[2009] UKFTT 356 (TC)

 

 

 

 

 

 

TC00294

Appeal number SC/3008/2009

 

 

Petroleum revenue tax (PRT) – participator in more than one field – whether expenditure incurred on assets to tie-back wells in the first field to a platform in the second field to produce production gases for use in winning oil in the second field is deductible in computing the second field’s profits – Oil Taxation Act 1983, s 3(1)(a)

 

 

 

FIRST-TIER TRIBUNAL

 

TAX

 

 

 

                              TALISMAN ENERGY (UK) LIMITED             Appellant

 

 

                                                                      - and -

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (Petroleum Revenue Tax)                                                                Respondents

 

 

                                                TRIBUNAL: JUDGE ROGER BERNER

                                                                        RICHARD LAW

                                                                       

                                                           

Sitting in public in London on 11 November 2009

 

 

Jonathan Peacock QC and Philip Walford, instructed by Slaughter and May, for the Appellant

 

Sam Grodzinski, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

 

 

© CROWN COPYRIGHT 2009

DECISION

 

1.     Talisman Energy (UK) Limited (“the Appellant”) appeals against notices given by HMRC under paragraph 3 of Schedule 5 to the Oil Taxation Act 1975 (OTA 1975”).  The notices relate to claims for allowable expenditure which were made by the Appellant under s 3 of the Oil Taxation Act 1983 (“OTA 1983”), in respect of petroleum revenue tax (“PRT”).

2.     Since proceedings were first brought before the Special Commissioners (now the First-tier Tribunal (Tax Chamber)), further appeals have been consolidated with these proceedings.  There are now 27 appeals before us, covering expenditure claimed to be allowable in respect of two oil fields, the Piper field and the Claymore field.  In aggregate the claims are for expenditure of around £85 million.

3.     As we describe it below, the same issue of principle arises in relation to each of the appeals.  We are asked to decide the matter in principle only.

4.     Jonathan Peacock QC and Philip Walford appeared for the Appellant, and HMRC were represented by Sam Grodzinski.

The facts

5.     There was no dispute on the facts.  The parties provided an Agreed Statement of Facts and Issues.  We also had witness statements of three witnesses for the Appellant, which were unchallenged by HMRC.

Agreed Statement of Facts and Issues

1.      The Appellant is a private limited company, incorporated in England and Wales, and resident for tax purposes in the United Kingdom.  The Appellant is a wholly-owned member of the Talisman group of companies in the UK, whose ultimate parent is Talisman Energy Inc, a Canadian incorporated and tax resident company.  Under licence from the UK Government, members of the Talisman group are licensees and operate, in conjunction with third parties, certain oil fields in the United Kingdom Continental Shelf.

2.      In particular, those fields include, inter alia, the Piper field, the Claymore field, the Tweedsmuir field and the Tweedsmuir South field, each of which is an oil field within the meaning of section 12 of, and Schedule 1 to, the Oil Taxation Act 1975.

3.      The Piper field is an area determined as an oil field (no. 013) by the Secretary of State on 13 August 1976.  It is situated in Block 15/17 of the North Sea and it is covered by licence number P. 220.  The current licensees are ENI UK Limited together with four wholly-owned members of the Talisman group: the Appellant, Talisman Energy Alpha Limited, Talisman North Sea Limited and Transworld Petroleum (U.K.) Limited.  Oil and gas are processed within the field at the Piper ‘B’ platform.  The field received development consent prior to 16 March 1993 and is a taxable field within the meaning of Section 12 of the Oil Taxation Act 1975 and Section 185 of the Finance Act 1993.

4.      The Appellant is the operator of the Piper field and the equity interests in the licence[1] for the Piper field are approximately as follows:

 

5.      The Claymore field is an area determined as an oil field (no. 016) by the Secretary of State on 3 March 1977.  It is situated in Block 14/19 of the North Sea and it is covered by licence number P. 249. The current licensees are ENI UK Limited, Dana Petroleum (E&P) Limited, and five wholly-owned members of the Talisman group: the Appellant, Talisman Energy Alpha Limited, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited and Talisman Oil Trading Limited.  Oil and gas are processed within the field at the Claymore platform.  The field received development consent prior to 16 March 1993 and is a taxable field within the meaning of Section 12 of the Oil Taxation Act 1975 and Section 185 of the Finance Act 1993.

6.      The Appellant is the operator of the Claymore field and the equity interests in the licence for the Claymore field are approximately as follows:

 

7.      The Piper and Claymore fields are within an area known as the Flotta Catchment Area (which also contains other fields operated by Talisman and other fields operated by third parties).  Oil and gas from that Area is collected offshore at various platforms, including the Piper ‘B’ and Claymore platforms. 

8.      The oil produced is transported from those platforms through a pipeline to the Flotta terminal, which is situated in the Orkney Islands.

9.      The Piper and Claymore fields need gas (i.e. “fuel gas”) to power their generators for production purposes; they also need gas (i.e. “lift gas”) to inject into existing wells to assist with the production of oil and gas. All of the gas extracted from the Piper and Claymore fields are used for these production purposes.

10.   Since the late 1990s, the Flotta Catchment Area has had a net gas deficiency i.e. the aggregate position is that the Area did not produce sufficient gas to meet the operating requirements of its platforms and fields; consequently, gas  had to be sourced from owners of other fields which had a surplus of gas to sell. In particular, each of the Piper and Claymore fields had, and continues to have, a gas deficiency.  This on-going gas deficiency has resulted in gas having to be purchased by the field’s owners pursuant to sale and purchase agreements with other field owners and/or Total E&P UK Limited.

11.   There is an agreement in place between the owners of each the Piper field and the Tartan field and Total E&P UK Limited, the owner of gas in and the operator of the Frigg UK pipeline for the sale and purchase of gas to be used for production purposes.

12.   In 2002 and 2003, discoveries were made by the Appellant, as the operator, in the two areas now known as the Tweedsmuir field and the Tweedsmuir South field to the south of the Flotta Catchment Area, in the mid-North Sea area.  The fields produce oil and associated gas as a commingled stream and as at the time of the announcement of development (August 2004), they were considered to have 71 million of barrels of oil equivalent of which 87% were thought to be liquids and 13% natural gas. The possibility, in addition to the production of crude oil from these fields, of producing gas which could be used for production purposes within the Flotta Catchment Area, as an alternative to buying gas from third parties was considered by the Appellant, and the other licence holders in Piper & Claymore.

13.   Each of the Tweedsmuir and Tweedsmuir South fields (together “the Tweedsmuir fields”) is an area determined as an oil field (nos. 382 and 381, respectively) by the Secretary of State on 17 September 2004.  They are situated in Block 21/1 of the North Sea and they are covered by licence number P. 241. The licensees are the Appellant, Talisman Energy Alpha Limited, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited and First Oil Expro Limited.

14.   Each of the Tweedsmuir fields is an oil field for the purposes of section 12 of, and Schedule 1 to, the Oil Taxation Act 1975; however, consent for development was given after 16 March 1993 and they are non-taxable fields within the meaning of Section 12 of the Oil Taxation Act 1975 and Section 185 of the Finance Act 1993.

15.   The Appellant is the operator of each of the Tweedsmuir fields and the equity interests in the licence for each field are approximately as follows:

 

Prior to 19 August 2005, Talisman Energy Alpha Limited had no equity interest in the fields.[3]

16.   A number of options were initially explored by the owners of the Tweedsmuir fields for processing the oil and gas to be produced from the Tweedsmuir fields, including the option of building a new platform and the option of tying-back the Tweedsmuir fields’ wells to existing platforms in other fields.  Eventually, the two viable options were to tie-back the Tweedsmuir fields’ wells either to the Piper ‘B’ platform (some 34 miles from Tweedsmuir) or to the Scott Field platform (which was owned entirely by unconnected third parties and was some 22 miles from Tweedsmuir).

17.   As the Appellant was the operator of the Piper field as well as the Tweedsmuir fields, in order to avoid a conflict of commercial interests, ENI UK Limited, on behalf of the owners of the Piper field, conducted the commercial negotiations for the use of the Piper facilities for the tying-back of the Tweedsmuir fields’ wells; whilst the negotiation for the use of the Scott facilities were conducted between the Appellant, as operator of the Tweedsmuir fields and Encana (U.K.) Limited, the operator of the Scott field.

18.   By early May 2004, the owners (the Appellant, Noble Energy (Europe) Limited and First Oil Expo Limited) of the Tweedsmuir fields elected to tie-back the Tweedsmuir fields’ wells to the Piper ‘B’ platform because it offered the Tweedsmuir fields’ owners a better economic return including the purchasing of the Tweedsmuir gas at the Piper ‘B’ platform.

19.   The respective Boards of the owners of the Tweedsmuir fields sanctioned the development of these fields and development consent was duly received from the UK Government in August 2004.

20.   As a result of the respective Board’s approval, work began on tying-back the wells in the Tweedsmuir fields to the Piper ‘B’ platform and expenditure was incurred by the Appellant, Talisman Energy Alpha Limited, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited and First Oil Expro Limited resulting in the creation of new assets and the enhancement of existing assets (“the Relevant Assets”).  In particular, it was necessary to construct pipelines  to transport commingled crude oil, gas and water (commonly known collectively as ‘produced liquids’) and to provide power from Piper ‘B’, to construct subsea facilities at the Tweedsmuir fields’ locations, and to make appropriate modifications to the Piper ‘B’ platform.

21.   Various agreements were entered into for the use of the Piper facilities, the gas produced from the Tweedsmuir fields to meet the gas requirements of the Piper ‘B’ and Claymore platforms and the transportation of oil to the oil terminal at Flotta. In particular, on 16 November 2005:

a.      The Appellant, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited, ENI UK Limited, Talisman Energy Alpha Limited and First Oil Expro Limited entered into the “Tweedsmuir Area Construction and Tie-in Agreement”, under which the modifications to the Piper ‘B’ platform would be constructed, and the tie-in of the pipelines and subsea facilities from the Tweedsmuir fields to the Piper ‘B’ platform would be achieved. 

b.      The Appellant, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited, ENI UK Limited, Talisman Energy Alpha Limited and First Oil Expro Limited entered into a “Processing and Operating Services Agreement” for the processing of Tweedsmuir produced liquids, the operation of the Tweedsmuir subsea facilities and the redelivery of oil and gas streams  at the Piper “B” platform.  Platform facilities on Piper separate Tweedsmuir produced liquids which are redelivered at the relevant “Delivery Point” on the Piper platform as Tweedsmuir gas and Tweedsmuir crude oil.

c.      First Oil Expro Limited and Talisman Oil Trading Limited entered into a “Gas Supply and Purchase Agreement”, under which the gas produced from the Tweedsmuir fields owned by First Oil Expro Limited would be sold to Talisman Oil Trading Limited.

d.      The Appellant and Talisman Oil Trading Limited entered into a “Gas Supply and Purchase Agreement”, under which some of the gas produced from the Tweedsmuir fields owned by the Appellant would be sold to Talisman Oil Trading Limited

e.      Talisman Oil Trading Limited and ENI UK Limited entered into a “Gas Sales Agreement” in respect of Natural Gas from the Tweedsmuir Area”, under which Talisman Oil Trading Limited sold the Tweedsmuir fields’ gas that it had purchased under the above agreements to ENI UK Limited for use for production purposes on the Piper and Claymore fields’ platforms.

f.       The Appellant, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited, Talisman Energy Alpha Limited, ENI UK Limited, Dana Petroleum (E&P) Limited and Talisman Oil Trading Limited entered into the “Gas Sales and Contribution Agreement between the Piper Field Group and the Claymore Field Group”, under which provision was made for the purchase and sale of gas between the parties so that, in accordance with their equity interests, the Claymore Field Group would be able to meet the fuel gas and lift gas requirements of the Claymore field.

g.      The Appellant, Talisman North Sea Limited, Transworld Petroleum (U.K.) Limited and Talisman Energy Alpha Limited (together “the Contributor Companies”) and Talisman Oil Trading Limited entered into a “Gas Supply and Purchase Agreement”, under which any of the gas from the Tweedsmuir fields owned by the Contributor Companies that is surplus to their requirements for production purposes at the Piper and Claymore platforms could be sold to Talisman Oil Trading Limited. 

22.   For the purposes of the contractual arrangements regarding the use of Tweedsmuir gas, the companies having equity interests in the Tweedsmuir fields were in effect divided into 2 groups.

a.      The Contributor Companies:

•           The Appellant in respect of an equity interest of 20.277%

•           Talisman North Sea Ltd (16.667%)

•           Transworld Petroleum (U.K.) Ltd (23.50%) and

•           Talisman Energy Alpha Ltd (19.556%)

b.      The “Seller Companies”:

•           The Appellant in respect of its remaining equity interest of 14.43% and

•           First Oil Expro Ltd (5.57%).

23.   The Appellant was a member [of] both groups, being a member of one group in respect of part of its total equity interest and the other group in respect of the remainder of that interest.

24.   The Contributor Companies do not need to purchase Tweedsmuir gas to meet their gas requirement for production purposes at the Piper and Claymore platforms since they already own that gas.  There is therefore no contract for the sale of Tweedsmuir gas between the owners of Tweedsmuir and the owners of Piper as far as the Contributor Companies are concerned. First Oil Expro Ltd has no equity interest in Piper and Claymore so sells its entitlement to Tweedsmuir gas to Talisman Oil Trading Limited.  The Appellant (as a Seller Company) also sells the part of its equity interest in Tweedsmuir gas which is in excess of its equity interest in Piper and Claymore to Talisman Oil Trading Limited.

25.   The balancing 20% interest in Piper not owned by the Contributor Companies is owned by ENI UK Limited which also had a 20% interest in the Claymore Field.  ENI buys Tweedsmuir gas from Talisman Oil Trading Limited under the agreement referred to at paragraph 21(e) above to meet its gas requirement for production purposes at the Piper and Claymore platforms.

26.   The Contributor Companies in Tweedsmuir also held 61.10% of the interests in the Claymore field in the same relative proportions. To the extent there is common ownership, the Contributor Companies will be using their equity share of Tweedsmuir gas at Claymore, i.e. there is no sale and purchase of the Tweedsmuir gas.  The remaining 18.90% interest in the Tweedsmuir gas used in Claymore is sold to Talisman Oil Trading Limited and Dana Petroleum (E&P) Limited.

27.   Where gas that is used for production purposes on the Piper and Claymore platforms is purchased by the Piper or Claymore field owners, the cost of that gas plus any cost of transporting it from the point of sale to the relevant field facility, is an allowable cost for Petroleum Revenue Tax purposes, to the Participators in the Piper and Claymore fields, being a cost of winning oil in those fields.

28.   The Contributor Companies do not have a purchase cost for their share of the Tweedsmuir gas.  These appeals are therefore concerned with whether part of the costs of producing and transporting the gas which is contributed for production purposes in relation to the Piper and Claymore fields can be taken into account in computing the profits from those fields.

29.   The Appellant is the responsible person for the Piper and Claymore fields within the meaning of paragraph 4 of Schedule 2 to the Oil Taxation Act 1975 and has identified the costs which it considers referable to the gas to be produced by the Contributor Companies from the Tweedsmuir fields which is to be used for winning oil in the Piper and Claymore fields.  In doing this the Appellant has allocated a proportion of the total costs of the Relevant Assets to the production of that gas.  The Relevant Assets are all long-term assets within the meaning of Section 3(8) of the Oil Taxation Act 1983 and the Appellant has made claims on this basis for expenditure under Section 3 of that Act for the costs it apportioned to the Piper and Claymore fields.

30.   The Appellant’s claims have been disallowed by notices given by HMRC on the basis that none of the costs of acquiring or bringing into existence or enhancing the value of the Relevant Assets are allowable expenditure in respect of the Piper and Claymore fields.  The Appellant has appealed under paragraph 5 of Schedule 5 to the Oil Taxation Act 1975 against those notices.

31.   The first issue for determination in these appeals is whether the Relevant Assets are, at the end of each relevant claim period, being or are expected to be used in connection with the Piper or Claymore fields for the purposes of Section 3(1)(a) of the Oil Taxation Act 1983 (and in particular as construed in the light of Section 15(5) of that Act and Sections 3(1) and 12(2) of the Oil Taxation Act 1975).  It is common ground that, subject to this question, the other requirements of Section 3 of the 1983 Act are met.

32.   If the first issue is answered in the affirmative, there is a second issue for determination, which is whether paragraph 5(1) of Schedule 1 to the Oil Taxation Act 1983 would operate so as to attribute all of the expenditure on the Relevant Assets to the Tweedsmuir fields or whether under paragraph 5(1) part of the expenditure would be apportioned to the Piper and Claymore fields and part to the Tweedsmuir fields.

33.   If under paragraph 5(1) part of the expenditure is to be apportioned to the Piper and Claymore fields and part to the Tweedsmuir fields, then it remains an issue between the parties as to the basis on which that apportionment should take place and the degree of apportionment of those costs.  In such a case, the parties ask for that the issues referred to in paragraphs 27 and 28 above be decided as matters of principle, leaving the parties to seek to agree the figures before a final determination of the appeals is made.

6.     The second issue, referred to in paragraph 32 of the Agreed Statement of Facts and Issues, is no longer before the Tribunal.  It is accepted by HMRC that if we decide the first issue in favour of the Appellant, then under para 5(1), Sch 1, OTA 1983 part of the expenditure will fall to be apportioned to the Piper and Claymore fields and part to the Tweedsmuir fields, and the only issue will then be as to the basis of apportionment.   The sole issue currently for our determination is the first issue.

Witness statements

7.     There were three witness statements served on behalf of the Appellant.  These were not challenged by HMRC, and we did not hear oral evidence.  We did not find that the witness statements added anything of material substance to the parties’ agreed position on the facts, but we summarise below for completeness certain aspects of the witness evidence.

Mr Raeburn

8.     Alan Raeburn is contracted to the Appellant as Process Engineer for the Piper, Saltire and Tweedsmuir areas.  His role involves providing support for the design, operation and maintenance of the processing facilities in those areas, liaising with the operations team in relation to offshore operational troubleshooting issues, identifying potential improvements to the processes and ensuring that equipment is suitable for both current and anticipated production.

9.     Mr Raeburn’s statement provided an explanation of the equipment in place within the Tweedsmuir field, its manner of operation and its connection to the platform in the Piper field.  This was helpful background.  Mr Peacock took us through diagrams admitted into evidence showing the location of the Flotta Catchment Area (“FCA”) and the Tweedsmuir fields and a diagrammatic representation of the pipelines connecting the two.  Mr Raeburn’s evidence also dealt with the modifications made to the Piper Bravo platform by reference to a series of slides to which we were referred.

Mr Smith

10.  Keith Smith is the Senior Commercial Advisor for the FCA within the Appellant.  His current role involves the administration of commercial agreements which relate to the operation of oil and gas pipelines and platforms within the FCA in which the Appellant has an ownership interest.

11.  Mr Smith’s statement provided background information on the Appellant’s group, the FCA oilfields and the gas deficiency in the FCA.  He also provided further details on the commercial negotiations for gas supplies for the FCA, involving third parties, the discovery of the Tweedsmuir fields and the prospect of accessing Tweedsmuir gas as fuel gas and lift gas.

12.  We were taken through a worked example to demonstrate how the commercial arrangements worked.  This followed a description of an example in Mr Smith’s statement.  Essentially what this amounts to is that Tweedsmuir gas is purchased for use at the Piper and Claymore fields to the extent of ENI’s third party interest in Piper and Claymore and to the extent that the Appellant and its fellow participators’  interests in Piper and Claymore are not aligned with their interests in Tweedsmuir.  The part of the Tweedsmuir gas owned by Appellant and other entities whose interests in Tweedsmuir matches their interests in Piper is contributed to Piper.  There is then a further adjustment between gas sold and gas contributed to Claymore to reflect the percentage ownership interests in a similar way.  These appeals do not concern gas sold under these arrangements, but the cost of producing and transporting the gas which is contributed for production purposes in relation to the Piper and Claymore fields.

13.  Mr Smith’s evidence also explained the way in which the claims for relief from tax in respect of the expenditure on the Relevant Assets were formulated.  There is no issue on these before us, and we do not therefore propose to summarise any of that material here.

Mr Parkin

14.  Gregory Parkin was until January 2009 the Senior Commercial Manager of the Mid-North Sea (“MNS”) group of assets owned by the Appellant.  His role gave him responsibility for all commercial matters within the MNS area.  In respect of the Tweedsmuir area he was responsible for negotiations regarding the platform at which the oil and gas extracted from the seabed in the Tweedsmuir field were to be processed for onward transportation to shore.

15.  Mr Parkin’s evidence explained the commercial background to the decision to tie-back the Tweedsmuir field to the Piper Bravo platform.  This evidence seemed to us to be primarily directed to demonstrating the commerciality (in terms of level of financial return, irrespective of common ownership) and the fact that tax considerations were not paramount.  These were not factors argued in HMRC’s case, and we do not therefore consider this evidence to be material to our decision.

Documentary evidence

16.  As well as the Agreed Statement of Facts and Issues and the witness statements to which we have referred, we were also provided with a number of bundles of documents.  None of this evidence was controversial.  Included amongst the documents were copies of the relevant commercial agreements.  We adopt the summary of certain of those agreements provided by the appendix to Mr Peacock and Mr Walford’s skeleton argument (the references are to the bundles):

Summary of the effect of the main agreements

1.      By reference to their respective licence interests, the gas from the Tweedsmuir fields would initially be owned as follows:

The Appellant—34.71 %

Talisman Energy Alpha Ltd—19.56 %

Talisman North Sea Ltd—16.67 %

Transworld Petroleum (UK) Ltd—23.50 %

First Oil Expro Ltd—5.56%

2.      By means of the Gas Supply and Purchase Agreement at Vol. B, tab 3, First Oil Expro Ltd sells all of its gas to Talisman Oil Trading Ltd.

3.      By means of the Gas Supply and Purchase Agreement at Vol. B, tab 4, the Appellant sells 14.43 % of the gas to Talisman Oil Trading Ltd.

4.      By means of the Gas Supply and Purchase Agreement at Vol. B, tab 6, Talisman Oil Trading Ltd sells all or some of the amount of gas it purchased from First Oil Expro Ltd and the Appellant to Eni UK Ltd (depending on the requirement for gas at Piper and Claymore).

5.      By means of the Gas Sales and Contribution Agreement at Vol. B, tab 7, up to 81 % of the gas of the Appellant (other than the gas sold under the agreement at 3. above) and that of Talisman Energy Alpha Ltd, Talisman North Sea Ltd, Transworld Petroleum (UK) Ltd and Eni UK Ltd would be used by them so as to meet their needs to obtain gas for Piper and Claymore.  Up to 19 % would be sold to the other licence-holders of the Claymore field so as to meet their outstanding need to obtain gas for Claymore.

6.      By means of the Gas Supply and Purchase Agreement at Vol. B, tab 5, the Appellant, Talisman Energy Alpha Ltd, Talisman North Sea Ltd and Transworld Petroleum (UK) Ltd sell any gas not required for Piper and Claymore to Talisman Oil Trading Ltd.

7.      If Talisman Oil Trading Ltd purchases gas by means of the Gas Supply and Purchase Agreement at Vol. B, tab 5 (i.e. that gas which is surplus to fuel gas requirements of Piper and Claymore), it will use it either as fuel gas in the Tartan field (of which it is the only licence-holder) or transport it for export through the Frigg system.

17.  We shall refer in a little more detail to the Tweedsmuir Area Construction and Tie-in Agreement (which was at Vol B, tab 1) when we discuss certain submissions made by Mr Grodzinski for HMRC.

The law

18.  Section 1, OTA 1975 imposes PRT, at the rate of 50%, on profits from oil won under authority of a relevant licence.  Tax is charged on the assessable profit accruing in any chargeable period from each taxable field.  Oil for this purpose includes gas (other than certain methane gas).  A field is a taxable field if it is one for which development consent was granted before 19 March 1993.  Fields with development consent after that date are non-taxable (see s 185, Finance Act 1993).

19.  Section 2, OTA 1975 concerns assessable profits and allowable losses.  It adopts a formulaic approach as follows:

“(1) For the purposes of the tax the assessable profit or allowable loss accruing to a participator in any chargeable period from an oil field shall be computed in accordance with the following provisions of this section.

(2) The assessable profit or allowable loss so accruing in the period is the difference (if any) between the sum of the positive amounts for the period and the sum of the negative amounts for the period; and that difference (if any) is an assessable profit if the sum of the positive amounts is greater than the sum of the negative amounts, and is otherwise an allowable loss.

(3) For the period—

(a)     the positive amounts for the purposes of this section are the following (as defined in this section), namely the gross profit (if any) accruing to the participator in the period, his licence credit (if any) for the period, and any amount to be credited to him for the period in respect of expenditure; and

(b)     the negative amounts for those purposes are the following (as so defined) namely the gross loss (if any) so accruing, his licence debit (if any) for the period, and any amount to be debited to him for the period in respect of expenditure.”

Gross profit is defined by s 2(4).  For the purpose of this appeal it is confined to the aggregate of the amounts mentioned in s 2(5).  We were referred to the first three paragraphs of s 2(5) which read as follows:

“(5) … the amounts referred to in subsection (4)(a) above are—

(a)     the price received or receivable for so much of any oil won from the field and disposed of by him crude in sales at arm's length as was delivered by him in the period (excluding oil delivered before 13 November 1974);

(b)     the aggregate market value, ascertained in accordance with Schedule 3 to this Act, of so much of any oil (not being light gases) so won and disposed of by him crude otherwise than in sales at arm's length as was delivered by him in the period (excluding oil delivered before 13 November 1974);

(c)     the aggregate market value, ascertained in accordance with Schedule 3 to this Act, of so much of any oil (not being light gases) so won as was relevantly appropriated by him in the period without being disposed of (excluding oil so appropriated before 13 November 1974)”

Section 2(8) provides that the amount to be debited or credited to the participator for the period in respect of expenditure is the sum of the amounts mentioned in s 2(9).  The material part of that subsection is at s 2(9)(b)(i):

“(9) … the amounts referred to in subsection (8)(a) above are—

(a)     …

(b)     the participator's share, as determined on a claim under Schedule 5 to this Act, of the aggregate of—

(i)     any expenditure allowable under section 3 or 4 of this Act for the field which has been allowed on such a claim before the Board have made an assessment to tax or a determination on or in relation to him for the period in respect of the field”

20.  Section 3, OTA 1975 deals with allowance of expenditure.  So far as material it provides:

(1) Subject to the provisions of this section and Schedules 4, 5 and 6 to this Act, the expenditure allowable under this section for any oil field is any expenditure (whether or not of a capital nature) which, not being expenditure to which section 4 of this Act applies, is incurred by a person at or before the time when he is a participator in the field to the extent subject to subsection (7) below that it is incurred for one or more of the following purposes, namely—

…

(d)     winning oil from the field;

…

(3) Expenditure is not allowable under this section for any oil field if, or to the extent that, it has been allowed under Schedule 5 or 6 to this Act for any other oil field or has been allowed under Schedule 7 to this Act in connection with any oil field but where expenditure allowable under section 5A or section 5B of this Act has been allowed on a claim under Schedule 7 to this Act, nothing in this subsection shall prevent a claim being made for an allowance under this section in respect of the same expenditure unless the person making the claim is the participator who made the claim under that Schedule.

…

(6) … for the purposes of subsections (1) and (5) above other than paragraph (hh) of subsection (1) expenditure incurred partly for one or more of the purposes there mentioned and partly not shall subject to subsection (7) below be apportioned in such manner as is just and reasonable …”

21.  Section 4, OTA 1975, which related to expenditure on long-term assets incurred up to 30 June 1982, does not apply to this appeal, except for s 4(13) as applied by s 3(7) of the OTA 1983.  Section 4(13) provides as follows:

“(13) The preceding provisions of this section, and any other provisions in this Part of this Act as to which it is provided that this subsection applies, shall, with any necessary modifications, apply in relation to expenditure incurred by a person in acquiring an interest in an asset, or in bringing into existence an asset in which he is to have an interest, or in enhancing the value of an asset in which he has an interest, as the provisions in question apply in relation to expenditure incurred by a person in acquiring, bringing into existence, or enhancing the value of an asset, as the case may be.”

22.  It is section 3, OTA 1983 that gives relief for expenditure on long-term assets of the nature with which this appeal is concerned.  The material parts of that section read:

“(1) Subject to section 13 below, this section applies to expenditure (whether or not of a capital nature) which is or was incurred by a person after 30 June 1982 and at or before the time when he is or was a participator in an oil field, being expenditure incurred, subject to subsection (2) below, in acquiring, bringing into existence, or enhancing the value of an asset—

(a)     which, at the end of the relevant claim period, is being or is expected to be used in connection with the field; and

(b)     which, at the end of the relevant claim period, is or is expected to be a long-term asset; and

(c)     which either is not a mobile asset or is a mobile asset which became dedicated to that field in the relevant claim period or in any earlier claim period.

…

(4) Except as provided by subsections (6) and (7) and sections 3A and 4 below and Part II of Schedule 1 to this Act, the whole of any expenditure to which this section applies shall be allowable on a claim under Schedule 5 or Schedule 6 to the principal Act for the relevant claim period.

…

(6) Subsections (3) to (5A) of section 3 of the principal Act apply for the purposes of this section and Schedule 1 to this Act as they apply for the purposes of that section; …

(7) Section 4(13) of the principal Act (interests in assets) applies to the preceding provisions of this section and the provisions of Schedule 1 to this Act; and those provisions are subject to paragraph 2 of Schedule 4 and to Schedules 5 and 6 to the principal Act.

(8) In this section “long-term asset” means an asset the useful life of which continues after the end of the claim period in which it is first used in connection with the oil field in question.”

23.  Section 15(5), OTA 1983 provides that the OTA 1983 is to be construed as one with Part 1 of the OTA 1975.  Accordingly s 12, OTA 1975 applies for these purposes.  It defines “participator” to include “a person who is or was at any time in the relevant chargeable period a licensee in respect of any licensed area then wholly or partly included in the field”.  Furthermore, s 12(2) provides:

“In this Part of this Act any reference to the use of an asset in connection with an oil field is a reference to its use in connection with that field for one or more of the purposes mentioned in section 3(1) of this Act (excluding section 3(1)(b)).”

The effect is to apply the purpose tests in s 3, OTA 1975 (apart from that relating to royalty-type payments to the Secretary of State) to the requirement under s 3(1)(a), OTA 1983 that the asset on which expenditure has been incurred must at the relevant time be used or expected to be used in connection with the participator’s field.

24.  Schedule 1, OTA 1983 contains certain provisions relating to allowable expenditure.  Part II of that Schedule sets out special rules concerning expenditure allowable in respect of fixed assets.  Paragraphs 4 and 5 provide:

“Interpretation

4 In this Part of this Schedule—

“allowable expenditure” means expenditure which, subject to the provisions of this Part, is allowable as mentioned in subsection (4) of the principal section;

“the new asset” means the asset referred to in subsection (1) of the principal section which was acquired or brought into existence, or the value of which was enhanced, as a result of the incurring of the allowable expenditure;

“the principal section” means section 3 of this Act;

“the purchaser” means the person referred to in subsection (1) of the principal section as the person incurring the allowable expenditure; and

“the relevant claim period”, in relation to any allowable expenditure, has the same meaning as, by virtue of subsection (5) of the principal section, it has for the purposes of subsection (1) of that section.

Assets acquired etc for two or more fields

5 (1) Subject to sub-paragraphs (2) and (3) below, where the purchaser is a participator in two or more oil fields (in this paragraph referred to as “the purchaser's fields”) and, at the end of the relevant claim period, it appears that the new asset is or is expected to be used in connection with two or more of those fields then, unless it seems just and reasonable to attribute all of the allowable expenditure relevant to the new asset to only one of those fields, that expenditure shall be apportioned, in such manner as may be just and reasonable, between those of the purchaser's fields in connection with which the new asset is or is expected to be used.

(2) If, in a case falling within sub-paragraph (1) above, the use of the new asset in connection with one of the purchaser's fields (in this paragraph referred to as “the paying field”) gives, or is at the end of the relevant claim period expected to give, rise to receipts which, by virtue of section 8 of this Act, are to be attributed to another of those fields, as being the chargeable field, so much (if any) of the allowable expenditure as, apart from this sub-paragraph, would be apportioned to the paying field and as is reasonably attributable to the use of the new asset which gives rise to the receipts shall be apportioned to the chargeable field.

(3) If, in a case falling within sub-paragraph (1) above, it appears, at the end of the relevant claim period, that the new asset also is or is expected to be used otherwise than in connection with a field in which the purchaser is a participator, then—

(a)     in the apportionment made by virtue of sub-paragraph (1) above, such a percentage of the allowable expenditure as is just and reasonable shall be apportioned to that use; and

(b)     for the purpose of any claim for an allowance in respect of any of the allowable expenditure, the percentage of that expenditure which under paragraph (a) above was apportioned to that use shall be added to the percentage of that expenditure which, under sub-paragraph (1) above, was apportioned to that one of the purchaser's fields which, in relation to the new asset, is the chargeable field.

(4) If, in relation to the allowable expenditure, the relevant claim periods of the purchaser's fields are not the same, references in the preceding provisions of this paragraph to the end of the relevant claim period are references to the end of that relevant claim period which ends earlier or earliest.”

25.  As is apparent from the facts, the Piper and Claymore fields are taxable fields, but Tweedsmuir and Tweedsmuir South are non-taxable.  For the purpose of apportionment, the fact that a field is a non-taxable field is to be ignored (s 185(6), Finance Act 1993).

The parties’ submissions

Appellant

26.  The argument for the Appellant, in essence, is that its use of the Relevant Assets[4] was in connection with the Piper and Claymore fields for the purpose of winning oil from those fields.  Accordingly, there being no dispute that other requirements of s 3, OTA 1983, read with s 3, OTA 1975, are met, the effect of s 3(4), OTA 1983 is to allow the whole of the expenditure for the relevant claim period, subject to the apportionment provisions in Part II, Sch 1, OTA 1983.

27.  The Appellant points to the Agreed Statement of Facts and Issues, and the unchallenged evidence of the witnesses, as showing clearly that both the Piper and Claymore fields require fuel gas and lift gas for the purpose of winning oil from those fields.  The gas produced by those fields themselves is insufficient and the licence holders therefore need to acquire gas from other sources for that purpose.  The Relevant Assets are used by the Appellant and other participators in both the Tweedsmuir and the Piper and Claymore fields to acquire such additional gas.  The Relevant Assets are used to produce hydrocarbons from the Tweedsmuir fields, convey them to the Piper Bravo platform (in the Piper field) and separate and process them at the platform for use, as to the gas, at least to a significant extent, as fuel and lift gas in Piper and Claymore.  Some of the licence holders in the Piper and Claymore fields (those who are also licence holders in the Tweedsmuir fields) own gas which they use for meeting the fuel gas and lift gas requirements of the Piper and Claymore fields.  That gas and the Relevant Assets involved in its acquisition are accordingly used in connection with the Piper and Claymore fields for the purpose of winning oil from those fields.

28.  As the Appellant itself makes clear, the Relevant Assets are also used in connection with the Tweedsmuir and Tweedsmuir South fields.  That, they say, is a circumstance covered by para 5, Sch 1, OTA 1983, which deals with the case where there is use of an asset (“the new asset” in connection with two or more fields (including both taxable and non-taxable fields) in which the purchaser (that is the person who incurs the expenditure) is a participator.  In that event para 5 provides that, unless it seems just and reasonable to attribute all of the allowable expenditure relevant to the new asset to only one of those fields, that expenditure must be apportioned on a just and reasonable basis between those of the purchaser’s fields in connection with which the new asset is or is expected to be used.  Mr Peacock, for the Appellant, argued that it was clear that dual field use was possible; indeed it was actively encouraged by the OTA 1983.  Furthermore, the legislation recognises not only dual field use, but dual purpose use and use of only part interests in assets.  From this it can be seen that the legislation is relatively sophisticated in recognising the different economic bases upon which assets or resources might be shared.

29.  Mr Peacock argued that in the context of the legislation it is clear that the requirement that assets be used in connection with the relevant field for one of the purposes in s 3(1) OTA 1975 (excluding s 3(1)(b)) is broad.  In particular:

(1)  There is no geographical requirement for the assets to be located within the area of the field in question, e.g. see s 3(1)(a) and (g), OTA 1975, which contemplate assets being used outside the field.  Indeed, s 3, OTA 1983 also permits claims for mobile assets dedicated to a field.

(2)  The draftsman is clearly envisaging that assets may be used in connection with more than one field, e.g. see para 5, Sch 1, OTA 1983 and s 185(6), Finance Act 1993.  Furthermore, s 3(3), OTA 1975 (which is applied by s 3(6), OTA 1983) prevents the same expenditure being claimed for two different fields — it presupposes therefore that there will sometimes be more than one field in which particular expenditure can be claimed.

(3)  It is also noteworthy that assets may be treated as being used for one of the purposes in s 3(1), OTA 1975 even though they are used for other purposes as well, e.g. see s 3(6), OTA 1975.

(4)  There is no additional requirement that the asset is to be used wholly or mainly in connection with the field.

(5)  Nor is there a requirement that the field in question is the field most closely connected, geographically or otherwise, to the use of the assets (e.g. see IRC v Amerada Hess [2001] STC 420).

30.  In support of the fourth of his propositions summarised above, Mr Peacock referred us to para 5, Sch 4, OTA 1975 as originally enacted.  There the provision in relation to long-term assets used in connection with more than one oil field, where payments for the hire of the asset were received by the participants in a field (“the relevant field”) required the asset to be used “to a substantial extent” in connection with the relevant field.  There is no qualification of this or any other nature, such as “whole”, “main”, “sole” or “substantial” in the provisions relevant to this appeal.  The requirement is simply “use in connection with that field …” (s 12(2), OTA 1975).

31.  In relation to the meaning of “in connection with” Mr Peacock took us to Revenue and Customs Commissioners v Barclays Bank plc and another [2008] STC 476, a case far removed from this on its facts but which was concerned with the expression “in connection with” in s 612(1) of the Income and Corporation Taxes Act 1988.  It was held that the expression could describe a range of links.  In such a situation the Court had to look closely at the surrounding words and the context of the legislative scheme.  The Court had to examine the function or purpose of the definition, in that case, of “relevant benefits”.  In the Court of Appeal, Lady Justice Arden, in giving the only reasoned judgment (with whom Scott Baker and May LJJ agreed) said (at [18]):

“The primary question in this case is the proper meaning of the words 'in connection with past service' in s 612(1) of ICTA. The expression 'in connection with' could describe a range of links. In Coventry and Solihull Waste Disposal Co Ltd v Russell (Valuation Officer) [1999] 1 WLR 2093 at 2103, Lord Hope held that in this situation the court must look closely at the surrounding words and the context of the legislative scheme:

'The majority in the Court of Appeal held that it was a sufficient answer to the appellant's argument to construe the words “in connection with” as meaning “having to do with”. This explanation of the meaning of the phrase was given by McFarlane J in [Re Nanaimo Community Hotel Ltd [1944] 4 DLR 638]. It was adopted by Somervell L.J. in [Johnson v Johnson [1952] P 47 at 50–51]. It may be that in some contexts the substitution of the words “having to do with” will solve the entire problem which is created by the use of the words “in connection with.” But I am not, with respect, satisfied that it does so in this case, and Mr. Holgate did not rely on this solution to the difficulty. As he said, the phrase is a protean one which tends to draw its meaning from the words which surround it. In this case it is the surrounding words, when taken together with the words used in the Amending Order of 1991 and its wider context, which provide the best guide to a sensible solution of the problem which has been created by the ambiguity.'”

Having considered the context and purpose of the definition, and having concluded that in that context, at the very least, Parliament was unlikely to have intended to limit connections to direct connections, Arden LJ continued (at [20]):

“Thus I conclude that a connection may be indirect for the purpose of the definition of relevant benefits. Accordingly, it is possible that the making of a payment will have a relevant connection with more than one thing. In that situation, it is in my judgment necessary to see whether the connections can co-exist, or whether one will actually exclude the other. If, on proper analysis the further connection displaces a prior connection, the prior connection ceases to be a relevant connection for the purpose of s 612(1).”

32.  Mr Peacock argued that if Parliament had intended to limit “connection” in the oil taxation legislation to direct connection it could and should have said so.  The purpose of the legislation, and the structure and context of the OTA 1983 is designed to encourage the shared use of assets.  So, as in Barclays Bank, Parliament is unlikely to have intended to limit connections in this context to direct connections.  In any event, Mr Peacock argued that there is a direct connection here between the use of the assets and the Piper and Claymore fields, but that even if the connection were regarded as indirect only he submitted that would be sufficient.

33.  Before leaving Barclays Bank, Mr Peacock referred us to a later passage from Arden LJ’s judgment where she said: (at [30]):

“There is no doubt that the court should, when interpreting a statutory provision, examine not just that provision but also the context in which it appears in the legislation in question. It may then be able to form a view as to the purpose of the provision in question and that knowledge may inform its thinking as to the choice of meaning to be offered where choices are available. The context of the provision in question, however, will not of itself justify the court in limiting the provision to that context, and thus reducing its apparent scope, unless there is some indication in the legislation that this is what Parliament intended. The effect of Mr Peacock's submission, is that the court should read down the definition of 'relevant benefits' to conform with the concept of a conventional 'retirement benefits scheme'. In my judgment, there is nothing in the legislation to justify this course. Indeed, the indications are the other way. Parliament has used a broad expression, namely the expression 'in connection with'. Having cast the net widely, Parliament has drawn it in particularly by imposing a limit that there should be a connection with service. The limitations prescribed by Parliament are the limitations that the court should apply. The context of occupational pension schemes cannot be used to narrow the phrase 'in connection with past service' yet further.”

Mr Peacock said that the same approach should be adopted in this case in relation to the language of s 12(2), OTA 1975.  The expression “in connection with the field” is a wide one that is then cut down by the need to satisfy one of the purpose tests.

HMRC

34.  Mr Grodzinski, for HMRC, reminded us that PRT is a field-based tax.  He said that, unlike in the corporation tax context, in the case of PRT a company cannot generally set off losses or expenditure in one part of its business against profits in another part where the two parts of the business are generated by licences held in relation to two separate fields.  He submitted that the importance of that overarching position needs to be borne in mind when assessing the arguments in this case.

35.  On the question whether the Relevant Assets have been used “in connection with” the Piper and Claymore fields for the purpose of winning oil from those fields, Mr Grodzinski submitted that the answer was plainly no.  He said that the proper analysis is that the Relevant Assets have been used in connection with the Tweedsmuir fields for the purpose of winning oil from those fields.  Although the oil obtained from the Tweedsmuir field using the Relevant Assets is then processed and the resultant gas is used as fuel gas and lift gas for the purpose of winning oil from the Piper and Claymore fields, that does not mean that the Relevant Assets are being used “in connection with” the Piper and Claymore fields for the purpose of winning oil from those fields.  He submitted that the Appellant’s argument that the Relevant Assets were being used partly for the purpose of winning oil from Tweedsmuir, and partly for the purposes of supplying fuel gas and lift gas for the purpose of winning oil from Piper and Claymore (so bringing into play the apportionment provisions in para 5, Sch 1, OTA 1983) ignored the intermediary step.

36.  Mr Grodzinski also argued that s 3(1)(a), OTA 1983 is unambiguously concerned with expenditure on assets used in connection with the field in which the person seeking the benefit of the deduction is a participator.  He suggested three questions that must be asked:

(1)  Whether the Appellant incurred expenditure at a time when it was a participator in the Piper and Claymore fields;

(2)  Whether that expenditure was incurred in acquiring, bringing into existence or enhancing the value of an asset or  assets; and

(3)  Whether that asset or those assets were being used by the Appellant as participator in the Piper and Claymore fields in connection with those fields.

37.  Mr Grodzinski referred us to the terms of s 3(1), OTA 1975 which sets out the relevant purposes for which (with the exception of para (b), which relates to the making of a payment to the Secretary of State to obtain a licence) the asset must be used in connection with the field in order that expenditure on it should be allowable.  He referred to the structure of the section as envisaging a chronological history of the process of exploring for and exploiting the oil.  He then examined the Relevant Assets, and argued that each was being used by the Tweedsmuir participators in connection with the Tweedsmuir fields and not by the Piper and Claymore participators in connection with the Piper and Claymore fields.  The Piper and Claymore participators are using the gas that they have acquired from the Tweedsmuir participators to win oil.  They are not using the Relevant Assets at all.  Mr Grodzinski argued that, by way of example, the drill heads and manifolds in the Tweedsmuir field were brought into existence by the Tweedsmuir participators in order to win oil from the Tweedsmuir fields.  That is all they are doing.  On no sensible use of language or construction of the statute can it be said that at the very same time those assets are also being used by the Piper and Claymore participators to win oil from those fields.  The Appellant’s argument that this can be done is based on the apportionment machinery in para 5, Sch 1, OTA 1983.  That is not correct, as the apportionment provisions do not operate here; they are concerned with such cases as a single pipeline being used to transport oil won from two or more fields.

38.  Mr Grodzinski referred us back to Barclays Bank and said that the important point to be taken from the judgment of Arden LJ in that case was that the words “in connection with”, however broad, have to be considered in their overall statutory context.  He argued that it would strain the language of the legislation here in issue beyond breaking point to say that the Relevant Assets have been used by the Piper and Claymore participants in connection with the Piper and Claymore fields for the purpose of winning oil from those fields.  On the Appellant’s case, said Mr Grodzinski, all that is needed for a relevant or sufficient connection is for the assets to be used to obtain gas that is subsequently, at some undefined point of time, then used to win oil from the Piper and Claymore fields.  If that were right, so argued Mr Grodzinski, then taken to its logical conclusion, it would lead to results which he said could not have been intended by Parliament.  He gave us three examples of what he meant.

39.  The first example was of oil obtained from the Tweedsmuir fields using the Relevant Assets, which was then processed and used as fuel in a helicopter that transported workers from the shore to the Piper platform.  On the Appellant’s argument, Mr Grodzinski asserted, the Relevant Assets would have been used “in connection with” winning oil from the Piper platform and thus the expenditure on those Relevant Assets would be deductible by the Appellant.

40.  The second example was described by Mr Grodzinski as more extreme but nevertheless, he argued, followed inexorably from the logic of the Appellant’s case.  He asked us to assume that the Appellant owned an oil field in Canada.  It incurs expenditure on building a platform in Canada which it uses to extract oil there and on building processing equipment which it uses to process or extract gas from the oil.  It then transports that gas in a compressed or other form on a container ship across the Atlantic, around the top of Scotland, down to the Piper B platform where it is used as fuel gas or lift gas.  On the Appellant’s argument, Mr Grodzinski said, the expenditure on the Canadian asset would have been, in part at least, deductible in assessing profit on the Piper and Claymore fields, as the assets would have been used in connection with those fields for the purpose of winning oil there.  It would not matter, on the logic of the Appellant’s case, that the Canadian oil field was not an oil field at all within the meaning of the UK legislation (because it is not a licensed area).  Mr Grodzinski argued that, seen from this perspective, it cannot have been within the contemplation of Parliament that assets used to win oil in one field could be deductible in calculating the PRT profits in another field.

41.  Mr Grodzinski’s third example was in two parts.  It demonstrated, he said, another significant anomaly produced by the Appellant’s analysis.  On the assumption that the Appellant was right, it would obtain a deduction in connection with the Piper and Claymore fields for the cost of the Relevant Assets.  Subsequently, the Appellant could sell its interest in those fields to a third party, X Ltd.  From that point onwards, X Ltd could decide to purchase from the Appellant fuel gas and lift gas obtained using the Relevant Assets.  X Ltd would obtain a deduction for the cost of the gas so purchased.  The owners of the Piper and Claymore fields would then have obtained a double deduction: first in relation to the cost of the gas-producing asset, and secondly for the cost of the gas itself.  Mr Grodzinski argued further that the same double deduction might be achieved by the Appellant and the other equity owners of the Tweedsmuir fields selling the Tweedsmuir gas to a third party who in turn would sell it to the Appellant and other equity owners of the Piper and Claymore fields.  On the Appellant’s case, argued Mr Grodzinski, a deduction would be obtained both for the Relevant Assets and for the cost of the gas.

42.  Mr Grodzinski argued that there was every difference between a case where, in their capacity as participators in the Piper and Claymore fields, those participators had incurred expense on assets to be used in winning oil from those fields and the present case, where the expenditure had been incurred by the participators in the Tweedsmuir fields.  In this connection he referred us to the Tweedsmuir Area Construction and Tie-in Agreement dated 16 November 2005 in which, although there was overlap as has been previously described, the capacities of the parties are defined in terms of the Piper Field Group (“PFG”) and the Tweedsmuir Area Group (“TAG”).  Recitals (C) and (D) of the Agreement read:

“(C) The TAG wish to construct the Tweedsmuir Area Facilities on the terms set out in this Agreement.

(D) The TAG wish the PFG to make certain modifications to the Piper Field Facilities and to tie-in the Tweedsmuir Area Facilities to the Piper Platform on the terms set out in this Agreement.”

The PFG is further defined as meaning the companies having a beneficial interest in the Piper Field under the Piper Joint Operating Agreement in that capacity and their respective successors and permitted assigns.  A similar definition applies to the TAG.  There is also a definition of Piper Work to mean the work to be carried out by the PFG in modifying the Piper Field Facilities and tying-in to the Tweedsmuir Area Facilities.

43.  Most importantly, argued Mr Grodzinski, the Agreement provided the following at clause 2.1 and 2.4:

“2.1 The TAG shall, at its sole expense, carry out or cause to be carried out the Tweedsmuir Area Construction Work and provide the PFG with such information as may reasonably be requested for the purposes of revising the statutory safety case for the Piper Platform.

…

2.4             2.4.1 The TAG shall obtain and maintain, at its sole expense, all necessary licences, governmental consents and other permissions for the Tweedsmuir Area Construction Work including, but not limited to, any necessary work permits and shall promptly on request supply copies of such documents to the PFG.

2.4.2 Any costs incurred by the PFG during the Tweedsmuir Area Construction Work and/or the Piper Work arising out of, in connection with or made necessary by the failure of the TAG to obtain in good time all the necessary licenses, permissions, consents and permits referred to in Clause 2.4.1 shall be the responsibility of the TAG.”

44.  Clause 3 deals with costs of the Piper Work:

“3.1 The PFG shall, at the sole expense of the TAG by capital contribution, carry out or cause to be carried out the Piper Work in accordance with Clause 4 subject to any Variation and in accordance with the approved budget and Accounting Procedure provided always that the PFG may suspend, vary or terminate any work if in the reasonable opinion of the PFG the Piper Work, or any part thereof, is likely to:

3.1.1 result in damage to the Piper Field Facilities or the Tweedsmuir Area Facilities; or

3.1.2 affect adversely the safe operation of the Piper Platform; or

            3.1.3 cause pollution or endanger the safety of personnel.

In the event of any such suspension or termination, the PFG and the PFO shall have no liability whatsoever for any Claims incurred by the TAO and/or the TAG in respect thereof.  However, the PFG shall ensure that the Piper Work which is suspended is re-commenced as soon as is reasonably practicable.”[5]

45.  Clause 4 provides more detailed provisions for the PFG carrying out the Piper Work “at the sole expense of the TAG by capital contribution”.  Mr Grodzinski submitted that in this case the participators who incurred the expenditure were the Tweedsmuir Area participators.  On the language of s 3(1), OTA 1983, and s 12(2), OTA 1975, the question was whether the Appellant incurred expenditure at a time when it was a participator in the Piper and Claymore fields in bringing into existence assets to be used in connection with those fields for one or more of the listed purposes, in this case winning oil from those fields.  He submitted that on any sensible construction of the legislation the answer to that question must be no.

Discussion

46.  PRT is a tax on profits.  In this context the term “profits” is not to be understood in its ordinary, or accountancy, meaning, but by reference to a statutory formula which provides for an arithmetical calculation.  That calculation is described in s 2, OTA 1975, subsection (3)(b) of which provides that the negative amounts in the calculation include any amount to be deducted for the relevant chargeable period in respect of expenditure.  Section 2 also makes it clear that what is sought to be taxed to PRT is the assessable profit accruing to a participator in any chargeable period from an oil field as defined.  It is thus, and there was no difference between the parties on this, a field-based tax.

47.  The provision which concerns us here is s 3, OTA 1983, which applies to expenditure on long-term assets.  It is not in dispute that the Relevant Assets are long-term assets and are not mobile assets.  The dispute is whether, at the end of the relevant claim periods, the Relevant Assets are being or are expected to be used in connection with the field (s 3(1)(a)), that is to say the Piper and/or Claymore fields.  There is no other dispute on the application of s 3, so that if the issue of principle is decided in favour of the Appellant the only remaining question will be the extent to which the expenditure is, on apportionment under Part II, Sch 1, OTA 1983, allowable expenditure in relation to the Piper and Claymore fields.

48.  The OTA 1983 falls to be construed as one with the OTA 1975 (s 15(5), OTA 1983).  Accordingly, in interpreting s 3(1)(a), OTA 1983, the reference to “an asset … which, at the end of the relevant claim period is being or is expected to be used in connection with the field” must be construed in accordance with s 12(2), OTA 1975, the effect of which is that the reference in s 3(1)(a) to the use of an asset in connection with the field is a reference to its use in connection with that field for one or more of the purposes mentioned in s 3(1), OTA 1975 (excluding s 3(1)(b)).  This includes the winning of oil from the field (s 3(1)(d)), and it is on that basis that the Appellant claims that the Relevant Assets were used in connection with the Piper and Claymore fields.

49.  In our view s 3, OTA 1983, and s 12(2) OTA 1975, should be construed according to their plain words, and accorded their ordinary and natural meaning.  We consider that, in the context of legislation which provides for a formulary approach to the ascertainment of profits, it must be intended that the meaning of the provisions describing the elements of that calculation must be capable of being understood according to their plain words, and that those words themselves will have been carefully crafted to give effect to Parliament’s intentions as regards any particular component part of the profits calculation.  The legislation is closely articulated and in our view is unambiguous and requires no gloss to discern its meaning.  The tests to be satisfied in order to obtain a deduction for expenditure in relation to a particular oil field so far as material to these appeals are, in our judgement, the following:

(1)  A person must incur expenditure (whether or not of a capital nature) at or before the time when he is or was a participator in an oil field.

(2)  That expenditure must be incurred in acquiring, bringing into existence, or enhancing the value of an asset which at the end of the relevant claim period is or is expected to be a long-term asset.

(3)  At the end of the relevant claim period the asset is being or is expected to be used in connection with the field for one or more of the prescribed purposes.

50.  On the plain wording of s 3, OTA 1983 it is not a requirement that the asset be acquired by a person in his capacity as a participator in the particular field in question, nor that the asset be used by that person as participator in that field.  The requirement in relation to the incurring of the expenditure is that, when a person incurs the expenditure this is either at or before the time when he is or was a participator in the field.  As regards the use of the asset, the requirement is expressed passively, that the asset is being or is expected to be used in connection with the field, not that it is used by a particular person in any particular capacity.  Mr Peacock argued that Mr Grodzinski’s contention to the contrary would require reading words into s 3, OTA 1983 and s 12(2), OTA 1975, and that this would be wrong in principle as there is no further requirement as to the capacity in which the expenditure is incurred or in relation to which the assets are used.  We agree.  The meaning of those provisions in our view is both clear and unambiguous and it would be unwarranted to alter the plain meaning by supplying an additional requirement that the legislation does not require.  It is not necessary to put any gloss on the plain words of the statutory provisions to conclude that the Appellant’s case falls within them, and it is not permissible to place any gloss on those words that would preclude that result.

51.  We have kept in mind, as Mr Grodzinski urged that we should, that PRT is a field-based tax, and that there are restrictions on the use of losses and expenditure across fields.  But we also have regard to the structure of the OTA 1983 in particular which recognises that an asset may be used in connection with more than one field within the scope of UK tax (including a non-taxable field), and that an asset may be used for more than one purpose.  The fact that PRT is a field-based tax does not require artificial distinctions to be drawn between participation in individual fields.  We reject Mr Grodzinski’s argument based on the drafting of the Tweedsmuir Area Construction and Tie-in Agreement.  For the purpose of drafting that agreement to reflect the commercial terms it is clear to us that it was expedient to refer to the Piper Field Group and to the Tweedsmuir Area Group as if they were separate and independent parties.  But the reality of the situation is that there was considerable community of participation.  All that the test requires is that the expenditure was incurred by a person or persons at or before the time when those persons were participators in the Piper and Claymore fields.  That condition is plainly satisfied in this case.

52.  We turn now to the question whether the Relevant Assets were being or were expected to be used in connection with the Piper and Claymore fields for the purpose of winning oil from those fields.  We need to consider the meaning of “in connection with” for this purpose.  In doing so we have regard to the context in which it is used: Barclays Bank.  The context here is provided by s 12(2), OTA 1975, which directs that there must be a connection with a particular field for one or more of the purposes prescribed in s 3(1), OTA 1975 (apart from para (b)).  In our view the structure of this provision is to apply a broad test of connection, which is then cut down by reference to specific prescribed purposes.  In the same way that Arden LJ found in Barclays Bank (at [30]) that Parliament had used a broad expression “in connection with” and, having cast the net widely, had drawn it in by imposing limitations, so too in the case of s 3, OTA 1983 and s 12(2), OTA 1975 do we consider that the same expression should be given a broad meaning and that the only limitations should be those prescribed by Parliament, namely the purpose tests in s 3(1), OTA 1975.  No geographical or physical connection is required.  In this context the existence of a relevant purpose in relation to a particular field is a connection with that field.  Nor is there any qualitative restriction on the meaning of the expression “in connection with” itself.  As Mr Peacock pointed out, the language of s 12(2), OTA 1975 does not include any words such as “wholly”, “main”, “sole” or, in contrast to the original wording in para 5, Sch 4, OTA 1975, “substantial”.  The qualitative nature of the connection is instead described fully by the prescribed purposes.  It follows therefore that we agree with Mr Peacock that, assuming it to be the case, the fact that the Relevant Assets were used for the purpose of winning oil from the Piper and Claymore fields is a sufficient connection, for s 3, OTA 1983 purposes, with those fields.

53.  Mr Grodzinski argued that the Relevant Assets were not in fact being used for the purpose of winning oil or for any other purpose in connection with the Piper and Claymore fields.  He said that the Piper and Claymore participants are using the gas that they acquired from the Tweedsmuir participators, and not the Relevant Assets at all.  He argued that on no sensible use of language or construction of the statute can it be said that at the very same time the Relevant Assets are being used both by the Tweedsmuir participators to win oil from the Tweedsmuir fields and by the Pier and Claymore participators to win oil from Piper and Claymore.

54.  We reject the suggestion that dual use in this way is not possible.  First, as we concluded earlier, there is nothing in the relevant statutory provisions that requires use by any particular person or participator; the requirement simply is that the asset is being used or is expected to be used.  Use by one person can, as a practical matter, readily be in connection with more than one field and more than one purpose.  Secondly, the statute expressly contemplates use for more than one purpose and in connection with more than one field (including a non-taxable field), and we do not regard there as being any restriction on the ways in which this might arise.  There is no justification for confining the apportionment provisions in Part II, Sch 1, OTA 1983 in the manner suggested by Mr Grodzinski.  Finally, where something (in this case production gases) that is directly used in the winning of oil is itself the product of a process or processes involving the use of another asset, we regard it as clearly the case that the other asset is used for the purpose of winning that oil even though that asset is not directly employed in the process of winning the oil itself.  The requirement is not that the asset is used in the winning of oil, but for the purpose of winning oil, which can be satisfied both directly and indirectly.  We consider that in this case the Relevant Assets were used for the purpose of winning oil from the Piper and Claymore fields as those assets were used in the production and delivery of the fuel gas and lift gas necessary for that purpose.

55.  We have referred earlier to a number of examples put to us by Mr Grodzinski that demonstrated, he said, that anomalous results could arise from the Appellant’s analysis, which analysis we have accepted. Mr Grodzinski’s argument in this respect suggested that the Appellant’s analysis, which he described as being that a relevant connection could be established by the use of assets to produce gas that is subsequently, at some undefined point of time, then used to win oil from the Piper and Claymore fields, could lead to results that could not have been intended by Parliament.  On the question of timing, the only requirement of s 3, OTA 1983 is that the asset is at the end of the relevant claim period being used or is expected to be used in connection with the field for one of the prescribed purposes (and is or is expected to be a long-term asset).  It is clear that there is no requirement as to immediacy in fulfilling the purpose, such as the actual winning of the oil; the only temporal condition is in relation to the use of the asset.  So it cannot be any objection that gas produced by the use of the Relevant Assets might not itself be used immediately in the winning of oil in Piper and Claymore, but would be used at some undefined later time.

56.  Nevertheless we need to consider if any of Mr Grodzinski’s examples persuade us that our interpretation of the relevant statutory provisions must be wrong.  All the examples were of course hypothetical.  We, by contrast, are concerned only with the application of the law to the particular facts and circumstances of these appeals.  The examples themselves depend on their own facts and on the application of concepts such as use and purpose which may lead to different conclusions dependent upon the facts in issue.  In general, the Courts and the Tribunal will be well able to discern whether there has been use in connection with a particular field for a particular purpose, whether that use or purpose is a dual use or purpose, and if so how the apportionment rules are to apply in a given case.

57.  Even if the result in a given example appears on the face of it anomalous, that does not mean that the legislation in question must be construed generally in a way that would be contrary to its plain and unambiguous meaning.  There are many reasons why a particular case, especially one at the extreme edge of hypothesis, might be regarded as giving rise to a surprising result.  This may be because a particular provision that is not in issue in the instant appeal does not operate as might be expected, or if the draftsman has omitted something that could have prevented the anomaly.  This is all the more so the further from reality the examples stray.  If the more extreme, and unlikely, examples demonstrate arguable anomalies, this may simply be because the draftsman, and Parliament, could not have been expected to have contemplated such a set of circumstances.  It will not be a reason for concluding that Parliament must have intended a different meaning to be attached to otherwise plain and unambiguous statutory wording of a core provision on allowability of expenditure.

58.  In considering Mr Grodzinski’s examples, we have regard to the structure of the relevant legislation as a whole.  We have found that s 3, OTA 1983, when coupled with s 12(2), OTA 1975, permits a broad connection with a field by reference to the use of the asset for a prescribed purpose.  We have seen also that the legislation specifically contemplates dual use and dual purpose or, in relation to a particular field, partial use or use only partly for a prescribed purpose or purposes, and includes provision for a just and reasonable apportionment in each of these cases, for use by virtue of Part II, Sch 1, OTA 1983, and for purpose by s 3(6), OTA 1975.  There are then other provisions which apply, broadly speaking, where there is a change or cessation of use, or a change of purpose.

59.  Mr Grodzinski’s first example was the helicopter one.  Here, using neutral locations rather than those applicable to this case, aviation fuel had been produced from oil won in Field A using the assets in question, and was then used in a helicopter transporting workers to the platform in Field B.  Mr Peacock argued that the example ignored the effect of the fuel having been refined from the oil and that the oil would have been appropriated out of Field A with the effect that the appropriated oil would be brought into the profit calculation of Field A at market value by virtue of s 2(5)(c), OTA 1975.  The analysis would then be that the expenditure on assets relating to Field A would be solely for the purpose of producing that oil appropriated from Field A.  It would not be for the purpose of winning oil from Field B.  Mr Peacock also argued that, if the conditions in s 3, OTA 1983 were met in this particular case there would be no difficulty in bringing in the correct proportion of a cost in Field B even if it is substantially incurred in relation to Field A.  We agree.  We see no reason why the expenditure on the asset in this example ought not in principle to be considered as used in connection with Field B for the purpose of winning oil from Field B.  However, that would only be the start of the enquiry.  We would expect any otherwise anomalous results to be eliminated by the apportionment provisions, both as to use and purpose. 

60.  The second example was admitted by Mr Grodzinski to be more extreme.  It featured the extraction of oil from a field in Canada owned by a participator and the transportation of extracted gas to a platform in the North Sea operated by the same participator.  Mr Grodzinski argued that on the Appellant’s analysis the Canadian assets would have been used in connection with the North Sea field for the purpose of winning oil from that field, and it would not matter that the Canadian field was not an oil field for PRT purpose.  Despite Mr Grodzinski’s best efforts we see nothing anomalous or surprising in this analysis.  The UK legislation is not concerned with fields outside its scope.  Its purpose is to determine the appropriate profit for each particular field on which PRT may be levied.  The only question to be asked, assuming the other conditions are met, is whether the assets are used, wholly or partly, in connection with the North Sea field for one or more prescribed purposes in relation to the North Sea field, and if so whether an apportionment is required.  In this example it seems to us that an apportionment is likely to be made under s 3(6), OTA 1975, which applies where expenditure is partly for a prescribed purpose and partly not.  The fact that the non-prescribed purpose is in relation to a Canadian field outside the scope of PRT is immaterial.  The application of a just and reasonable apportionment under s 3(6) would prevent any anomalous result arising; indeed the operation of these rules should, it seems to us, enable a proper economic result to be achieved.

61.  Mr Grodzinski’s final examples were intended to demonstrate that, on the basis of the Appellant’s analysis, a double deduction might be obtained in a particular case.  We do not consider that either of the examples provided by Mr Grodzinski in this respect should affect the way s 3, OTA 1983 ought properly to be construed.  As regards the sale of the Piper and Claymore fields, followed by the purchaser (X Ltd) buying in gas from the Appellant, we see no double deduction.  On the one hand a deduction is obtained by the Appellant in respect of Piper and Claymore.  That deduction is for costs incurred for the purpose of winning oil from those fields.  On the other hand X Ltd obtains a deduction for its cost of buying fuel gas and lift gas from the Appellant.  There is in our view no double deduction because there are two expenses.  There is a single deduction for each.  Furthermore, we think that the unintended consequence that Mr Grodzinski claims would arise is effectively the obtaining of relief for the cost of assets which subsequently cease to be used for the purpose of the Piper and Claymore fields.  In that event, it seems to us that para 8, Sch 1, OTA 1983 should apply, because the Appellant would have ceased to use the Relevant Assets for a qualifying purpose, and the effect is that there would be a reduction in the allowable expenditure, and an amount would fall to be brought into account as disposal receipts in the chargeable period in which the Relevant Assets ceased to be used for a qualifying purpose.  Accordingly, no anomaly would arise.

62.  In relation to Mr Grodzinski’s suggestion that a double deduction could be obtained if the Appellant were to sell Tweedsmuir gas to a third party and then buy it back in for Piper and Claymore, the answer it seems to us is the same.  Mr Peacock argued that the clawback provisions in para 8, Sch 1, OTA 1983 would also apply here.  We think that is right.  We would see no difficulty in concluding that in a case where the Tweedsmuir gas was sold rather than contributed to Piper and Claymore, the Relevant Assets were no longer being used in connection with any purpose in connection with Piper and Claymore.  Use solely for Tweedsmuir would not be use for a qualifying purpose because it would not be use in connection with a taxable field (see para 8(2A) and (2B)).

63.  Our conclusion in relation to Mr Grodzinski’s examples is that in each case the legislation itself is likely to provide a logical and workable means of preventing the anomalies posited by Mr Grodzinski from arising.  None of the examples suggests in any way that the construction we have placed on the legislation material to these appeals is wrong.

Decision

64.  On the issue for determination in these appeals, namely whether the Relevant Assets are, at the end of each relevant claim period, being or are expected to be used in connection with the Piper and Claymore fields for the purposes of s 3(1)(a) of the Oil Taxation Act 1983 (and in particular as construed in the light of s 15(5) of that Act and ss 3(1) and 12(2) of the Oil Taxation Act 1975), our answer is yes.

65.  For the reasons we have given, we allow these appeals.

66.  We understand that the parties will seek now to agree an apportionment under Part II, Sch 1, OTA 1983.  We shall adjourn pending final determination of the figures.

 

The Respondents have a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

ROGER BERNER

 

TRIBUNAL JUDGE

RELEASE DATE: 8 December 2009

 

 

 

Case cited in argument and not referred to in the decision

 

BP Exploration Co v IRC [2000] STC (SCD) 466