Capital allowances available on the full amount of plant purchased in connection with an interest in an oil field even though part was contracted to be on sold before ownership was secured.
Perenco UK Limited (“PUK”) has been successful at the First Tier Tribunal (“FTT”) in obtaining plant and machinery allowances in connection with the acquisition of a 67.5% interest in the Wytch Farm field from BP in 2011. Approximately 70% of the $555m headline price was allocated to plant
HMRC challenged PUKs entitlement to allowances on part of the expenditure on the basis that part was not incurred for the purposes of PUKs oil and gas ring fence (“RF”) trade. This was on the basis that prior to completion of the acquisition of the 67.5% interest PUK entered into an agreement to on sell 17.2% to Premier Oil UK Limited (“Premier”).
The FTT found on the facts that the purpose of the acquisition of the full interest in the plant was for the purposes of the trade. The on sale had been agreed in the light of Premier’s pre–emption rights. Key to this finding was that PUK had retained the hope that Premier would not be able to complete on its purchase due to financial constraints in which case PUK would have kept the full interest, which was its preferred option.
HMRC were also unsuccessful in their contention that a FYA was not available on the plant under the special RF rules. The court held that the assets were used wholly for the purposes of the ring fence trade during their period of ownership. The FTT rejected HMRCs further argument that the pricing mechanism used within the on sale agreement, which backdated the economic effect of the sale to a date before completion of the acquisition of the assets from BP meant that the plant on sold could not be regarded as “owned” by Perenco for any period of time. The court held that the Perenco did meet the ownership test as a result obtaining legal and equitable ownership on completion of the acquisition from BP.
The on–sale agreement included a fixtures election to limit the consideration allocated to plant to $2. This was included at Premier’s request in order to allow them to reduce the price payable for their interest. HMRC argued that the fixtures anti–avoidance provisions would apply to set aside the $2 and apply a notional tax written down value. Having held that an FYA was available these rules would have no effect. In any event, the FTT found on the facts that they were not in point as whilst there was clearly a tax advantage this was not a main purpose.
HMRC were clearly unhappy with the arrangement as they initially raised a penalty assessment on PUK but this was withdrawn before the case proceeded to the FTT.
Comments
The facts of this case are unusual in the context of UK oil and gas licence sales. The allocation of consideration to plant can have a material impact on a deal where parties have different tax profiles. Although there may be some flexibility here the allocation must be just and reasonable. The fixtures election sets this requirement aside and in this case allowed allowances to remain with the seller. This election is not a common feature of North Sea deals as it can, in our view, only apply to onshore facilities.
The decision includes a useful summary of the hurdles that RF companies need to clear if a FYA is to be available under the special RF provisions.
The analysis of the fixtures anti–avoidance rules is also interesting. It is clear that there was a tax advantage as a result of the arrangement in the sense that the allowances stayed with the entity that could use them and were not passed to Premier who we believe had significant tax losses at the time and could not afford to pay for the allowances. However the FTT determined this tax advantage was not one of the main purposes of the arrangement when looked at from PUK’s point of view; PUK’s main purpose was considered by the FTT as being more transactional in nature (i.e. securing of the Wytch Farm interest) whilst managing risk associated with pre-emption. The tax advantage was important but not a main purpose.