Marathon have lost their appeal in the First Tier Tribunal for their claim for relief for expenditure incurred under an “acceleration” scheme which they entered into in 2008 under the special decommissioning relief provisions in s163/s164 CAA 2010 as they applied at that time.
Marathon Oil U.K., LLC (“MOUK”), was the licence holder for a number of the group’s North Sea assets. They entered into an arrangement to secure relief in advance of decommissioning work actually being carried out in the North Sea in respect of the Brae area.
The case is to some extent of historical interest as the law governing the special relief available for decommissioning was changed in 2009, once HMRC became aware of these arrangements, to tighten the conditions for relief.
It is this tighter scheme that applies today, and under the current rules it is clear that relief is not available until decommissioning work is carried out.
Facts
Marathon identified that, as relief for decommissioning was not expected to arise until the end of field life, this was likely to interfere with their double tax relief position in the US. In particular the carry back of losses generated by such expenditure and consequent repayments of UK taxes could adversely affect the US group’s foreign tax credit planning.
EY provided Marathon with a proposal to accelerate the relief and therefore provide a greater degree of certainty on the foreign tax credit planning position.
Marathon established a special purpose group decommissioning services company in December 2007, MODS. This company contracted with MOUK to undertake its decommissioning work in respect of the Brae area. The service contract provided for an upfront payment of $300m which was intended to meet a substantial portion of MOUK’s forecast decommissioning liability. The categories of work to be covered by the payment were carefully defined to ensure the work related to expenditures which were expected to fall within the special allowance provisions of s163/164.
The upfront payment was made in 2008 and not repayable. MOUK claimed a 100% P&M allowances for the $300m in the period in which the contractual liability arose and in which it was paid.
The first actual decommissioning work, the costs of which were set against the upfront payment, arose in 2012, and as at the date of writing the Brae area continues to produce and the major part of the decommissioning work is still to be carried out.
Decision
The Tribunal accepted that the main reason for MOUK entering into the arrangements were to control the group’s tax credit position in the United States. However, it also found, as a matter of fact, that an important element of the arrangement was to obtain an accelerated UK tax deduction. Marathon accepted that there was no operational reason for entering into the relevant transactions. The Tribunal also noted that there was no net cash outlay to the Marathon group as a result of the initial arrangement.
The Tribunal was unimpressed by the relevance of the expert witness put forward by Marathon to provide details of the reasons behind the arrangements, given they had no contemporaneous knowledge of the facts or circumstances.
However, despite these issues it is clear that the decision in the case turned on a narrow point; was the payment made by MOUK to MODS “expenditure…incurred on decommissioning of plant or machinery” within section 163.
The Tribunal rejected the contention that incurring expenditure “on” decommissioning meant incurring expenditure for “the purpose of decommissioning”. They noted that the legislation granted the special allowance only if various conditions were satisfied in respect of specific plant and machinery. HMRC contended that it simply was not possible for MOUK or HMRC to know whether those conditions would in fact be satisfied in relation to the actual decommissioning work.
HMRC’s view was that in order to qualify for the special allowance the legislation required that specific amounts of expenditure must be identified and spent on specific decommissioning activities in relation to specific items of plant and machinery.
This view was accepted by the Tribunal.
The finding was that, adopting a purposive approach to statutory interpretation in the real world and in a meaningful sense, the payment made to MODS was not incurred “on” decommissioning but on putting funds aside within the Marathon group to meet future costs of decommissioning.
It is not known whether Marathon intend to appeal this decision.
Comment:
The decision is a useful summary of the current principles of statutory construction and in particular the requirement to adopt a purposive approach in this type of case. The Tribunal established that the purpose of the legislation was to provide for relief for actual work carried out in connection with actual plant and machinery, and it was in this context that the meaning of the phrase “on decommissioning” needed to be determined.
In order to understand the case it is useful to review some of the history behind the special relief provisions.
When originally introduced the main conditions for the special relief were that the
“Expenditure had to be incurred for the purposes of, or in connection with, the closing down of an oil field or of any part of an oil field” and
“The decommissioning of the plant or machinery must be carried out, wholly or substantially, to comply with–
(a) an abandonment programme, or
(b) any condition to which the approval of an abandonment programme is subject.
Industry identified that the original wording would not allow for the special relief to apply to mid-life decommissioning. Following lobbying by industry the rules were modified and in particular this condition surrounding the requirement to have an abandonment programme in place was deleted.
We believe it was the removal of this compliance with an abandonment programme condition which paved the way for the “acceleration idea” to be adopted. What seems to have been missed by Marathon is that the new legislation also moved away from a “purpose” test and introduced the narrower concept that the expenditure in question must be “on decommissioning”.
As soon as HMRC became aware of this transaction the law was changed once again to ensure that relief was only available in a period to the extent that actual work was carried out by the end of that period. However although the “comply with” test was reintroduced this was in a wider form which was intended to allow for mid-life decommissioning.
There were discussions between industry and HMRC a number of years ago under the post 2009 scheme as to what “on decommissioning” meant in the context of studies expenditure. HMRC published guidance which reflects the view that expenditure on such studies is indeed expenditure on decommissioning.
The precise extent of the special relief in s163/164 is currently being discussed between industry and government. The main issue which HMRC seem to have raised was to question if the special relief could be obtained in advance of an abandonment programme being put in place. We do not believe there is such a requirement, but the work needs to be undertaken in accordance with some form of Government agreement. It is nevertheless hoped that this decision will clear the way to a common position being established. We understand that HMRC have, in fact, already accepted that in certain circumstances expenditure incurred before the abandonment plan has been agreed can indeed qualify.
CW Energy LLP
November 2017