In HMRC v Total E&P North Sea UK Limited and another [2019] UKUT TC133 the Upper Tribunal overruled the FTT; the method used by the taxpayers to apportion their company profits went beyond what was just and reasonable. The Court of Appeal (CA) has found in favour of the taxpayers and agreed with the FTT findings.
Where the tax rules change within an accounting period, the results must be apportioned between the pre- and post- change periods.
- The default position is an allocation on a simple time basis
- The allocation can instead be done on a “just and reasonable” basis where the time basis would give an unfair result.
The taxpayers' rule change occurred part way through its accounting year ended 31 December 2011.
- Severe damage during a storm resulted in significant capital expenditure, insurance claims and a prolonged shut down in the later part of the year, causing a significant fall in production.
- The companies prepared their computations as if the pre- and post- change periods were separate accounting periods with capital allowances allocated based on when expenditure was incurred, which was almost entirely in the post change period.
- As a result they generated a disproportionate amount of their profits before the rule change and their allocation showed no profits in the second part of the year after capital allowances.
The FTT found that the requirement is that if time apportionment is not a reasonable approach, an alternative basis can be used, but that basis must be just and reasonable, and there is no requirement that the proposed method is “more just and reasonable than a simple time apportionment. They agreed that the method used by the taxpayer, though not perfect, was just and reasonable.
The UT found that the FTT erred in law when it considered the result of the companies’ basis of apportionment, and set aside the decision.
- It should have considered whether the result went beyond what was necessary to compensate for the factors which made time apportionment unjust or unreasonable.
- The basis of apportionment used by the companies reallocated more profit into the months before the rule change than could be justified by impact of the events which took place during the accounting period.
However, the UT refrained from commenting on whether HMRC's alternative basis was better; it has been left for the parties to reach an agreement on what would be a just and reasonable basis of apportionment.
Update
The CA found:
- Whilst the UT were correct in identifying the time apportionment method as the default method, this did not stop it being unjust or unreasonable for some. The need for an election to use another method ensured it was the default.
- There was no evidence to suggest that the requirement to elect for an alternative method required reasons specific to the company in question. Exceptional circumstances effecting many companies was still sufficient to meet the unjust and unreasonable criteria.
- Nor was the reason behind more profits being earned in one period than another of particular issue. Whether from exceptional or routine circumstances, the question was whether time apportionment would work "unjustly or unreasonably".
- The FTT were correct in finding that the apportionment chosen by the taxpayer was just and reasonable. Capital allowances were rightly allocated in the period of time when the expenditure was incurred.
Comment:
With a reduction in corporation tax rates coming in April 2020 and the temporary increase in the Annual investment allowance from January 2019, it may be that more companies find themselves looking at how they should allocate their profits and whether they can justify a method other than time apportionment.
Links to our guides:
Companies: Trading, non-trading and accounting periods
Company Tax Rates and Allowances
FTT decision: Maersk Oil North Sea UK Limited and Maersk Oil UK Limited v HMRC [2018] TC06295
External link:
HMRC v Total E&P North Sea UK Limited and another [2019] UKUT TC133
Total E&P North Sea UK Limited and Total Oil UK Limited v HMRC [2020] EWCA Civ 1419