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First-tier Tribunal decision - extent of the ring fence

First-tier Tribunal decision - extent of the ring

A recent FTT case considers the scope of the UK’s taxing rights on profits related to oil production from the UK Continental Shelf.

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The judgment in a recent First-tier Tribunal (FTT) case considers the scope of the UK’s taxing rights on profits related to oil production from the UK Continental Shelf. The case concerns a royalty arrangement which entitled a non-resident bank to payments contingent on production from a UK oil field, calculated by reference to the oil price at the time. The Tribunal found that although the taxpayer did not have an interest in the oil licence it did, by virtue of the royalty agreement, enjoy ‘the benefit of’ the oil and therefore should be subject to the UK ring fence tax regime.

The case considered whether royalties received by a non-resident bank gave rise to UK taxable profits subject to ring fence taxation. The royalty agreement entitled the bank to quarterly payments based on production from an oil field which were linked to the excess of the market price of the oil in question above a benchmark level.

Profits related to exploitation of UK oil and gas assets are subject to the upstream tax regime (broadly known as ‘the ring fence’ which aims to prevent the dilution of such taxable profits and also subjects such profits to higher rates of tax). The scope of the ring fence encompasses oil-related activities, defined in Part 8 CTA 10. The taxpayer considered that as it did not own any UK oil rights it should not be subject to upstream taxation.

The Tribunal found that the royalty arrangement gave the taxpayer the rights to ‘the benefit of’ the oil won from the oil field, and therefore a UK ring fence trade was triggered. 

Structures involving payments linked to production are increasingly common and this decision highlights the risk that such arrangements may subject related profits to ring fence taxation, even where the taxpayer is not directly undertaking UK oil activities. 

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