What is a just and reasonable apportionment of profits as an alternative to time apportionment?
In Total E&P North Sea Ltd and Total Oil UK Ltd v HMRC (formerly Maersk North Sea Ltd and Maersk Oil UK Ltd v HMRC) [2019] UKUT 133 (TCC), the Upper Tribunal (UT) disallowed two companies’ alternative bases for allocating profits between accounting periods on the grounds that the bases go beyond what is necessary and sufficient to ensure that the allocations were just and reasonable.
This case is useful for interpreting how apportionment of profits is determined for the purposes of various elements of the corporation tax code, including:
the 1 April 2017 commencement of the corporate interest restriction rules (F(No. 2)A 2017 Sch 5 para 26);
corporate carried forward loss reform (F(No. 2)A 2017 Sch 4 paras 190–192);
the basis of apportionment for group relief purposes (CTA 2010 s 141); and
what might be a ‘just and reasonable’ adjustment by HMRC for the corporate interest restriction rules where the issue is under enquiry (TIOPA 2010 Sch 7A para 54).
The case concerned the apportionment of profits for the year ended 31 December 2011 during which the rate of supplementary charge on ring fence profits was increased (from 24 March 2011), and during which the business experienced significant disruption as a result of a storm (in February 2011) necessitating a shutdown of operations.
The legislation for the rate change specified that periods before and after 24 March were to be treated as separate accounting periods with the adjusted ring fence profits apportioned between these periods on a time basis. However, if this produced an unjust or unreasonable amount, then an election could be made to use a just and reasonable apportionment.
The company made the election and contended that 100% capital allowances as a result of new plant acquisitions incurred after 24 March 2011 related solely to that period. This created a loss which was carried back against profits for the previous period, resulting in no profits subject to the increased supplementary charge for the year ended 31 December 2011.
The First-tier Tribunal had previously accepted the companies’ method of apportionment, but the UT held this method overcompensated for the effect of the storm as the majority of expenditure qualifying for capital allowances did not relate to the storm. In other words, the FTT had not considered whether the company’s alternative method produced a result that ‘was limited to what was necessary and sufficient to ensure that the apportionment was just and reasonable.’
The UT considered it did not need to determine whether HMRC’s assessment was just and reasonable. As a result, the company’s appeal against HMRC’s assessment of £6.8m for the two companies was dismissed.
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Allocating profits between accounting periods
What is a just and reasonable apportionment of profits as an alternative to time apportionment?
In Total E&P North Sea Ltd and Total Oil UK Ltd v HMRC (formerly Maersk North Sea Ltd and Maersk Oil UK Ltd v HMRC) [2019] UKUT 133 (TCC), the Upper Tribunal (UT) disallowed two companies’ alternative bases for allocating profits between accounting periods on the grounds that the bases go beyond what is necessary and sufficient to ensure that the allocations were just and reasonable.
This case is useful for interpreting how apportionment of profits is determined for the purposes of various elements of the corporation tax code, including:
the 1 April 2017 commencement of the corporate interest restriction rules (F(No. 2)A 2017 Sch 5 para 26);
corporate carried forward loss reform (F(No. 2)A 2017 Sch 4 paras 190–192);
the basis of apportionment for group relief purposes (CTA 2010 s 141); and
what might be a ‘just and reasonable’ adjustment by HMRC for the corporate interest restriction rules where the issue is under enquiry (TIOPA 2010 Sch 7A para 54).
The case concerned the apportionment of profits for the year ended 31 December 2011 during which the rate of supplementary charge on ring fence profits was increased (from 24 March 2011), and during which the business experienced significant disruption as a result of a storm (in February 2011) necessitating a shutdown of operations.
The legislation for the rate change specified that periods before and after 24 March were to be treated as separate accounting periods with the adjusted ring fence profits apportioned between these periods on a time basis. However, if this produced an unjust or unreasonable amount, then an election could be made to use a just and reasonable apportionment.
The company made the election and contended that 100% capital allowances as a result of new plant acquisitions incurred after 24 March 2011 related solely to that period. This created a loss which was carried back against profits for the previous period, resulting in no profits subject to the increased supplementary charge for the year ended 31 December 2011.
The First-tier Tribunal had previously accepted the companies’ method of apportionment, but the UT held this method overcompensated for the effect of the storm as the majority of expenditure qualifying for capital allowances did not relate to the storm. In other words, the FTT had not considered whether the company’s alternative method produced a result that ‘was limited to what was necessary and sufficient to ensure that the apportionment was just and reasonable.’
The UT considered it did not need to determine whether HMRC’s assessment was just and reasonable. As a result, the company’s appeal against HMRC’s assessment of £6.8m for the two companies was dismissed.
