By Helen Cracknell
Background
Maersk Oil North Sea UK Ltd and Maersk Oil UK Ltd v HMRC concerned two companies that carried on oil related trades and had both suffered from incidents that affected their profits.
During 2011, Maersk Oil North Sea UK Ltd (MONS) was the operator of six oil fields in the North Sea and Maersk Oil UK Ltd (MOUK) had a license share in four fields in the North Sea.
During the relevant period in 2011, MONS’ business suffered unexpected catastrophic events that had a negative effect on its profits.
Similarly, in 2011 MOUK suffered an unexpected prolonged shut down of one of its oil fields that lasted until April 2012, and led to production volumes being reduced by 35.5%.
Prior to the tribunal hearing, HMRC had assessed both companies as being liable for further corporation tax for the 2011 accounting period.
The corporation tax issue
Ring fence profits (such as those generated by the appellants through their oil related trades) are subject to a supplementary tax charge, over and above normal corporation tax. On 23 March 2011 the government increased the rate of supplementary charge overnight from 20% to 32%.
Companies with open accounting periods at the date of the rate change were to treat the periods before and after the rate change, as two separate accounting periods and allocate their profits between them on a time-apportioned basis.
Alternatively, companies can choose to use the method under s7(5) Finance Act 2011, if time apportionment would give rise to an unjust or unreasonable result. An alternative method must itself be ‘just and reasonable’.
Both MONS and MOUK made an election under s7(5), which was accepted by HMRC.
The arguments
The appellants argued that a time apportioned basis for profits was not used as it would have worked unfavourably for both companies. The catastrophic events that had occurred would have meant that the profits for both companies were concentrated within the first half of 2011.
Further, the appellants submitted that an actual basis (as if the company had actually closed an accounting period) was used to allocate the profits between the periods before and after the rate change as this produced a more just and reasonable result.
HMRC advanced a number of arguments which recognised that the trade of both MONS and MOUK suffered in 2011, but that this did not prevent MONS and MOUK from trading and earning profits after 24 March 2011 (after the increase of the supplementary charge).
HMRC's overarching argument was to object to MONS and MOUK's approach to apportionment, as they had departed completely from a time apportionment method.
The decision
The tribunal held that the method used for MONS and MOUK's corporation tax calculations was a just and reasonable basis of apportioning the companies' ring fence profits under s7(5) FA 2011.
The tribunal cited a number of reasons for this:
- The method was not contrived.
- The method was consistently applied and did not always work in MONS and MOUK’s favour.
- The method provided a reasonable reflection of the financial results of the two companies for the relevant periods.
Crucially, the tribunal held that if the taxpayer’s approach to apportionment is just and reasonable, it is not relevant whether HMRC might have had a better approach (or indeed one that is more just and reasonable).
This decision will be of particular interest to companies operating within the oil and gas sector.
How can Burges Salmon help?
The corporate tax team at Burges Salmon has experience dealing with a variety of tax issues. For further advice contact Nigel Popplewell.