FTT decision on interaction of the succession rules and oil taxation

The case considered the tax treatment of a hive down of a UK oil pipeline between two related parties in advance of a third party sale. The oil pipeline was entirely subject to ring fence taxation in the hands of the transferor but following the hive down, due to the operation of s279 Corporation Tax Act (CTA) 2010 the transferee was only partly subject to ring fence taxation based on the use of the pipeline to transfer equity production of the group. Relevantly, s279 deemed that there were two separate trades for the purposes of the charge to corporation tax. 

Application of the trade succession rules

While both parties agreed that the ownership and tax conditions under the trade succession rules were satisfied, the contention was whether s279, which treated oil-related activities as a separate trade for corporation tax purposes, prevented the application of a transfer of trade. 

The taxpayer asserted that the conditions for a transfer of trade were not met because, broadly, the legislation requires that the same trade (or part trade) is carried on before and after the transfer. In this case, s279 deemed that the transferee carried on two trades after the transfer.

The First-tier Tribunal (FTT) disagreed and took a purposive approach. It held that s279's purpose is to apply special tax rules to ring fence activities. It did not have wider application to negate the application of trade succession rules. The FTT held that the activities carried out by the transferor and transferee were substantially the same before and after the hive down.

Capital allowances treatment

Capital allowance disposals

After deciding that there was a transfer of trade, the FTT agreed with HMRC’s submissions that the transferee inherited the transferors’ tax written down values. However, as the transferee used the plant and machinery for both a ring fence and non-ring fence activity, a disposal event under s61 Capital Allowances Act 2001 (CAA 2001) was triggered. This resulted in a disposal value being brought into account at market value, capped at historic cost.

The FTT considered that this produced the correct result. It held that there is no good reason why the interaction of s279 with the imposition of a hive-down should result in the side-stepping of the basic structure of the capital allowances code.

Single asset pools

Finally, the FTT agreed with HMRC that the transferee was required to maintain two single asset pools for capital allowances purposes, both of which inherited the disposal value recognised per s206 CAA 2001. Writing down allowances for each pool are then pro-rated based on actual use of the plant and machinery for each qualifying activity. It is noted that it was not strictly necessary for the FTT to decide this point as the triggering of the disposal event meant that further charge arises on the sale of the transferee.