Commercial transactions do not always unfold as planned, and that can have significant tax implications. In Perenco UK Limited v HMRC [2026] UKFTT 1096 (TC), an acquisition of oilfield interests became more complicated when a co-owner exercised contractual pre-emption rights and acquired part of the assets shortly after completion. This gave rise to a dispute with HMRC over £250m of capital allowances and a resulting £39.1m increase in Perenco’s corporation tax liability. The First-tier Tribunal (Tax Chamber) (“the Tribunal”) found in Perenco’s favour, providing valuable guidance on the role of commercial purpose and the application of the capital allowances regime in the context of complex transactions.

In this article, partner Anastasia Nourescu and associate Mikolaj Kudlinski examine the Tribunal’s decision and consider its wider implications for businesses undertaking complex transactions involving plant and machinery.

An acquisition complicated by pre-emption rights

The dispute arose from Perenco’s acquisition of interests in two oilfields in southern England. In early 2011, Perenco agreed to acquire BP Exploration Operating Company Limited’s (“BP”) and ARCO British Limited’s (“ARCO”) combined 67.5% interest in the oilfields under a sale agreement known as the BASPA. The acquisition included interests in various items of plant and machinery used in the operation of the fields (the “Field Facilities”).

The joint operating agreements governing the oilfields granted pre-emption rights to the minority interest holders, the largest of which was Premier Oil UK Limited (“Premier”). This meant that the majority interest holders were required to offer the interests being sold to existing minority interest holders on the same terms before selling them to a third party. Premier indicated that it intended to exercise those rights.

Rather than allowing the pre-emption process to derail the transaction, Perenco and Premier negotiated a separate sale agreement, the POSPA. Under that agreement, Premier acquired a 17.2% interest in the oilfields for $96m. To bridge the gap between that consideration and Perenco’s original acquisition cost under the BASPA, the parties made a joint election under section 198 of the Capital Allowances Act 2001 (the “CAA 2001”), fixing the disposal value of the Field Facilities at $2. This allowed Perenco to retain the associated capital allowances while reflecting the parties’ wider commercial agreement.

Perenco subsequently claimed first-year capital allowances of approximately £250m in respect of its expenditure on the Field Facilities. HMRC challenged the claim and issued closure notices increasing Perenco’s corporation tax liability by £39.1m. Perenco appealed to the Tribunal.

Capital allowances: legal framework

The appeal concerned Perenco’s entitlement to first-year allowances on expenditure incurred in acquiring the Field Facilities. Under section 11(4) of CAA 2001, expenditure qualifies for plant and machinery allowances if it is capital expenditure on the provision of plant or machinery used wholly or partly for the purposes of a qualifying activity carried on by the person incurring the expenditure and which the taxpayer owns as a result of incurring that expenditure. In this case, the relevant qualifying activity was Perenco’s ring fence oil and gas trade.

Sections 45F and 45G contain additional rules applicable to first-year allowances for ring fence expenditure. In essence, expenditure will qualify for the 100% first-year allowance if it is on the provision of plant or machinery for use wholly for the purposes of a ring fence trade. Relief may also be withdrawn if, during a specified period, the taxpayer uses the assets for a purpose other than that of the ring fence trade.

Where qualifying plant and machinery on which capital allowances have been claimed is sold, a disposal value must generally be brought into account in calculating the seller’s capital allowances position. Section 198 allows the parties to agree the disposal value. However, section 197 is an anti-avoidance provision that permits HMRC, in certain circumstances, to substitute a different disposal value where obtaining a capital allowances tax advantage was one of the main purposes of the arrangements.

In this case, HMRC argued that Perenco did not satisfy the statutory requirements for first-year allowances and that the section 198 election formed part of arrangements designed to secure an impermissible tax advantage. The Tribunal rejected both arguments.

The Tribunal’s decision

HMRC argued that Perenco was not entitled to first-year allowances because the statutory requirements in sections 11(4), 45F and 45G of CAA 2001 were not satisfied. In essence, HMRC’s position was that Perenco acquired the Field Facilities with the intention of selling part of its interest to Premier and had therefore not incurred the expenditure for the purposes of its ring fence trade. HMRC also argued that the arrangements under the POSPA effectively transferred the benefits and burdens of ownership to Premier during the period in which Perenco held legal title.

The Tribunal rejected HMRC’s arguments and found in favour of Perenco. It held that the relevant purpose under section 11(4) had to be assessed at the time Perenco incurred the expenditure and acquired ownership of the Field Facilities. The evidence showed that Perenco’s main objective was to acquire BP’s and ARCO’s interests in the oilfields, and the subsequent arrangements aimed to address the exercise of Premier’s pre-emption rights. The Tribunal held that, even if Perenco had contemplated a future disposal, that did not prevent the expenditure from satisfying the “wholly or partly” requirement.

HMRC also argued under sections 45F and 45G that Perenco’s intention to sell part of its interest to Premier meant that the Field Facilities were not being used wholly for the purposes of its ring fence trade and that the requirements for first-year allowances were therefore not satisfied. The Tribunal disagreed and held that a future intention to dispose of an asset does not in itself amount to a separate “use” of that asset. While Perenco owned the Field Facilities, they were used exclusively for the purposes of its ring fence trade.

The Tribunal also rejected HMRC’s argument that the POSPA effectively transferred ownership of the Field Facilities to Premier before the formal disposal took place. The Tribunal found that, although the POSPA allocated certain economic benefits and obligations between the parties during the period of Perenco’s ownership, it did not have the effect of backdating either the legal or beneficial ownership of the Field Facilities.

Finally, the Tribunal rejected HMRC’s alternative argument that the POSPA and section 198 election formed part of arrangements designed to secure a tax advantage by allowing Perenco to retain the benefit of the allowances. Although the Tribunal accepted that the arrangements were capable of producing a tax advantage, it held that obtaining that advantage was not one of Perenco’s main purposes. The contemporaneous evidence showed that the arrangements were driven principally by the commercial difficulties arising from Premier’s exercise of its pre-emption rights and the parties’ desire to ensure that the wider transaction could proceed. The section 198 election was therefore not an end in itself, but simply the mechanism through which that commercial objective was achieved.

Why does it matter?

The case provides useful guidance on the availability of first-year allowances in the context of complex commercial transactions. The Tribunal highlighted that entitlement to capital allowances must be assessed by reference to the commercial reality and purpose of the transaction at the time the expenditure is incurred. A taxpayer may therefore satisfy the requirements even where it is contemplating a future disposal, provided the assets are acquired and used for the purposes of the relevant qualifying activity.

The decision also clarifies the concepts of ownership and use in the context of the capital allowances regime. The Tribunal confirmed that a future intention to dispose of an asset does not in itself constitute a separate “use” of that asset. In addition, ownership and use must be assessed by reference to the commercial reality of the arrangements as a whole, rather than strictly by contractual provisions allocating specific economic benefits and obligations between the parties.

Relatedly, the judgment further highlights the importance of preserving contemporaneous documentation, including internal memos, notes and correspondence, in order to evidence the commercial rationale for the arrangements. Issues or questions that might seem trivial at the time the transaction is only contemplated might later prove critical if the transaction later comes under HMRC’s scrutiny.

Although the dispute arose in the oil and gas sector, the decision will be relevant more broadly wherever businesses undertake transactions involving significant plant and machinery assets. Operators in industries such as infrastructure, construction, and renewable energy will be particularly interested in this decision, as complex ownership structures, joint venture arrangements, and contractual provisions for allocating risk are common features of transactions in those sectors.