For a concept that is so commonly found in our tax legislation, it is perhaps surprising that there has not been more guidance on what the parameters of a ‘just and reasonable’ apportionment are. The First-tier Tribunal’s recent decision on this important principle in Maersk Oil North Sea UK Ltd and Maersk Oil UK Ltd v HMRC [2018] UKFTT 20 (TC) (reported on page 4) will therefore be welcome news for many taxpayers.
The case revolves around the government’s surprise announcement on 23 March 2011 that it would, overnight, increase the rate of supplementary charge (from 20% to 32%) on the adjusted ring fence profits of oil and gas companies.
In applying the increased rate, companies with accounting periods that straddled the date of the rate increase (which is the vast majority of oil companies) were required to allocate profits across the straddle period on a time apportioned basis. If time apportionment would work unjustly or unreasonably in a particular company’s case, the company was allowed to elect an alternative method under FA 2011 s 7(5), which itself had to be ‘just and reasonable’.
The appellants, who both operated oil fields in the North Sea and suffered the 12% tax hike, had the added misfortune that year of being forced to shut down production on a number of their fields due to seasonal factors and, for one of the appellants, because of severe damage caused to its floating production, storage and offtake vessel by a violent storm. This caused both appellants’ revenues to be lower, and their expenditure to be higher, for the part-period following the rate increase.
Time apportioning such unevenly distributed profits would have effectively resulted in retrospective taxation by making profits that arose before the rate increase subject to tax at the higher rate. The appellants therefore elected to use an alternative method; they would apportion profits on an ‘actual’ basis by treating the periods before and after the rate increase as if they were separate notional accounting periods, and allocating revenues and expenses between them on the basis of when they actually arose.
HMRC accepted that the appellants were entitled to elect an alternative method, but disagreed that the method they had elected was just and reasonable. The matter came before the tribunal, which rendered a decision vindicating the appellants’ position. The judge held that s 7(5) was intended to provide relief to companies whose profits were not smoothly spread throughout the year, and who could therefore be disadvantaged by a rate change part way through the year – which is exactly the position the appellants were in.
More generally, the Judge held that a method was not unjust or unreasonable simply because it produced a result which did not align with HMRC’s preferred outcome (HMRC seemed particularly aggrieved by the fact that the actual basis allowed the appellants to claim 100% first year allowances against profits subject to the higher tax rate). Nor was a method unjust or unreasonable because of the availability of other methods which might have been more just and reasonable (including, said the judge, the default time apportionment method itself).
In reaching her conclusion, the judge noted that a taxpayer electing for an alternative method is free to start from a completely different principle to time apportionment. On this basis, the ‘actual’ basis adopted by the appellants was both just and reasonable. The method was not contrived, it was applied consistently, it was in line with the statutory basis of the apportionment provision, and it was a reasonable reflection of the appellants’ financial results.
The Maersk case will be of interest to companies in the oil and gas sector facing similar issues. However, it is also of broader application to other situations; for example, when apportioning profits and losses to an ‘overlapping period’ for group relief purposes, applying the new corporate interest restriction to accounting periods straddling its introduction, or even when apportioning a purchase price between different assets.
The tribunal’s decision will give comfort to taxpayers that deviating to a non-time based methodology is permissible and that HMRC cannot simply substitute its preferred methodology where the taxpayer’s is already just and reasonable. In Maersk’s example, an ‘actual’ basis was chosen, which is surely the paradigm case of a ‘just and reasonable’ method.
Jenny Doak (jdoak@velaw.com) & Evlogi Kabzamalov (ekabzamalov@velaw.com), Vinson & Elkins (Note: the author’s firm advised the taxpayers in this case)
Home >Articles > Maersk Oil: ‘just and reasonable’ apportionment
Maersk Oil: ‘just and reasonable’ apportionment
For a concept that is so commonly found in our tax legislation, it is perhaps surprising that there has not been more guidance on what the parameters of a ‘just and reasonable’ apportionment are. The First-tier Tribunal’s recent decision on this important principle in Maersk Oil North Sea UK Ltd and Maersk Oil UK Ltd v HMRC [2018] UKFTT 20 (TC) (reported on page 4) will therefore be welcome news for many taxpayers.
The case revolves around the government’s surprise announcement on 23 March 2011 that it would, overnight, increase the rate of supplementary charge (from 20% to 32%) on the adjusted ring fence profits of oil and gas companies.
In applying the increased rate, companies with accounting periods that straddled the date of the rate increase (which is the vast majority of oil companies) were required to allocate profits across the straddle period on a time apportioned basis. If time apportionment would work unjustly or unreasonably in a particular company’s case, the company was allowed to elect an alternative method under FA 2011 s 7(5), which itself had to be ‘just and reasonable’.
The appellants, who both operated oil fields in the North Sea and suffered the 12% tax hike, had the added misfortune that year of being forced to shut down production on a number of their fields due to seasonal factors and, for one of the appellants, because of severe damage caused to its floating production, storage and offtake vessel by a violent storm. This caused both appellants’ revenues to be lower, and their expenditure to be higher, for the part-period following the rate increase.
Time apportioning such unevenly distributed profits would have effectively resulted in retrospective taxation by making profits that arose before the rate increase subject to tax at the higher rate. The appellants therefore elected to use an alternative method; they would apportion profits on an ‘actual’ basis by treating the periods before and after the rate increase as if they were separate notional accounting periods, and allocating revenues and expenses between them on the basis of when they actually arose.
HMRC accepted that the appellants were entitled to elect an alternative method, but disagreed that the method they had elected was just and reasonable. The matter came before the tribunal, which rendered a decision vindicating the appellants’ position. The judge held that s 7(5) was intended to provide relief to companies whose profits were not smoothly spread throughout the year, and who could therefore be disadvantaged by a rate change part way through the year – which is exactly the position the appellants were in.
More generally, the Judge held that a method was not unjust or unreasonable simply because it produced a result which did not align with HMRC’s preferred outcome (HMRC seemed particularly aggrieved by the fact that the actual basis allowed the appellants to claim 100% first year allowances against profits subject to the higher tax rate). Nor was a method unjust or unreasonable because of the availability of other methods which might have been more just and reasonable (including, said the judge, the default time apportionment method itself).
In reaching her conclusion, the judge noted that a taxpayer electing for an alternative method is free to start from a completely different principle to time apportionment. On this basis, the ‘actual’ basis adopted by the appellants was both just and reasonable. The method was not contrived, it was applied consistently, it was in line with the statutory basis of the apportionment provision, and it was a reasonable reflection of the appellants’ financial results.
The Maersk case will be of interest to companies in the oil and gas sector facing similar issues. However, it is also of broader application to other situations; for example, when apportioning profits and losses to an ‘overlapping period’ for group relief purposes, applying the new corporate interest restriction to accounting periods straddling its introduction, or even when apportioning a purchase price between different assets.
The tribunal’s decision will give comfort to taxpayers that deviating to a non-time based methodology is permissible and that HMRC cannot simply substitute its preferred methodology where the taxpayer’s is already just and reasonable. In Maersk’s example, an ‘actual’ basis was chosen, which is surely the paradigm case of a ‘just and reasonable’ method.
Jenny Doak (jdoak@velaw.com) & Evlogi Kabzamalov (ekabzamalov@velaw.com), Vinson & Elkins (Note: the author’s firm advised the taxpayers in this case)
