CATS North Sea Limited v HMRC: Upper Tribunal overturns FTT on ring-fence trade transfer and capital allowances pooling

The Upper Tribunal has allowed the appeal of CATS North Sea Limited ("CNSL") against an FTT decision that had upheld HMRC's position on balancing charges arising from an intra-group hive-down of a North Sea pipeline interest. The judgement, handed down by Judge Swami Raghavan and Judge Ashley Greenbank, resolves a significant question about the interaction between the oil ring-fence provisions in Part 8 CTA 2010 and the transfer-of-trade regime in Part 22.

Amoco (U.K.) Exploration Company LLC, a BP group company, transferred its approximately 36% interest in the Central Area Transmission System (CATS) pipeline to its wholly-owned subsidiary, CNSL, for US$1 in October 2015. Amoco had claimed capital allowances of £167m on the pipeline at inside-ring-fence (IRF) rates. CNSL was subsequently sold to a third-party purchaser for approximately US$388m. HMRC sought a balancing charge of £167m on CNSL, arguing that Part 22 applied to the hive-down and that CNSL's subsequent partly outside-ring-fence (ORF) use of the pipeline triggered a disposal event under s61(1)(e) CAA 2001.

The core dispute turned on the interaction of s279 CTA 2010 — which deems oil-related activities to constitute a separate trade "for the purposes of the charge to corporation tax on income" — and the Part 22 transfer-of-trade provisions, in particular s951(3).

S279 and the scope of Part 22

The tribunal rejected HMRC's primary submission that s279 operates only to demarcate profits for the purposes of applying the ring-fence tax rate, and has no bearing on whether a transfer of trade has occurred under Part 22. Analysing the structure of Part 8 as a "comprehensive mini-corporation tax code", the tribunal held that s279 applies across the full range of corporation tax computational provisions, including capital allowances. The deemed separation of oil-related activities into a distinct trade is not confined to profit calculation but governs the entire charging framework.

Applying the Supreme Court's guidance on deeming provisions in Fowler v HMRC [2020] UKSC 22, the tribunal held that the separate-trade fiction in s279 must be given effect when assessing the s951(3) transfer-of-trade test.

Scenario D: two part-trades, one transfer

The tribunal adopted what the parties had termed "Scenario D". On this analysis, Amoco carried on two notional part-trades in the CATS pipeline: Part Y1 (transportation of BP group hydrocarbons, IRF) and Part Y2 (transportation of third-party hydrocarbons, also IRF in Amoco's hands by reason of its deemed participator status). Upon the hive-down, CNSL acquired those same activities — but its lack of deemed participator status meant Part Y2 became an ORF trade in its hands.

Working through the three-step analysis drawn from Falmer Jeans Ltd v Rodin [1990] STC 270 and reflected in s951(3)(a) and (b), the tribunal held that Part 22 applied to Part Y1 (IRF to IRF) but not to Part Y2 (IRF to ORF), because the trade carried on by CNSL in respect of Part Y2 was not the same trade as that carried on by Amoco. Accordingly, the share sale generated an IRF balancing charge of approximately £23m, not £167m.

The pooling question

On the capital allowances pooling methodology — which the FTT had addressed only obiter — the tribunal preferred CNSL's approach. Section 53(2) CAA 2001 prohibits expenditure relating to different qualifying activities from being allocated to the same pool. The tribunal held that a single dollar of expenditure that relates to two qualifying activities must be apportioned between the relevant pools at the outset, rather than placed in full into each pool with s207 adjustments applied later.

The tribunal also held that ss206–207 CAA 2001, which provide for single-asset pools and just-and-reasonable reductions, address mixed qualifying and non-qualifying use only — not the case where the same asset is used across two distinct qualifying activities. That situation falls within the separate-pooling regime of ss11(3) and 53(2).

The FTT decision was set aside and remade accordingly.