Total E&P North Sea UK Ltd & Anor v Revenue And Customs

Where a tax rate changes during an accounting period, time apportionment may be replaced if it would work unjustly or unreasonably in the company’s case. That condition is not confined to exceptional events or factors unique to the taxpayer. It may be satisfied where profits were earned significantly faster before the rate increase than afterwards, whether the difference resulted from routine or exceptional circumstances. An alternative basis must provide a just and reasonable apportionment of the profits of the whole period. An actual-performance allocation may be valid even if profits attributed to the earlier period exceed the total annual profits, and even if capital allowances for expenditure incurred after the increase are allocated to the later period.

The appeal concerned the transitional increase in the supplementary charge on ring fence profits under section 7 of the Finance Act 2011. The appellants’ accounting periods straddled the increase from 20% to 32%. They elected to use an actual-performance basis instead of the statutory time apportionment basis under section 7(4).

The First-tier Tribunal accepted that basis as just and reasonable. The Upper Tribunal allowed HMRC’s appeal in [2019] UKUT 133 (TCC), holding that an alternative basis could compensate only for exceptional factors specific to the company and could not go beyond what was necessary. The central issue was the proper construction of section 7(5), including the treatment of capital allowances.

Appeal allowed unanimously. Lord Justice Newey gave the leading judgment, with Lady Justice Andrews and Lady Justice King agreeing.

1. Under section 7(4) of the Finance Act 2011, time apportionment was the default method for allocating adjusted ring fence profits between the periods before and after the rate increase. Section 7(5) permitted an election for another basis where time apportionment would work unjustly or unreasonably in the company’s case.
2. The phrase in the company’s case focuses on the circumstances of the taxpayer concerned. It does not require the relevant factors to be unique to that taxpayer. Nor does section 7(5) apply only to exceptional events. A company whose profits were earned at a significantly faster rate in the earlier period than in the later period could be materially prejudiced by time apportionment, whether the difference arose from routine or exceptional circumstances.
3. The reference to apportionment did not prevent an allocation based on actual performance. The relevant exercise remained an apportionment of the profits of the complete accounting period. The amounts allocated to the two periods had to aggregate to the full-period profit and provide an intelligible basis for the allocation.
4. It was not inherently erroneous for profits attributed to the earlier period to exceed 100% of the profits for the year. If a company was profitable in the earlier period and loss-making in the later period, allocating all its adjusted ring fence profits to the earlier period could be appropriate.
5. The First-tier Tribunal was entitled to conclude that allocating capital allowances to the later period, reflecting the companies’ entitlement to 100% allowances when expenditure was incurred, did not prevent the actual basis from being just and reasonable. The Upper Tribunal’s contrary construction was rejected and the appeal was allowed.

• Court of Appeal (Civil Division) allowed the companies’ appeal.
• Upper Tribunal (Tax and Chancery Chamber), in [2019] UKUT 133 (TCC), allowed HMRC’s appeal from the First-tier Tribunal and dismissed the companies’ appeals against the additional assessments.
• First-tier Tribunal accepted the companies’ elected actual-performance basis as just and reasonable.