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

The Court of Appeal considered the construction and application of section 7 of the Finance Act 2011, in particular subsection (5), which permits a company whose accounting period straddles 24 March 2011 to elect for a basis of apportionment other than simple time apportionment where the time basis would work "unjustly or unreasonably" in the company's case. The court held that the phrase in subsection (5) is concerned with the circumstances of the company in question but is not limited to events unique to that company; a company with profits materially concentrated in the period before 24 March 2011 may elect an alternative basis if time apportionment would materially prejudice it.

The Court rejected the Upper Tribunal's approach that the election is confined to compensation for exceptional events unique to the taxpayer and that an alternative basis must not go beyond what is necessary to counteract those exceptional events. The Court affirmed that an alternative basis may reflect actual allocation of income, expenditure and capital allowances across the earlier and later parts of the straddling period so long as it is just and reasonable. Applied to the facts, the Court held the First-tier Tribunal was entitled to find the Companies' "actual" basis, including the treatment of capital allowances as incurred, to be just and reasonable and allowed the appeal.

Background and parties: The appellants, Total E&P North Sea UK Limited and Total Oil UK Limited (formerly Maersk companies), carried on oil-related activities and were subject to corporation tax and the ring-fence supplementary charge. Parliament increased the supplementary charge from 20% to 32% with effect for accounting periods beginning on or after 24 March 2011 by section 7 of the Finance Act 2011. Both companies had accounting periods running 1 January to 31 December 2011 and therefore their accounting year straddled the date of change.

Facts: MONS suffered major storm damage to the Gryphon FPSO on 4 February 2011 causing prolonged shut-ins and significant capital expenditure after 24 March 2011; MOUK had shut-ins at Dumbarton and the Janice floating production unit. Each company prepared an "actual" apportionment of adjusted ring fence profits treating the pre-24 March and post-24 March periods as separate and allocating income, expenditure and allowances to the period in which they arose, which resulted in all adjusted ring fence profits being allocated to the earlier period and thus taxed at 20% rather than 32%.

Procedural posture and relief sought: HM Revenue and Customs issued notices amending tax for the companies on a different apportionment. The companies appealed; the First-tier Tribunal accepted the companies' election under section 7(5) FA 2011 and found their "actual" basis just and reasonable. The Upper Tribunal allowed HMRC's appeal against the FTT. The present appeal was from the Upper Tribunal to the Court of Appeal. The appellants sought to restore the FTT decision.

Issues:

• How should section 7(5) of the Finance Act 2011 be construed: does it permit an alternative apportionment only to address exceptional events unique to the company, or more generally where time apportionment would work unjustly or unreasonably?
• Whether the Companies' "actual" basis of apportionment, including treating capital allowances as incurred in the later period, was a "just and reasonable" basis under section 7(5).

Court's reasoning: The Court of Appeal rejected the Upper Tribunal's restrictive reading that section 7(5) is confined to exceptional events unique to a company. The court held that the words "in the company's case" direct attention to the circumstances of the taxpayer but do not exclude matters that affect other companies. Time apportionment was the default but that did not mean departures are limited to rarities. The court explained that an alternative basis must be just and reasonable in the company's context and need not be constrained to adjustments only for events that are unique or exceptionally unusual. The First-tier Tribunal was entitled to conclude that the companies' method, reflecting management accruals and treating capital allowances as incurred, was just and reasonable. The court therefore allowed the appeal and restored the FTT's decision.

The Court of Appeal allowed the appeal. It held that section 7(5) of the Finance Act 2011 permits a company to elect an alternative apportionment where time apportionment would work unjustly or unreasonably in the company’s case, and that this is not limited to events unique to that company. The First-tier Tribunal was entitled to find the appellants' "actual" apportionment, including the incurred treatment of capital allowances, to be just and reasonable.

Appeal to the Court of Appeal from the Upper Tribunal (Tax and Chancery Chamber) [2019] UKUT 133 (TCC); the First-tier Tribunal (decision cited in the proceedings) had originally allowed the appellants' election under section 7(5) FA 2011.