally in due course.

Reportable transactions under the new rules

Only transactions that are included in Category D of the EU Hallmarks are required to be disclosed under the UK DAC 6 legislation as now amended.  Category D transactions are:

  • Arrangements which have the effect of undermining reporting requirements under agreements for the automatic exchange of information; and
  • Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.

Transactions that fall under Category D are not at all common in the oil and gas industry and therefore the changes represent a significant reduction in scope of the rules for that sector. Nevertheless, such Category D transactions are reportable; where the first step occurs

  • between 25 June 2018 and 30 June 2020:- by 28 February 2021;
  • in the period 1 July 2020 to 31 December 2020:- by 31 January; and
  • after 31 December 2020:- within 30 days.

Consultation and introduction of new rules

HMRC has announced its intention to consult on the implementation of the OECD model reporting rules, with the expectation that what remains of the DAC6 UK domestic law is to be repealed and replaced by new legislation based on the OECD model.


The DAC6 rules required a lot of effort and indeed led to a degree of uncertainty, without seemingly providing EU tax authorities much by way of new or relevant information.  Therefore, this is good news. 

However, businesses should remember that EU Member States are implementing DAC6 rules in full and therefore there will be transactions for which there is no UK reporting requirement, but there may still be an EU reporting requirement.  In addition, the DAC6 rules allowed businesses to rely on reporting transactions to one tax authority to satisfy their obligations in a different Member State.  If there is now no UK reporting obligation, that may mean a reporting obligation in other EU jurisdictions is triggered if previously the UK entity was going to make the disclosure.

Companies are also reminded that the UK has an existing disclosure of tax avoidance schemes rules, the so called DOTAS rules, and these will continue to potentially apply.


CW Energy LLP
January 5 2021