Perenco UK Ltd v HMRC – FTT Tax Case
Background
Perenco UK Ltd (PUK) acquires and operates mature hydrocarbon assets. In 2011, PUK acquired BP Exploration Operating Company Ltd (BPEOC) and ARCO British Limited’s (ARCO) ~67.5% interest in the Wytch Farm and Wareham oilfields. A sale and purchase agreement (BASPA) was signed on 16 May 2011 for US$555 million, with PUK paying a US$500 million deposit that day and assuming operatorship.
On 17 May 2011, pre-emption notices were issued to co-participants. Premier Oil indicated on 19 May its intention to exercise its pre-emption rights. After negotiations, PUK and Premier signed the POSPA on 19 June 2011, under which PUK agreed to sell ~17.2% of the oilfields to Premier for US$96 million.
Key Dates & Dispute
The BASPA completed on 14 December 2011, and the POSPA completed on 20 December 2011 – meaning PUK legally owned the disputed assets for six days. The BASPA allocated US$386 million to plant and machinery (field facilities). PUK claimed 100% first-year capital allowances under s.45F CAA 2001, with Deloitte submitting a return based on £250.4 million qualifying expenditure.
On 28 July 2023, HMRC issued closure notices reducing qualifying expenditure to £185 million, creating a disputed amount of £65.4 million (plus additional tax for 2012 and 2013 totalling ~£39.1 million). HMRC argued that PUK failed s.11(4), s.45F and s.45G, and that s.197 anti-avoidance overrode the s.198 election.
Section 11(4) – Timing and Purpose
PUK argued the relevant date was when expenditure was unconditionally incurred (16 May 2011 for the deposit). HMRC contended it should be when ownership was obtained (14 December 2011). The FTT agreed with HMRC: expenditure cannot be qualifying until it results in ownership. Accordingly, PUK’s purpose was assessed at 14 December 2011.
On purpose, the FTT found that although PUK had committed to the POSPA by completion, it nevertheless used the disputed facilities wholly for its ring fence trade (RFT) during the six days of ownership. The “economic date” clauses did not backdate beneficial ownership to Premier – they were merely pricing mechanisms. If the POSPA had not completed, PUK would have continued using the assets for its RFT indefinitely.
Ownership & Sections 45F/45G
HMRC argued, citing Altrad, that ownership must be assessed in a “real and practical sense” and that PUK’s interest was hollowed out. The FTT rejected this, applying Melluish – legal and equitable ownership is determinative. PUK owned the assets from 14–20 December 2011.
On s.45F, the FTT held that an intention to sell does not negate use “wholly” for a RFT while owned. On s.45G (the five-year clawback), the relevant period ran from 16 May 2011 (deposit) to 19 December 2011. Because PUK actually used the assets in its RFT for six days, s.45G did not apply. Crucially, had the BASPA and POSPA completed on the same day, PUK would have lost – but they did not.
Section 197 (Anti-Avoidance)
HMRC argued the s.198 election for US$2 was a tax-avoidance scheme. The FTT found that while the POSPA and election formed a “scheme or arrangement”, the main purpose was to secure the BP deal and avoid Premier derailing it – not to obtain a tax advantage. Moreover, even if s.197 applied, the notional written-down value would be zero (due to 100% allowances), rendering it ineffective.
Conclusion
The FTT allowed PUK’s appeal. The s.198 election for US$2 was valid, and PUK retained full first-year capital allowances on the disputed £65.4 million expenditure.
Lovell Consulting Comments
PUK v HMRC is an important tax case for capital allowances moving forward. It demonstrates that ownership of assets held in ring-fenced trades does not need to span years to qualify for first-year allowances, although careful consideration must be applied to ensure eligibility, particularly amid rising HMRC scrutiny.
This case is unique: PUK legally owned the assets for only six days but successfully appealed, relying on contractual obligations (pre-emption rights) and the FTT’s finding that the s.198 election was not the main purpose of the POSPA.
We consider this case a significant win for UK investors, particularly as it clarifies when plant or machinery assets can qualify for 100% first-year allowances. The key takeaways for meeting the requirements are:
- The acquisition must be genuinely for a commercial purpose within a ring-fence trade (RFT);
- The assets must actually be used for the RFT during the period of ownership; and
- If assets are disposed of rapidly, there must be clear evidence that the disposal is driven by commercial or contractual obligations, not tax avoidance.
PUK v HMRC also underscores the importance of meticulous record-keeping and careful contract drafting. Lovell Consulting can assist by providing robust draft wording and ensuring capital allowances legislation is properly complied with to maximise tax savings for our clients.
Contact Lovell Consulting on 020 7329 1300 to discuss further.
