HMRC has had its appeal dismissed in a recent decision by the Upper Tribunal (“UT”), meaning Perenco, an oil and gas producer, will not be liable for £524,000 of petroleum revenue Tax (“PRT”).
Matthew Greene, Krishna Mahajan and Francesca Bugg review the recent case of HMRC v Perenco UK Ltd [2023] UKUT 169 (TCC) and its potential implications in a research and development (R&D) relief context.
Summary of Perenco
Following the implementation of The Ozone–Depleting Substances (Qualifications) Regulations 2009, SI 2009/2016, and the Environmental Protection (Controls on Ozone-Depleting Substances) Regulations 2011 and SI 2011/1543), Perenco were required to replace a cooling plant at one of its gas terminals with a non-Freon branded cooling plant. It began incurring costs on this project in the planning stage on handover from BP in November 2012, and the works were completed in late 2017.
During 2013, Perenco received three payments via transport and processing agreements (“TPAs”) relating to three of its oil fields for Freon replacement works. HMRC’s view was that these payments were subsidies under paragraph 8, schedule 3 of the Oil Taxation Act 1975 (“OTA 1975”) on the basis that the expenditure had been “met directly or indirectly” by the owners of the oil fields who paid to use the terminal under the terms of TPAs.
It was common ground that, but for paragraph 8, Perenco’s expenditure on the Freon’s replacement work would fall within s3 Oil Taxation Act 1983 and would be allowable.
The First Tier Tribunal (“FTT”) found that the payments that constitute tariff receipts/tax exempt tariffing receipts (“TETRs”) cannot be regarded as payments that meet directly or indirectly the participator’s expenditures in generating those tariff receipts/ TETRs for the purposes of paragraph 8.
The UT upheld the FTT’s decision and decided that the restriction in paragraph 8 of Schedule 3 did not apply to disallow expenditure incurred by Perenco in replacing a cooling plant at its Dimlington terminal.
Subsidised expenditure
Both the Quinn and Perenco cases concern the application of subsidised expenditure provisions.
In Quinn (London) Limited v HMRC [2021] UKFTT 437 (TC), the taxpayer carried out works of construction and refurbishment on behalf of clients, during which it carried out R&D. However, Quinn incorporated all their costs, including those relating to R&D, into the price charged; their clients didn’t pay or reimburse particular costs, including the R&D expenditure.
HMRC unsuccessfully argued that fees paid by Quinn’s clients amounted to meeting the costs of R&D and, therefore, did not qualify for any additional R&D reliefs as the work fell within the exclusion of “subsidised expenditure”.
The judge in Quinn noted: “[I]f HMRC’s approach were to be adopted, the circumstances in which an SME could claim enhanced R&D relief would seem to be confined to those where it has no prospect of exploiting the R&D for commercial gain.”
This ruling means that R&D work undertaken while providing a service for a client, the costs of which are subsumed within the overall fee, will not automatically be denied the enhanced relief given under the R&D rules.
The UT expressly endorsed the FTT’s approach in Quinn, saying: “Our approach to this point is very similar to that of the FTT in Quinn (London) Limited v HMRC… The FTT regarded the relevant words in s. 1138(1) CTA 2009 [the subsided expenditure provision for the relevant R&D claims] as a form of sweep up provision to catch cases where expenditure is not ‘met’ by subsidy but is met ‘in a similar sense’. In that context the FTT observed (at s47(3)) that a subsidy or grant ‘generally involves the provision of funds to a recipient who either provides nothing in return or provides something which, viewed from the perspective of parties acting on an arm’s length basis, does not represent a commercial return commensurate with the value of the funds provided (albeit that, in some cases, such as where a public or government body provides the funds, that body may consider it is in the wider public interest to fund the relevant R&D).’”
Implications going forward
FTT decisions do not constitute a binding precedent, so HMRC’s decision not to appeal in Quinn had arguably left HMRC with leeway to downplay the implications of that case, unduly limit its scope or disregard it when dealing with other taxpayers with R&D claims. However, the UT’s approach in Perenco makes that a harder approach for HMRC to maintain. The Oil Taxation Act and the R&D legislation may be very different, but the relevant tests the UT and FTT were addressing are similar, and the reasoning the UT gives for its decision is clear. Payment for goods or services on the basis of an arm’s length contract is properly regarded as consideration for what the customer receives, not a means for meeting the supplier’s expenditure (even if the consideration is to some extent calculated to reflect the expenditure).
R&D cases are highly fact-specific, and HMRC will likely continue to try to distinguish other cases on their facts. Nevertheless, Perenco and Quinn, taken together, should put taxpayers in a stronger position when faced which HMRC’s arguments based on the disallowance for subsidised expenditure.
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