Upper Tribunal allows taxpayer's appeal in asset hive down case

In CATS North Sea Ltd v HMRC [2026] UKUT 142 (TCC), the Upper Tribunal (UT) overturned the First-tier Tribunal's (FTT) decision and ruled that CATS North Sea Ltd's (CNSL) calculation of its balancing charge was correct.

Background

CNSL was a wholly owned subsidiary of Amoco (UK) Exploration Company LLC (Amoco). CNSL and Amoco were both part of the BP group.

The Central Area Transmission System North Sea Oil and Gas pipeline (CATS Pipeline) was built by Amoco, along with other co-venture partners, to transport hydrocarbons from the Everest/Lomond fields in the North Sea to mainland UK. It operated as a joint venture. Throughput began in 1993 and the BP group first incurred capital expenditure on the CATS Pipeline in 1990.

In July 2014, Antin Infrastructure Partners Luxembourg II SARL (Antin), through a company it owned called Kellas, offered to buy Amoco's interest in the CATS Pipeline. The disposal took place in two stages:

1. In November 2014, Amoco sold its entire interest in the CATS Pipeline and associated contracts to CNSL for $1 under a Hive-Down Agreement, which completed on 1 October 2015, being the date CNSL began trading (the Hive-Down).
2. Amoco later sold its shares in CNSL to Kellas for $388m in December 2015 (the Share Sale). On completion of the Share Sale, CNSL ceased to be a member of the BP group and became part of the Antin group.

Before the Hive-Down, for corporation tax purposes, Amoco treated all CATS Pipeline activities, including transportation of BP group and non-BP group hydrocarbons, as part of its single ring fence trade, also described as an Inside Ring Fence trade (IRF), being a trade which consists of "oil-related activities" and which is treated as a separate trade by virtue of section 279, Corporation Tax Act 2010 (CTA 2010). Amoco claimed capital allowances, at IRF rates, on expenditure of around £167m on plant and machinery relating to the CATS Pipeline.

After the Hive-Down, when Amoco transferred CATS Pipeline activities to CNSL, those activities comprised two part-trades: (1) transportation of BP group hydrocarbons (being IRF to IRF and categorised as Part Y1); and (2) transportation of non-BP hydrocarbons (IRF to outside ring fence (ORF), categorised as Part Y2). 

The different categories of trade between Amoco and CNSL was due to Amoco's status as participator under section 291(6)(a), CTA 2010, which did not apply to CNSL. CNSL was not a participator and therefore all of its transportation activities could not be treated as IRF to IRF. Rather, because CNSL was not a participator, the effect of the legislation, particularly section 272(4), was that CNSL's transportation of hydrocarbons, where extraction rights were held by an associated company (ie the BP group) were oil extraction activities and therefore oil related. In contrast, the transportation of non-BP group / third party hydrocarbons, not covered by this provision, were not oil related because the hydrocarbons were extracted under the rights of a third party, not the rights of CNSL, or a related company. After the Share Sale, CNSL's activities were entirely ORF.

CNSL filed its return based on mixed IRF/ORF trades after the Hive-Down, returning an IRF balancing charge of £23m on cessation of its IRF trade at the time of the Share Sale.

In March 2021, HMRC issued a closure notice to CNSL for the period ended 31 December 2015, concluding that a balancing charge of £169m arose on the Hive-Down, or in the alternative, a balancing charge of £166m, when CNSL left the BP group on the Share Sale.

CNSL appealed the closure notice to the FTT.

FTT decision

The appeal was dismissed.

The FTT, agreeing with HMRC, concluded that Part 22, CTA 2010, applied to CNSL. Part 22 contains rules applicable to cases where a trade is transferred between companies and certain conditions, such as common ownership of the trade, are met. In broad terms, one of the purposes of Part 22 is to allow a successor to step into its predecessor's capital allowance position in certain circumstances where there has been an intra-group transfer of a trade (or part of a trade).

In the FTT's view, Part 22 applied in the circumstances of this case because CNSL began to carry on the activities of part of Amoco's trade and the deeming provisions allow this to be treated as a transfer of a trade even though CNSL carried on two trades by virtue of section 279, CTA 2010. Therefore, CNSL inherited Amoco's tax written down value and should be treated as having carried on the transferred trade since Amoco began to do so. 

The FTT also found that CNSL's subsequent use of the pipeline constituted a disposal event under section, 61(1)(e), Capital Allowances Act 2001 (CAA 2001), which resulted (under Part 22, CTA 2010) in a balancing charge of £167m, as calculated by HMRC. 

CNSL appealed to the UT. 

UT decision

The appeal was allowed. 

The central issue before the UT was whether, and if so how, section 279, CTA 2010, is taken into account when interpreting the transfer of trade provisions, in particular, section 951(3), CTA 2010. Under section 279, oil related activities which are part of a trade are to be treated as distinct from all other activities carried on by the company as part of its trade.

The UT confirmed that section 279 must be taken into account when applying the transfer of trade provisions in Part 22, CTA 2010, with the effect that only IRF activities on transfer qualified for transfer of trade treatment. There was therefore no balancing charge on the Hive-Down. Instead, only the IRF-to-IRF element gave rise to a later balancing charge of £23m on the sale of CNSL. 

The UT, rejecting the FTT and HMRC's approach, agreed with CNSL's submission that it did not carry on the same trade as Amoco (as is required by Part 22), but rather, carried on two separate trades, namely, CNSL's transportation of BP group hydrocarbons (oil related) and the transportation of non-BP group / third party hydrocarbons (not oil related). 

In reaching this conclusion, the UT identified that one of the key tests within Part 22 was to consider, under section 951(3), CTA 2010, whether there would have been a transfer of trade had Amoco carried on each part as a separate trade. The UT concluded that, for Part Y1, Part 22 applied because the same IRF trade continued in CNSL and if Amoco had carried on the activities of Part Y1 as a separate trade, there would be a transfer of trade. With regard to Part Y2, Part 22 did not apply because the trade changed from IRF in Amoco to ORF in CNSL, reflecting Amoco's deemed participator status which CNSL lacked, and if Amoco had carried on the activities of Part Y2 as a separate trade, there would not be a transfer of trade. 

The UT also found that CNSL's IRF qualifying activity ceased on the Share Sale, when CNSL left the BP group, in line with section 61(1)(f), CAA 2001. At that point, a smaller balancing charge of £23 million arose in relation to the IRF trade.

The UT also commented on the correct way of pooling qualifying expenditure and agreed with CNSL's approach that sections 53(2) and 206(2)(b), CAA 2001, require upfront apportionment of qualifying expenditure between separate pools for different qualifying activities. The UT rejected HMRC's approach of allocating the full amount to both pools with subsequent section 207, CAA 2001, adjustments. 

Comment

In finding for the taxpayer in this case, the UT confirmed the proper operation of the capital allowances pooling provisions in the circumstances under consideration, and whilst the decision will be of interest mainly to businesses with oil and gas operations in the UK, the UT's comments regarding the scope of deeming provisions, transfers of trade, ring-fence activities and capital allowances pooling rules, will be of wider interest when considering other regimes which create ring-fenced trades by deeming them to be separate trades. 

Given the sums involved, it will be interesting to see if HMRC seek to appeal the decision to the Court of Appeal.

The decision can be viewed here.