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 wholly 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 transport 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.
The Upper Tribunal (UT) agreed with the taxpayer that the ring fence rules in Part 8 of CTA 2010 should be considered comprehensive in nature and have wide application to all elements of corporation tax.
As a result, the UT agreed with the taxpayer’s position that the transferor’s trade could be considered in two parts, with the part of trade which remained subject to ring fence taxation after hive down being subject to Part 22 of CTA 2010, but the part of trade which was outwith the ring fence following the transfer not being subject to Part 22.
Capital allowances treatment
Capital allowance disposals
For the element of the hive down which fell within Part 22, the UT agreed with the taxpayer’s submissions that the transferee inherited the transferor’s tax written down values. There was no disposal event until the share sale to the third party, when a just and reasonable proportion of historic cost was brought into account.
For the element of the hive down which did not fall within Part 22, the transferee incurred a nominal amount of qualifying expenditure, representing the consideration paid for the hive down. This part of the trade, being non-ring fence, was not subject to a disposal event.
Single asset pools
Finally, the UT agreed with the taxpayer that the transferee was required to maintain two single asset pools for capital allowances purposes, but critically that each pool represented a proportion of expenditure (not that each pool recognise the same value, as asserted by HMRC on application of s206 CAA 2001).
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