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