Author Archives: Pete Hawkins

22 Jun 2022

Energy Profits Levy – draft legislation published for consultation

The Energy Profits Levy (EPL) draft legislation has now been published for consultation. The consultation period closes on 28 June 2022.

We understand that it is intended to have EPL enacted before the Summer recess but that the EPL legislation will not be substantively enacted for accounting purposes before 30 June 2022.

The comments below reflect the current draft, but we do not expect there to be much change given the compressed legislative timetable.

As expected the EPL applies to companies with ring fence trades and profits that would be chargeable to ring-fence tax. The EPL will therefore include relevant chargeable gains and PRT refunds.

The EPL will cover profits arising in accounting periods, or deemed accounting periods, starting from 26 May 2022 and ending on 31 December 2025.

The starting point for EPL is the company’s ring-fence profit or loss for a period, which will exclude any RFES, and is then adjusted to remove:

  • finance charges, determined using the SCT rules,
  • CT Losses brought forward, or back,
  • CT Group relief, and
  • Decommissioning expenditure.

An “additional deduction” is introduced as an uplift on so-called “investment expenditure” in the period. This is calculated as 80% of the relevant expenditure and counts as a deduction in computing the EPL profit/loss of the EPL period.

The rules include a bespoke EPL loss regime. EPL losses can be carried forward or carried back one year or surrendered as “EPL” group relief against EPL profits. If the ring-fence trade ceases, “EPL” terminal loss relief rules permit a three-year extended carry back against profits within the EPL regime.

The EPL profits and losses for accounting periods which straddle the 26 May 2022 and 31 December 2025 dates are to be apportioned on a just and reasonable basis except for investment expenditure which is to be apportioned with reference to when the expenditure was actually incurred (using the specific capital allowance rules on when expenditure is incurred). Overall we believe this approach will generate less difficulty than experienced when the Supplementary Charge rate was increased in 2011, where time apportionment was the default position adopted by the law.

The 80% uplift which generates the additional EPL deduction applies to investment expenditure as defined. This is broadly the type of expenditure on oil-related activities that qualify for investment allowance within the SCT regime, but unlike the SCT investment allowance, the expenditure does not have to relate to a defined oil field or Cluster Area. There is also no requirement for it to be “activated” with production income.

The definition covers not only capital expenditure but also some leasing costs and non-routine operating costs on facilities and wells that enhance production, reserves or tariff income. As with the rule for computing, EPL profits decommissioning and financing costs are specifically carved out from the uplift regime.

However, the 80% uplift is not available on ‘second-hand’ assets. The rules here are very broadly drafted and deny the allowance on any asset where it would have been possible for an uplift to have been claimed by a previous owner of the asset, on the assumption that EPL was in place at the time that the owner incurred the relevant costs. The legislation includes as an example expenditure on the acquisition of a field interest but would appear to apply to the acquisition of substantially all second-hand assets if previously held by a ring-fence company, including exploration licences.

There is no claw-back of any uplift on a transfer/sale of an asset but the new owner will not obtain the uplift on their acquisition cost, regardless of whether the seller actually obtained such uplift.

The rules also incorporate anti-avoidance specifically in regard to the 80% uplift and EPL losses for any avoidance arrangements with the main purpose of obtaining the uplift.

The rules provide for the normal CT machinery provisions to apply, including the instalment provisions, and a requirement to notify HMRC of the amount, on or before any EPL payments are made.


Overall the draft legislation is largely as expected based on the announcements last month.

The rules are generally tightly drawn. Companies will, in particular, need to look carefully at the transitional rules. There may also be some areas where companies can plan to mitigate their exposure. There does not seem to be anything in the draft which delays the instalment payments for December year-end companies until 14 January 2013 as previously announced.

The inclusion of ring-fence capital gains and PRT repayments appear particularly anomalous. Capital gains will be based on all future profits from the licence, capturing profits to be made after the sunset date of 31 December 2025. This is likely to deter any movement of field interests unless reinvestment or other reliefs can be found. For PRT repayments there is no relation to the excess profits through high prices that the levy is designed to catch. Indeed, the loss available to carry back will have already been reduced by the current high prices and is then being taxed again. Companies will no doubt be looking closely at whether this gives rise to a claim under the DRD.

CW Energy can assist companies in planning for and complying with the EPL.

CW Energy LLP
22 June 2022

23 Mar 2022

Spring Statement 2022

The Chancellor delivered the Spring Statement 2022 today.

Despite the speculation and calls for a windfall tax there was no 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.

In addition, there was no announcement on any changes to the calculation of profits chargeable to ring fence taxation.  Neither was oil and gas taxation mentioned in the Spring Statement Tax Plan.


While there have been many public statements in the last few weeks that HM Government were not considering changes to oil taxation it is welcome that the Chancellor has once again allowed a stable regime to remain in place.  This again is evidence that HM Government understands the importance of fiscal stability and should underpin the plan for more investment in UK domestic oil and gas production in these uncertain times in energy markets.

14 Mar 2022

Scope of the ring-fence: Result of the appeal in the Royal Bank of Canada case

In August 2020 we published a newsletter on a First-tier Tribunal (‘FTT’) case that considered whether an oil and gas royalty interest held by a non-UK resident gave rise to ring-fence income and whether the relevant treaty allowed HMRC to tax the income.  That newsletter can be found here:

As we reported at the time the taxpayer lost on both counts at the FFT and appealed. The appeal was heard by the Upper Tribunal (‘UT’) in December and the decision was published on 17 February 2022.  The UT confirmed the decision of the FTT on both the domestic law and treaty matters and consequently found that the royalty income was taxable as ring-fence income in the UK.

In terms of the treaty position, the UTT agreed that the oil royalty constituted “rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits…” and therefore fell within the definition of immovable property under the treaty.

The key domestic law finding in terms of the wider relevance of this decision is the UT’s decision on the meaning of the “benefit of” exploration or exploitation rights. There was very little analysis of the meaning of this term in the FTT decision, and unfortunately, there is not much more in the UT decision.

The UT found that the oil royalty constituted “rights to the benefit of the oil because, provided that the oil was sold at a sufficiently high price to generate a payment of the royalty, the Bank would thereby benefit from the oil produced..” and the reference to benefit “is capable of including a wide range of arrangements, whether proprietary or contractual or otherwise, giving rise to a benefit, including a commercial benefit.”

As a consequence, the UT dismissed the grounds for appeal and affirmed that the UK domestic tax rules would, based on the facts of this case, treat the income arising as subject to tax in the UK as ring-fence trading income.

One matter to note is that this is a UT decision and therefore does set legal precedent.

The implications for taxpayers are as we set out in our original newsletter when the FTT decision was published.  Taxpayers should review any similar arrangements already in place

Generally, we see royalties of the type considered in this case to be created as a result of the transfer of interests in oil fields. It may however to be possible to distinguish some forms of contingent deferred consideration from the royalty in this case.

In today’s oil and gas price environment mechanisms that share the benefit of price fluctuations have remained common in transactions.  Such mechanisms should be considered carefully.

CW Energy LLP
March 2022

09 Feb 2022

Proposed changes to taxation of profits for multinational groups – Pillar Two

In our newsletter in July 2021, we summarised and commented on the potential changes to the taxation of profits for multinational groups published by the OECD/G20.  That newsletter can be found here

The OECD issued a report at the end of December 2021 that sets out details on how Pillar Two rules are to be implemented (“Model Rules”).  Pillar Two deals with the Global Anti-Base Erosion (“GloBE”) rules which provides for the introduction of a minimum corporate tax rate of 15%.

On 11 January 2022 HM Treasury and HMRC issued a consultation document to seek input on the UK application of the Model Rules and wider implementation questions.

In early 2022, OECD is expected to issue further guidance on these rules and also will engage further with stakeholders to refine the Pillar One rules.

In this newsletter, we summarise and briefly comment on some of the key components of the Pillar Two Model Rules and relevant parts of the UK consultation.


Changes to the international tax rules had already been made through other BEPS (Base erosion and profit shifting) initiatives; however, it has been perceived that there remains a need for a broader change to address the possibility that companies could still shift profits to low tax jurisdictions.  Pillar Two seeks to ensure that large multi-jurisdictional 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 an “in scope” entity suffers a rate of tax lower than 15% in any jurisdiction the rules seek to identify this and levy a charge, normally in the group parent company, for the difference, thereby removing the advantage of shifting profits to low tax jurisdictions. The rules also allow a country that has implemented the rules to charge additional tax to bring their rate up to 15%, thereby preserving that jurisdiction’s primary right to levy taxes on income generated in its own jurisdiction.

Scope of the rules

The rules are to apply to multinational groups with annual global revenues greater than EUR 750m.  The value is taken from the consolidated financial statements of the parent entity.  For the rules to apply the EUR 750m revenue threshold needs to be met in at least two of the last four years preceding the year under consideration.  Therefore while the rules, at first sight, seem to replicate the scope of the Country-by Country Reporting rules they are slightly different.

If the multinational group is in scope, each entity in that group is subject to the rules.  There are some exclusions, e.g. not for profit organisations, pension funds and governmental organisations, but all multinational oil and gas and energy groups will be potentially affected if they meet the revenue threshold.

Pillar Two, however, applies only to multinational groups which means a group that includes solely UK tax resident companies with no foreign permanent establishments will not be subject to the rules.

Determining the rate of tax

The tax rate is determined by finding each entity’s “GloBE Income or Loss”, i.e. broadly profits, and its “Adjusted Covered Taxes”, i.e. the related tax liability for the period.  The values for each entity in the same jurisdiction are aggregated with an overall tax rate determined for each jurisdiction.

GloBE Income or Loss

Globe Income or Loss is found by taking the amount of income or loss that was included in the consolidated financial statements for each entity.  This amount is then subject to numerous adjustments.  For example, the following are to be adjusted:

  • Any accrued illegal payments;
  • Fines or penalties of EUR 50,000 or more;
  • Pension costs accrued and not paid;
  • Property, plant or equipment that has been revalued for accounting purposes but not sold;
  • Certain foreign currency gains or losses of an entity whose accounting and tax functional currencies are different;
  • Prior period errors and changes in accounting principles.

The starting point is therefore book profit and loss amounts and notably, the adjustments required to determine Globe Income or Loss do not include the items we would typically see being adjusted in a UK upstream oil company tax computation, such as add-back for depreciation, deduction for capital allowances and use of brought forward tax losses.  However, there are separate adjustments to be made to the calculation of Adjusted Covered Taxes in respect of temporary differences, i.e. profits and losses recognised in different periods for tax and accounting purposes (see below).

Gains and losses arising from the sale of greater than 10 per cent shareholdings and gains and losses in relation to a reorganisation where the gain or loss is deferred for local tax purposes are to be excluded.

However, a gain or loss on the disposal of an interest in an oil field would not seemingly be covered by the exclusions and potentially any gain arising would constitute GloBE income even though any gain may be exempt from tax where reinvestment relief applies.

Substance-based Income Exclusion Carve Out

In order to seek to include only “excess profits” of a company in the rules, GloBE Income is to be reduced by two further amounts:

  • A payroll carve out at 5 per cent of the payroll costs of employees of the entity; and
  • A tangible asset carve out at 5 per cent of the book value of relevant assets. Such assets are stated to include property, plant and equipment and also natural resources.

There are transitional rules which allow higher rates to apply for the first ten years.

Adjusted Covered Taxes

Adjusted Covered Taxes is found by taking the amount of current tax expense accrued in the financial accounts for taxes levied, broadly, on the entity’s income or profits.

We would expect in scope taxes to include both PRT and SCT and also other oil tax regimes such as Norway’s special tax, Netherlands’ state profit share and Denmark’s hydrocarbon tax.

In addition, taxes imposed in lieu of a generally applicable corporate income tax are also included.  This is expected to cover petroleum sharing contracts where tax is often paid by the host state on behalf of the oil company out of the state’s share of oil.

In quantifying the amount of current tax expense in any year it appears this will be the amount of tax that has or will be included in a submitted tax computation as the amount of current tax expense that relates to an uncertain tax position is to be excluded until that tax has been paid.

Deferred tax expense is to be included in the calculation of Adjusted Covered Taxes.  Where there is a deferred tax expense the tax rate used to calculate deferred tax is to be recast, in most cases, downwards so that deferred tax cannot be recognised at a rate above 15%. Deferred tax credits will also be recognised at a rate restricted to 15%.

There are multiple further adjustments that should be made, with perhaps the most significant being an adjustment to the deferred tax being removed from the calculation of Adjusted Covered Taxes if a deferred tax liability is not “recaptured pursuant to this article” within five years.  This appears to mean the deferred tax liability must have “reversed” within five years or the Adjusted Covered Taxes amount is reassessed for the year the deferred tax expense was included. This five-year rule does not apply where the deferred tax meets the definition of “Recapture Exception Accrual” which means tax expense is attributable to certain items including:

  • Cost recovery allowances on tangible assets;
  • The cost of a licence or similar arrangement from the government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets; and
  • De-commissioning and remediation expenses.


These items are not further defined in the report.  On the face of it, this may mean that deferred tax charges made for items such as accelerated capital allowances on-field development costs may not be subject to the five-year rule.


De minimis exception

A group may elect on an annual basis for the rules not to apply to certain jurisdictions where the entities in that jurisdiction have both:

  • average GloBE revenue (broadly, the revenue included in the consolidated accounts for that jurisdiction) of less than EUR 10 million; and
  • average GloBE income (calculated as set out above) is a loss or is less than EUR 1 million.

The average is calculated by taking the current and preceding two years of GloBE revenue and GloBE income.

There is also reference to a “GloBE Safe Harbour”.  It appears that details of this exclusion are to be included in the GloBE Implementation Framework which has yet to be published.

From the UK consultation document, it appears the GloBE Safe Harbour may use the country by country (CBCR) filings (with some adjustments) to identify if there is a lower risk of a particular jurisdiction being subject to tax below the minimum rate.  This safe harbour approach may remove the need to undergo a full set of calculations for a safe harbour jurisdiction.

Transitional rules

In the first year that an entity comes within the scope of the GloBE rules, the entity is to take account of all deferred tax assets and liabilities reflected or disclosed in the financial accounts in arriving at the Adjusted Covered Tax.  The impact of any valuation adjustment (where the full deferred tax asset is not recognised) is disregarded so that the utilisation of losses that were unrecognised for deferred tax purposes are taken into account in determining the tax charge.

Charging provisions

Where a tax rate has been found that is below the 15% minimum tax rate then a top-up tax is to be charged (called Income Inclusion Rule).  This is usually levied by the tax jurisdiction of the parent company of the group.  Where the tax jurisdiction of the parent company of the group has not implemented the GloBE rules then a jurisdiction further down the ownership chain may levy the top-up tax.  The rules use a top-down approach so that, for example, if the jurisdiction of the parent company of the group does not operate the GloBE rules but an immediate subsidiary is in a jurisdiction that has implemented the rules then it is that jurisdiction that charges the top-up tax.

Where there is still tax to pay then another mechanism may apply (called the Undertaxed Profits Rule) which would arise if the parent company of the group is not subject to the Income Inclusion Rule and the top-up tax has not been collected by other jurisdictions (e.g. where none of the companies in the ownership chain is in jurisdictions that have implemented the GloBE rules), the remaining top-up tax is charged by jurisdictions that have group entities and have adopted the GloBE rules. The amount of tax charged by each jurisdiction is based on the relative size of the group’s entities measured by tangible assets and the number of employees.

UK domestic minimum tax

The UK consultation document includes a section on the possibility that the UK will implement a domestic taxation rule that would apply to charge income to UK taxation under domestic law if the Pillar 2 rules would otherwise apply in respect of UK activities.  The consultation states that absent a domestic minimum tax, these rules will mean low tax profits in the UK will likely be topped up in foreign jurisdictions.  This domestic minimum taxation would be designed to ensure tax flows to the UK rather than a foreign jurisdiction.

UK implementation timing

The UK consultation is open until 4 April 2022 with the draft legislation to be published in summer 2022.  It is expected the legislation will be included in Finance Bill 2022-2023 and have effect from 1 April 2023.  The Undertaxed Profits Rule and domestic minimum tax rule (if implemented) would be introduced from 1 April 2024 at the earliest.


The Model Rules include many concepts which were not set out in earlier papers and reports.  The OECD guidance, when published, should hopefully set out in more detail how some of these concepts and calculations are expected to work.  In addition, the UK consultation and legislative process will provide more clarity.  However, we do now know that these rules will be complex and for the proposals to work effectively, will need to be implemented cohesively across all relevant jurisdictions that have signed up.

For upstream oil and gas operations in the UK, one would expect that the rules should not be relevant due to the high rate of tax applicable to UK upstream companies.  However, there are some instances where there is a possibility that the rules could apply.  For example, on the refund of PRT, the repayment interest is not taxable which may result in a reduced effective tax rate.  Where decommissioning losses are carried back the credit to current tax may be greater than the associated capped deferred tax charge thereby also reducing the effective tax rate unduly.  Where reinvestment relief applies to field disposals this may also give rise to a tax charge below the minimum rate.  The utilisation of losses that have arisen on claims to ring-fence expenditure supplement may also cause issues. Other anomalies may emerge as the rules are analysed further.

For UK based oil and gas groups with activities overseas it may be that the rules could be in point, but with the potential for countries to change their domestic rules in the style that the UK has suggested may mean that these rules, in most cases, become one of domestic law compliance and group reporting.

We shall provide further updates as more details are published.

CW Energy LLP

February 2022

25 Jan 2022

Notification of uncertain tax treatments – revised guidance

In our newsletter last year we summarised and commented on the proposed rules for the notification of uncertain tax treatments.  That newsletter can be found here

Since then the relevant statutory provisions have been included in Finance (No.2) Bill 2021-2022, and last week revised draft HMRC guidance was published, subject to a short period of consultation.  The consultation will run to 1 February 2022.

The big change in the Finance Bill was the omission of the notification requirement where 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. The notes accompanying the legislation indicate that this trigger may yet, however, be adopted.

In this newsletter, we summarise and comment on some of the key parts of the Finance Bill clauses and accompanying notes and the recently published revised draft guidance.

Threshold for notification

As a reminder, 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.

The Finance Bill contains a clarification of how to measure whether the threshold is met in cases where tax losses are created or increased using treatments that are ‘uncertain’. Where such losses are used, the rules will look to the actual reduction in the tax liability, but where the losses are unused a 10% reduction in liability is assumed unless there is no reasonable prospect of the loss being used to reduce tax liability. In the latter case, the value is zero.

In determining whether there is a reasonable prospect of the uncertain loss being used the same process as applies to the determination of potential lost revenue for penalties for inaccuracies is to be used.  This process considers both technical and practical reasons why the loss will not be used e.g. we would expect a lack of sufficient anticipated profits from current field interests would be a relevant factor.

While there are examples of how to calculate the amount of tax at stake in the draft guidance, we would expect complications will still remain.

Provision made in the accounts trigger

The first of the two remaining triggers is where the taxpayer has made a provision in their accounts to reflect the probability that a different tax treatment will be applied to the treatment reflected in a tax return.

In earlier draft legislation this trigger required the provision to be in accordance with GAAP.  This condition has now been removed so a provision whether rightly made or not may satisfy this trigger.

The draft guidance notes that there must be a link between that provision and at least one entry (which includes nil) on a relevant tax return.  The trigger may apply “irrespective of where the provision is presented in the accounts” which presumably references amounts provided as deferred tax as well as provisions included in current tax.

The draft guidance includes an example where a provision was not made in the accounts that included the transaction but a provision was raised subsequently in a later period.  The draft guidance makes clear that this would satisfy the trigger when the provision was raised (i.e. in the later period).

HMRC’s known interpretation of the law trigger

The second of the two triggers for notification is where the taxpayer files on a basis where it is known that HMRC’s interpretation of the law is different.  There are two ways that an interpretation may be taken as being “known”:

  1. Where the position is generally known to all taxpayers from documents published by HMRC; and
  2. Where the position is specifically known to a taxpayer through correspondence with HMRC.

Whether the taxpayer actually did or did not know of HMRC’s interpretation is not relevant as the rules say that “HMRC’s position on a matter is taken to be “known” by a company or partnership”.

Documents published by HMRC

The draft guidance includes some illustrative, but not exhaustive, examples of publications that could indicate HMRC’s known position, and include HMRC Manuals, Statements of Practice, Public Notices, Revenue & Customs Briefs and Explanatory and technical notes relating to legislation (with the latter newly added to the publications that indicate HMRC’s known position).

The draft guidance also sets out publications that should not be considered as containing HMRC’s known view, being advice provided in HMRC forums and submissions HMRC makes in litigation.

In earlier draft guidance it was stated that “advice provided via Online HMRC forums” were not to be considered so this later draft guidance appears to make it clearer that statements made at the Direct Tax Forum (for example) should not be taken to represent HMRC’s interpretation of the law.  In addition, although the minutes of each Direct Tax Forum are published there is potentially insufficient analysis for a company to understand the technical detail and intended application.

Furthermore, much of the correspondence between HMRC and the industry is in the form of letters and meetings between HMRC and UKOITC, Brindex and OTAC.  These letters and meeting notes are not published and are not in the public domain so presumably should not be considered in determining what is a “known” HMRC position.

Known to the taxpayer through correspondence with HMRC

In addition to published materials, a taxpayer may know HMRC’s interpretation from “dealings with HMRC by or in respect of the company or partnership (whether or not they concern the amount in question or the transaction to which the amount relates)”.

The draft guidance notes that dealings with HMRC may include not just a written view of the correct tax treatment from HMRC but also discussions with an HMRC CCM or Tax Specialist.  It seems reasonable where a taxpayer has a written view from HMRC of a legal interpretation that they are put on notice that a certain treatment is that favoured by HMRC, but it seems strange that a telephone discussion with an HMRC Inspector may be considered as giving a taxpayer sufficient notice of the known position of HMRC.

There is no group concept in this part of the rules so that if a similar discussion has happened with Company A and a year later the same technical question arises with regard to another group company, Company B, that latter company seemingly has no knowledge of HMRC’s known position as the first discussion was not in respect of its affairs. Similarly, if an adviser such as CWE is aware of a particular HMRC treatment from correspondence on one client other CWE clients would not be treated as having that knowledge.

It would appear that this test can only be triggered if the discussions with HMRC are in respect of the tax affairs of the company itself.  Therefore, if for example a company’s tax manager is engaged in general discussions with HMRC policy teams about how a law should be interpreted as part of an oil industry discussion, then that will not be sufficient for the company or partnership to be taken as knowing HMRC’s known position from “dealings with HMRC by or in respect of the company or partnership”. Also, if the tax manager is employed by a service company within the group it would seem that no other companies within the group can be deemed to be aware of any discussions the manager holds with HMRC.

Other HMRC comments

The draft guidance does make some further comments:

  • There is recognition that there is a large volume of published material and the new rules are “not intended to act as a series of tripwires leading to penalties”. The draft guidance suggests that HMRC expects a “level of familiarity” with its published material but where guidance is hard to find there is more likely to be a reasonable excuse for not making a notification.  The guidance suggests a higher hurdle where a treatment is “novel, contentious, high-value or high-risk such that a careful examination of HMRC’s view would be warranted”;
  • HMRC has confirmed that where the known position of HMRC cannot be determined or is unclear then this trigger cannot apply. This is potentially applicable to many situations in the oil industry as guidance often does not address particular circumstances;
  • The trigger can still apply where there is legal uncertainty of whether HMRC’s known position is indeed correct. The example given in the draft guidance is where the Upper Tribunal has found against HMRC’s technical position but HMRC has not yet adopted the Upper Tribunal’s technical analysis as their “known” position.  In that scenario, the draft guidance provides that the trigger condition may be met even though the Upper Tribunal has not supported HMRC’s known position;
  • HMRC acknowledges that their publications may be “out of date or contain conflicting advice”. The draft guidance states where HMRC’s position is contradictory the most recently published statement is to be taken as the known position.  This is different from earlier draft guidance that stated that where statements were contradictory the trigger would not be satisfied as there was no known position.

Exemption from notification

Even where a trigger test has been satisfied, a business is not required to notify HMRC if it is reasonable to conclude that HMRC already have available to them all, or substantially all, of the information relating to the amount, including the amount itself, that would have been included in a notification.

Perhaps unsurprisingly the draft guidance seeks to make clear that to rely on this exemption each individual taxpayer will need to make the uncertain treatment obvious to HMRC.  It will not be sufficient if this information “is hidden away or it is obscure”.

There is also no group concept for this aspect so even if other group companies have made HMRC aware of similar treatments in their own affairs this will not exempt the particular company.

Furthermore, the draft guidance indicates that in the course of any discussions with HMRC over uncertain treatments it would be recommended that taxpayers make clear that the discussion is to avoid the requirement to notify and the discussion is documented. We would expect most taxpayers will wish to expressly confirm that they will not make a formal notification of the uncertain tax treatment under these rules.

In a change from earlier guidance, HMRC has clarified that if a company treats a transaction in accordance with how it was outlined in a clearance request and the business undertakes and treats the transaction in the way included in the clearance, there will be no further need to notify the transaction.  In the earlier guidance, this exemption only applied where HMRC agreed with the treatment included in the clearance.

HMRC have encouraged businesses to seek exemption early and in real-time rather than reporting formally under these rules.

Form of the notification

The Finance Bill provides that the form of the notification shall be specified in a notice to be published by HMRC.  This notice has not yet been published.


The omission of the “substantial possibility” trigger is welcome as that element of the rules would have led to a lot of uncertainty as to its application.

The Finance Bill has now passed the Committee Stage and although both the draft guidance and related statutory provisions are not final, the potential for these rules to apply to transactions currently being undertaken means that companies should be considering their impact now.

The draft guidance does provide some assistance to companies seeking to understand how to meet their obligations.  We expect companies will need to look at relevant transactions carefully and prepare notifications or commence earlier discussions with HMRC where necessary. Consideration of these rules will also need to become part and parcel of any tax planning being undertaken for groups within the regime.

We at CW Energy will be working with clients who will be within the regime to ensure that the implications are understood and to assist them in complying with the new rules.

CW Energy LLP
January 2022

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

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