CW Energy LLP

Scope of the ring-fence decision published

Court of Appeal decision published in the Royal Bank of Canada case

In March 2022. we published a newsletter on the Upper Tribunal (‘UT’) decision that considered whether an oil and gas “royalty” interest held by a non-UK resident (Royal Bank of Canada (‘RBC’)) gave rise to ring-fence income and whether the relevant treaty allowed HMRC to tax the income.

The UT decided in favour of HMRC, and RBC was held to be liable to UK ring fence corporation tax on receipt of the payments, notwithstanding the Canada/UK tax treaty. Our newsletter on the UT decision can be found here:

RBC has since appealed against that decision. The Court of Appeal heard the appeal in May, with the decision published on 21 June 2023.  The Court of Appeal found unanimously for the taxpayer and overruled the decision of the UT.  The leading judgement was delivered by Lady Justice Falk (a former Freshfields tax partner).

Application of the Canada/UK tax treaty: Nature of RBC’s rights

RBC succeeded in its argument that the receipts were not income derived from immovable property: they were not rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. RBC had never held the underlying immovable property.

The Court of Appeal was not persuaded by earlier judgements that the precise legal structure should be looked through to the commercial arrangements saying:

“That legal structure cannot simply be ignored on the basis of some broader concept of commercial or economic reality.”

As the right to work the Buchan field was contained in the licence interest and that interest was never held by the former owner or RBC it could not be said that the payments were received by RBC in consideration for that “right to work”. The Court of Appeal held that the characteristic of the former owner of the right to receive payments did not pass to RBC.  That meant the payments should not be taxed as either income or capital gains due to the application of the treaty.

Some of the UK’s treaties will provide similar protection to that provided by the UK-Canada treaty. However, where the treaty includes an offshore activities article, it is likely that similar protection may not be available.

UK domestic law

As the Court of Appeal found that the UK had not reserved its taxing right, that dealt with the matter under appeal, and Lady Justice Falk said she would “prefer not to express a concluded view” on the UK domestic law position.  However, she also made it clear that she was not necessarily supportive of the position of the lower courts by stating:

“it is not clear to me that an interest in a proportion of sale proceeds from oil of the kind in issue here can properly be described as “the benefit of” the oil, as opposed to being a benefit deriving from proceeds of sales of oil made by BP or Talisman.”

Comments on deduction of royalty payment

Where the payments of this nature have not been structured as instalments of capital, it is common in the industry for ongoing payments to be treated as deductible.  HMRC clearances have been obtained routinely following this treatment which is included in published HMRC guidance on taxation of deferred consideration.

However, this judgement included comments in respect of the tax treatment of the company making such payments:

“…it would ordinarily be expected that the consideration paid, including the Payments, would form part of BP’s acquisition cost for chargeable gains purposes. For whatever reason, HMRC appears to have taken a different approach and to have treated the Payments made, initially by BP and then by Talisman, not as part of their acquisition cost of Sulpetro’s interest in the Buchan field but as deductible revenue payments. I cannot comment on the possible basis for that, but what is clear is that the fact that a particular tax treatment has been afforded to the payer and has subsequently given rise to a concern about the impact of those deductions on the UK tax take.., cannot determine the tax treatment of the payee.”

We believe that these comments simply reiterate the established position that a payer’s tax treatment is not relevant when considering the tax treatment of the payee and should not be read as providing precedent on the deductibility or otherwise of royalty payments.


As the Court of Appeal has decided the case without the need to consider the domestic law taxing provisions in detail and has overruled the lower courts, this seems to leave the UK domestic law position without binding case law precedent on the fundamental issue of whether a royalty of this kind is an oil right.  There are, however, arguments and views included in the judgements which may be useful in determining how a future court may rule on these matters. In this sense, whilst the decision in the judgement was reached based on a narrow treaty point, the case does potentially have wider relevance for payers and recipients of royalties of this kind generally, including UK resident recipients.

HMRC may seek to seek leave to appeal this decision to the Supreme Court so this may not represent the final position.

CW Energy LLP
July 2023