The FTT rejected an appeal for capital allowances on a fee paid for decommissioning
The recent First-tier Tribunal (FTT) decision of Judge Thomas Scott in Marathon Oil UK LLC v HMRC is of interest in that it shows the court reading significant words into the legislation, based on a purposive construction. The taxpayer had entered into arrangements to accelerate UK tax relief and to manage its group's US foreign tax credit (FTC) position. In brief, a fellow group company (MODS) agreed to perform North Sea decommissioning services for it in future. A $300 million payment was made by the company to MODS under this agreement (MODS immediately lent it back). To obtain a 100 percent capital allowance under s164 CAA 2001 at the time the relevant tax law only required expenditure to be "incurred on decommissioning plant and machinery" (s163 (3) CAA 2001).
It was accepted by HMRC and the FTT that the expenditure had been incurred in the period of payment as is required by s5 CAA 2001. At the time there was no stipulation as to when the actual decommissioning work be carried out.
The FTT rejected the taxpayer’s claim for capital allowances on the basis that the legislation in specifying ‘on’ plant and machinery needed to be interpreted purposively to mean that expenditure had to be incurred (directly by someone) on the plant and machinery in question (at or about the time of the incurring of the expenditure by the taxpayer). Incurring expenditure on paying a fee for decommissioning which had the effect of setting aside funds for future use on the actual plant and machinery decommissioning was not, in the FTT’s view, sufficient and did not amount to “incurring on decommissioning”.
The FTT used the judgment in Ben-Odeco to support the approach of distinguishing between purposes which are more and less remote. In Ben-Odeco, interest costs incurred on raising funds to acquire plant were held to be too remote to qualify as incurred on provision of the plant. In this case the monies were to be spent on decommissioning but the FTT concluded that there was a degree of remoteness insofar as the decommissioning work was not done immediately (indeed it is unclear what would happen if the monies were never spent on decommissioning).
This case may be seen as an example of the courts seeking to defeat what they perceive as tax avoidance arrangements, and appears to extend the boundary of what can be achieved under the banner of ‘purposive construction’. It will be interesting to see whether this approach is upheld if the case is appealed to a higher court.
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