In July 2023, we published a newsletter on the Court of Appeal (‘CA’) decision that considered whether an oil and gas “royalty” interest held by a non-UK resident (Royal Bank of Canada (‘RBC’)) gave rise to income within the charge to UK tax and whether the relevant treaty allowed HMRC to tax the income.
The CA decided in favour of RBC, who had argued that the payments being received were not in consideration for the “right to work” the Buchan field as such a right was contained in the licence interest which was never owned by RBC. This meant that the payments would not be taxed as either income or capital gains under the application of the Canada/UK tax treaty.
Our newsletter on the Court of Appeal decision can be found here:
https://cwenergy.co.uk/scope-of-the-ring-fence-decision-published/
HMRC has since appealed against that decision. The Supreme Court heard the appeal in November, with the decision published on 12 February 2025. The Supreme Court found for the taxpayer (4 in favour, 1 dissenting) and upheld the decision of the CA. The leading judgement was delivered by Lady Rose.
Application of the Canada/UK tax treaty: Right to work
The court considered the scope of Article 6 of the Canada/UK double tax treaty and whether the amounts received under the royalty were properly regarded as income from immovable property situated in the UK. This was defined to include rights to variable payments as consideration for the working of, or the right to work natural resources.
The first issue considered was whether Sulpetro had the right to work the natural resources of the Buchan field as outlined in Article 6. The Supreme Court made a distinction between the two Sulpetro entities stating that whilst Sulpetro (UK) held the Buchan licence, Sulpetro itself, never held the licence. Although the economic benefit of the licence had been transferred to the Canadian company by means of an Illustrative Agreement, it could not be said to have the right to work the Buchan field. The fact that Sulpetro was able to direct the activities of Sulpetro (UK) did not change the reality that it could not directly work the field itself.
Following this, the Court considered whether, if Sulpetro had the right to work Buchan field, the royalty could be regarded as consideration for the working of this right. The Court followed a similar line of reasoning to the Court of Appeal in clarifying that consideration for a right to work could only be received by a company who held such a right at the time the payment were made, which Sulpetro did not as it had never held the Buchan licence.
UK domestic law
Given that the Court found that the UK did not have a right to tax the royalty payment under the treaty, the domestic law position was not the focus of the judgment. However, Lady Rose addressed the issue in obiter, taking a different view from Lady Falk in the Court of Appeal. While Lady Falk expressed doubt over whether an interest in the sale proceeds of oil could be described as “the benefit of” the oil, Lady Rose stated that in this case that “the payments are more closely related to the extraction of oil.” This was due to the payments being calculated based on actual volumes and prices of oil sold.
Lady Rose went on to clarify that this did not mean all payments in relation to financing oil projects would automatically be caught under section 1313 Corporation Tax Act 2009. Instead, she emphasized that each case must be assessed on its specific facts, with particular attention to how closely linked the payments are to extraction activities.
Comments
The obiter in paragraphs 119-122 expressing views on the domestic law position indicates that where there is sufficient linkage of the receipts to actual proceeds, based on actual prices and volumes of oil sold then it was likely that such payments would be brought within the scope of section 1313. These amounts could be seen as representing the benefit of oil to be won. Such income will fall within the ring fence corporation tax regime chargeable at the 30% rate. Where amounts are earned as part of a trade, they will also be subject to the Supplementary Charge and Energy Profits Levy.
The Court of Appeal raised doubts over whether HMRC were correct to give BP a clearance that its payments to Sulpetro would be deductible within the ring fence. However, the Supreme Court did not to address this point. In the absence of commentary from the Supreme Court we would expect HMRC’s existing approach to royalty payments and receipts of the type considered in this case to remain unchanged in the hands of UK taxpayers with deductions being available for the payer and the recipients being subject to ring fence tax on receipts.
Helpfully the Court made it clear that their comments on section 1313 did not mean that all payments made for services or in respect of financing transactions which are computed with reference to the results of a field should be regarded as arsing under oil rights. However, care will be needed to ensure that the structuring of such rights cannot be regarded as conferring the benefit of oil to be won.
Ultimately, as with the Court of Appeal decision, the Supreme Court ruled on the treaty position rather than the domestic law issue. This means that the UK domestic law remains without a clearly binding precedent on whether a royalty of this kind is an oil right for tax purposes. However, the lower courts may find the comments made by the Supreme Court as persuasive.