- Summary:
This case considers the precise scope of the transfer of trade rules in Part 22 Corporation Taxes Act 2010, and in particular, their interaction with the rules that deem certain oil-related activities to be treated as carried on as part of a separate so-called “ring fence” trade. They also look at the rules concerning the pooling of expenditure for capital allowances purposes and in particular where expenditure is incurred partly for one qualifying activity and party for another.
On the 7th of April 2026, the Upper Tribunal (UT) published its ruling in respect of the case between CATS North Sea Limited (CNSL) and The Commissioners for His Majesty’s Revenue and Customs (HMRC). The UT has allowed CNSL’s appeal against the previous judgement reached by the First Tier Tribunal (FTT) which was originally in favour of HMRC. This UT ruling has in effect reduced a ring fence balancing charge which HMRC argued arose from £167 million, to CNSL’s lower value of £23 million.
The UT has held that the FTT erred in law by failing to properly account for the effect of the deemed separate trade rules that can apply for the oil and gas ring-fence regime (s279 CTA 2010 in particular) when applying the intra-group transfer rules under Part 22 CTA 2010.
- High-level facts:
The case addressed the tax treatment relating to the intra-group transfer (a hive-down) of the CATS pipeline by Amoco (UK) Exploration Company LLC (Amoco) to its subsidiary CNSL (a company established in October 2014). Both companies were members of the BP group.
Prior to the hive down, Amoco had a ring-fenced trade of which the CATS pipeline formed part. Accordingly, Amoco’s tariff income arising from use of the pipeline was subject to the oil and gas ring fence tax regime. The ring fence tariffs generated by Amoco from CATS were in respect of the transportation of Amoco’s own equity production and from the transportation of other third-party production volumes.
In October 2015 Amoco hived down its CATS pipeline and associated contracts to CNSL for US$1. This hive down was part of an arrangement to ultimately dispose of the CATS pipeline to a third party group. CNSL continued to operate its business of transporting production (both Amoco and other third-party businesses) using the CATS pipeline. At the time of the hive down, CNSL anticipated that 13.55% of future tariff income would be inside the ring fence (IRF) and 86.45% outside the ring fence (ORF).
In December 2015 Amoco disposed of its shares in CNSL to a 3rd party for US$388 million, at which time CNSL ceased to be part of the BP group and all activities were ORF.
- Tax
HMRC and CNSL disagreed on the capital allowance balancing charge that arose as a result of the transactions.
HMRC’s position was that Part 22 CTA 2010 (transfer‑of‑trade rules) applied to the hive down and as such, no disposal event arose for capital allowance purposes (CNSL inherited Amoco’s tax written down values) at that time. However, CNSL’s usage of the CATS pipeline following the hive down was otherwise than wholly for the purposes of a ring fence trade, therefore a disposal event for capital allowances arose. This disposal event arose in CNSL immediately after the transfer on the basis that the effect of Part 22 was that CNSL was deemed to have carried out the activities of the transferred trade that had been carried on by and that the assets following hive down began to be used partly for non-ring-fence purposes. This resulted in a balancing charge of £167 million immediately after transfer based on market value but limited to the group’s historic cost. No capital allowance disposal event arises on the disposal of the shares in CNSL.
The second argument that HMRC put forward was that if there was no a single transfer within Part 22, then there were two distinct transfers: a transfer of the activities related to the transportation of Amoco production, the ring fence (RF) part, and the transfer of activities related to third parties, the Outside Ring fence part (ORF). CNSL was to be treated as carrying on these two separate trades immediately after the transfer and so as before, there was a disposal of that part of the asset which this started to be used post transfer ORF. Further on the sale of the shares, there was a disposal of the RF part as the asset, as this also started to be used outside the RF one the shares were sold. The overall balancing charge was the £167m albeit this amount was recognised in two tranches.
HMRC’s third argument looked at the position where Part 22 did not apply at all. HMRCs view was in that case a balancing charge arose on the sale of the CNSL shares in substantially the same amount as in the first two cases because the acquisition cost of the assets, which was $1, was to be placed into a single pool and a balancing charge arose on that pool at market value, limited to cost for the BP group, when the asset started to be used wholly for the ORF activity on the sale of the shares. The relevant provisions in s207 CAA 2001 then allocated this balancing charge between the ring fence and non ring fence on a just and reasonable basis, and HMRC’s view was that this should look at the total historic usage of the assets by the group, leading to substantially all of the balancing charge being treated as ring fence.
CNSL’s primary view was that no transfer of trade arose (as the scenario in question was not specifically catered for within the Part 22 rules ). The assets were therefore treated as being disposed of for $1 by Amoco and this acquisition price had to be apportioned between two separate pools , a RF and ORF pool. On disposal of the shares, a capital allowance disposal event at market value arises in respect of the RF pool due to CATS no longer being used for IRF qualifying purposes (resulting in a balancing charge of £23 million which was broadly equivalent to the 13% throughput/usage estimate, capped at historic cost). This amount then moved across into the pool for ORF purposes. There was no disposal event in respect of the ORF pool.
The key issue for the UT was to determine how the transfer of trade (stand in shoes) provisions (Part 22 CTA 2010) applied in respect of the hive down where:
- Amoco was transferring part of its entire IRF trade
- Post transfer, CNSL had two trades
- an IRF trade (being the element relating to tariff generated on transporting BP’s production – retained as IRF due CNSL transporting “associated company” hydrocarbons through CATS); and
- an ORF trade (being the element relating to tariff generated on transporting third-party production volumes).
UT ruling
In addressing the above, the UT considered to what extent s279 CTA 2010 should be applied when considering the general transfer of trade provisions (Part 22 CTA 2010).
The UT’s view was that there was one IRF trade in Amoco pre-hive down but two trades in CNSL (IRF and ORF) from the moment CNSL acquired the CATS pipeline. The UT did not agree with CNSL that no transfer of trade occurred; they took the view that the portion of the trade in CNSL that related to income from transporting Amoco’s production was a transfer of part of a trade from Amoco to CNSL (being IRF to IRF). However, there was no such transfer in respect of the activities that were carried on as the ORF trade by CNSL. This was on the basis that the transfer of those activities would not have been regarded as an actual transfer of trade by Amoco if they had constituted Amoco’s entire trade and CNSL’s entire trade , as required by s951(3) CTA 2010, because the deemed trade carried on by Amoco would have been a RF trade but that deemed trade carried on by CNS would have been NRF.
The UT rejected HMRC’s view that s279 CTA 2010 was only relevant once the transfer of trade provisions had been applied, noting that the transfer of trade provisions (Part 22 CTA 2010) need to take into account the deemed separate trade provision 279 CTA 2010.
UT also considered capital allowance pooling, including the allocation of the US$1 of proceeds on hive down between CNSL’s IRF trade and ORF trade for qualifying expenditure purposes; in short, the UT concluded that amounts should be allocated to each relevant pool by way of upfront apportionment rather than being applied 100% to a single pool and with allowances then apportioned between RF and ORF.
Accordingly, there was no clawback on the sale of the RF part, as this fell within Part 22 but there was a balancing charge at the time of the sale of the shares as the assets ceased to be used in the RF. For the ORF part the only disposal was a sale by Amoco for a consideration equal to part of the $1 consideration actually given.
The balancing charge was reduced from £167 million to £23 million in CSNL.
- Next steps:
Although not confirmed, we would expect HMRC to appeal.
- CWE comments:
This case is important in understanding the extent of the deeming rules in s279 CTA 2010. The court held that this deeming should be applied widely, and this has led to a narrow application of the transfer of trade rules. As the North Sea matures, there may be further instances of groups looking to move infrastructure outside the ring fence. As recognised by the judge, there is a potential lacuna in the capital allowance rules when looking at assets moving from the ring fence to the non-ring fence. However, assuming the UT ruling is appealed by HMRC, a level of uncertainty in respect of these types of restructuring will remain in place for some years.
Should you have any queries, please contact Tommy McKnight or your normal CWE contact.