Centrica Energy Storage Limited v The Commissioners for HMRC [2026] UKFTT 566 (TC)

[2026] UKFTT 00566 (TC)Case No TC 09842
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 1-5 December 2025Date Judgment date: 10 April 2026
Taylor House, London
Appeal reference: TC/2023/16710
CORPORATION TAX – Section 272(3) Corporation Tax Act 2010 – Ring Fence Corporation Tax - whether Appellant carrying out “oil extraction activities” – yes – whether any of the activities carried out were not “oil extraction activities” – no – appeal dismissed
Before
TRIBUNAL JUDGE MICHAELA SNELDERSDUNCAN MCBRIDE
Between
CENTRICA ENERGY STORAGE LIMITEDAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentJonathan Peacock KC and Susanna Breslin of counsel, instructed by Pinsent Masons LLP for AppellantDavid Ewart KC and Barbara Belgrano of counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs for RespondentsDECISION

Introduction

[1]This appeal concerns the corporation tax (“CT”) treatment of the profits of the Appellant (“CESL”) and more specifically whether, and if so to what extent, CESL carried out ‘oil extraction activities’, as defined by section 272(3) of the Corporation Tax Act 2010 (“CTA 2010”), for its wholly owned subsidiary, Centrica Offshore UK Ltd (“COUK”). If CESL did carry out ‘oil extraction activities’, then the profits from those activities are subject to ring fence corporation tax (“RFCT”) and the supplementary charge (“SC”).[2]The Respondents (“HMRC”) issued closure notices on 1 April 2022 for the accounting periods ending 31 December 2017 and 31 December 2018 on the basis that CESL’s income from the services that it provided to COUK for those periods did arise from ‘oil extraction activities’ (“the Closure Notices”). The Closure Notices resulted in additional CT due from CESL of £2,124,944.80 for the accounting period ending 31 December 2017 and £3,234,826.85 for the accounting period ending 31 December 2018.[3]CESL is appealing against the Closure Notices on the basis that it did not carry out ‘oil extraction activities’ for COUK or if it did they were only a very small proportion of all the activities it carried out for COUK. Consequently, CESL asserts that it is either not subject to RFCT and the SC or it is subject to a much lower amount.[4]The issues for determination by the Tribunal are therefore whether and, if so to what extent, CESL’s income in the periods ending 31 December 2017 and 31 December 2018 arose from ‘oil extraction activities’ within the meaning of section 272(3) of CTA 2010.

facts

[5]The facts are largely not in dispute. The parties have very helpfully provided the Tribunal with their statement of agreed facts which we attach as Appendix A to this decision. We accept the facts as agreed between the parties in Appendix A and adopt the same abbreviations in our decision as used in that statement.[6]We were provided with an electronic hearing bundle of 2433 pages. Included in that bundle was a written witness statement from Richard Foster (“RF”), Head of Procurement and Commercial Contracts at CESL, of 38 pages plus exhibits. RF also gave oral evidence at the hearing and was cross-examined by Mr Ewart.[7]Rough became a natural gas storage facility in 1985 and continued to be operated as a gas storage facility until 2017.[8]During the accounting periods ending 31 December 2017 and 31 December 2018 (“the Relevant Time”):(1) CESL was the licence-holder of the Storage Licence and the Gas Storage Licence;(2) COUK was the licence-holder of the Second Production Licence; and(3) CESL and COUK were associated companies as defined by section 271 of CTA 2010 for the purposes of Part 8 of the CTA 2010.[9]By an Asset Purchase Agreement dated 20 June 2017, CESL sold the Rough complex (including the Rough platforms and the Easington Terminal) to COUK for £148 million with effect from 1 December 2017.[10]By a Services Agreement dated 20 June 2017 (“the Services Agreement”), COUK appointed CESL (which was called Centrica Storage Limited (“CSL”) at the time) to carry out all the services and works required in respect of the Production Operations from 20 June 2017, and CESL agreed to provide those services. (1) “Production Operations” is defined in Recital D of the Services Agreement as follows:
“As such, CSL and COUK intend to take all necessary steps (including seeking all consents and licences) and conduct the necessary activities to produce all recoverable gas from Rough ("Production Operations").” (2) Clause 2 of the Services Agreement provides: “2. Services 2.1. With effect from the Commencement Date, CSL agrees to provide, or cause to be provided, the Services required in respect of, in relation to and arising out of the Production Operations, on COUK's behalf. 2.2. CSL may engage, or cause to be engaged, third parties as it considers appropriate in its judgment to assist with the performance of the Services under this Contract. 2.3. Nothing in this Contract shall be construed to create the relationship of partnership, principal and agent, joint venture, or fiduciary and beneficiary between the parties.” (3) Clause 3 of the Services Agreement provides: “3. Costs and Expenses 3.1. In consideration of the provision of the Services by CSL, COUK agrees to reimburse all and any costs and expenses incurred by CSL in relation to and arising from the provision of the Services, including but not limited to all and any costs received by CSL from third parties, at cost + 15% ("Services Fees").”
[11]On 22 June 2017, COUK notified the Oil and Gas Authority (“OGA”) of the Appellant’s appointment as the operator of the Rough 3B platform.[12]In June 2017 COUK applied to the OGA for consent to produce a certain amount of gas to reduce the pressure on the Rough wells as an interim safety measure. The OGA granted consent in September 2017 (“the production consent issued on 26 September 2017”) and production of gas commenced in October 2017.[13]In December 2017 CESL and COUK applied to the OGA for permission to cease storage operations at the Rough reservoir and to produce recoverable indigenous gas from the Rough reservoir. On 15 January 2018 the OGA granted consent with effect from 17 January 2018. Operations as a production facility at the Rough reservoir subsequently began.[14]On 5 January 2018 CESL and British Gas Trading Limited entered into a Gas Sale and Supply Agreement (“the Gas Sale and Supply Agreement”) in which, broadly and subject to conditions, British Gas Trading Limited agreed to purchase and CESL agreed to sell, all of the Sales Gas produced by CESL from the Rough Reservoir for an initial term of five years, “subject to an earlier termination/cessation of production/expiry of production licences”.(1) This agreement provides that the Second Production Licence is held by COUK and that CESL has the right to sell the Sales Gas.(2) “Sales Gas” is defined in this agreement as: “the Seller's Interest in the Gas produced from the Reservoir (excluding at all times that portion of the 30.7bcf of Gas from the Rough Field which CSL produces pursuant to the production consent issued on 26 September 2017) from time to time and as may attributed to the Seller at the Delivery Point in accordance with the Allocation Agreements (if any)”(3) “the Seller” is defined in this agreement as CESL.[15]On 17 January 2018 CESL and COUK entered into a Gas Sales Agreement (“the Gas Sales Agreement”) that ensured that any gas CESL sells to British Gas Trading Limited under the Gas Sale and Supply Agreement is automatically treated as having been supplied to CESL by COUK on identical terms.[16]The Services Agreement, the Gas Sale and Supply Agreement and the Gas Sales Agreement all acknowledge that COUK holds the Second Production Licence.[17]In its CT returns for the Relevant Time, CESL has accounted for the Services Fees it received under the Services Agreement at the main rate of CT outside the ring fence (“ORF”). COUK deducted the Services Fees from its inside the ring fence (“IRF”) profits.

the legislation

[18]The parties have produced an agreed summary of the regulatory position in respect of oil and gas extraction, production and storage which we attach as Appendix B to this decision.[19]We were also provided with an electronic authorities bundle of 1920 pages.[20]In this appeal we are concerned with Part 8 of CTA 2010. All references to sections in this decision are to sections of the CTA 2010 unless otherwise stated.[21]Section 279 establishes that “oil-related activities” are treated as a separate trade for CT purposes. Section 279 provides as follows:
“If a company carries on any oil-related activities as part of a trade, those activities are treated for the purposes of the charge to corporation tax on income as a separate trade, distinct from all other activities carried on by the company as part of the trade.”
[22]This separate trade is a “ring fence trade” for the purpose of Part 8 of CTA 2010 pursuant to section 277 as follows:
“In this Part “ring fence trade” means activities which – (a) are within the definition of “oil-related activities” in section 274, and (b) constitute a separate trade (whether because of section 279 or otherwise).”
[23]Section 274 defines “oil-related activities” as “(a) oil extraction activities, and (b) any activities consisting of the acquisition, enjoyment or exploitation of oil rights.”[24]Further relevant definitions are: (1) “ring fence income” which is defined in section 275 as:
“income arising from oil extraction activities or oil rights”; (2) “ring fence profits” which are defined in section 276 in relation to an accounting period as: “(a) if in accordance with section 197(3) of TCGA 1992 a company has an aggregate gain for that period, that gain and that company's ring fence income (if any) for that period, or (b) otherwise, that company's ring fence income for that period.” (3) “oil rights” which is defined in section 273 as: “(a) rights to oil to be extracted at any place in the United Kingdom or a designated area, or (b) rights to interest in or to the benefit of such oil.”
[25]The consequence of having a ring fence trade is that it is subject to RFCT which is different to main CT in the following respects:(1) Pursuant to section 304, relief for trade losses may only be given against ring fence profits to the extent that the loss arises from oil extraction activities or from oil rights as follows: “(1) Relief in respect of a loss incurred by a company may not be given under section 37 (relief for trade losses against total profits) against that company’s ring fence profits except so far as the loss arises from oil extraction activities or from oil rights.”(2) Pursuant to section 279A, ring fence profits are charged to corporation tax at the RFCT rate. At the Relevant Time the RFCT rate was 30% and therefore higher than the main CT rate at that time.(3) Ring fence profits are also subject to the SC pursuant to section 330. At the Relevant Time the SC was equal to 10% of the adjusted ring fence profits (as defined in section 330(2)).(4) The Energy Profits Levy, often referred to as the windfall tax, did not apply at the Relevant Time but would apply to certain ring fenced profits of a company (the levy profits as defined by section 1(4) of the Energy (Oil and Gas) Profits Levy Act 2022 for accounting periods beginning on 26 May 2022 or later). The current rate of the energy profits levy is 38%.[26]In this appeal we are concerned with whether the activities of CESL constitute “oil extraction activities” which are “oil-related activities” pursuant to section 274(a). Oil extraction activities are defined in section 272 as follows: “(1) In this Part “oil extraction activities” means activities within any of subsections (2) to (5) (but see also section 291(6)). (2) Activities of a company in searching for oil in the United Kingdom or a designated area or causing such searching to be carried out for it. (3) Activities of a company in extracting, or causing to be extracted for it, oil at any place in the United Kingdom or a designated area under rights which—(a) authorise the extraction, and(b) are held by it or by a company associated with it. (4) Activities of a company in transporting, or causing to be transported for it, oil extracted at any such place not on dry land under rights which— (a) authorise the extraction, and (b) are held as mentioned in subsection (3)(b), if the transportation meets condition A or B (see subsections (6) and (7)). (5) Activities of a company in effecting, or causing to be effected for it, the initial treatment or initial storage of oil won from any oil field under rights which— (a) authorise its extraction, and (b) are held as mentioned in subsection (3)(b). (6) Condition A is that the transportation is to the place where the oil is first landed in the United Kingdom. (7) Condition B is that the transportation— (a) is to the place in the United Kingdom, or (b) in the case of oil first landed in another country, is to the place in that or any other country (other than the United Kingdom), at which the seller in a sale at arm's length could reasonably be expected to deliver it (or, if there is more than one such place, the one nearest to the place of extraction). (8) The definition of “initial storage” in section 12(1) of OTA 1975 applies for the purposes of this section. (9) But in its application for those purposes in relation to the company mentioned in subsection (5) and to oil won from any one oil field, that definition is to have effect as if the reference to the maximum daily production rate of oil for the field mentioned in that definition were to a share of that maximum daily production rate proportionate to that company's share of the oil won from that field. (10) In this section “initial treatment” has the same meaning as in Part 1 of OTA 1975 (see section 12(1) of that Act).” (b) in the case of oil first landed in another country, is to the place in that or any other country (other than the United Kingdom),[27]“Oil” is defined in section 278 to include natural gas and we use the word oil to refer to both oil and gas throughout this decision.[28]“Associated companies” are defined in section 271 as follows: “(1) For the purposes of this Part two companies are associated with one another if—(a) one is a 51% subsidiary of the other,(b) each is a 51% subsidiary of a third company,(c) one is owned by a consortium of which the other is a member,(d) one has control of the other, or(e) both are under the control of the same person. (2) For the purposes of this section— (a) a company is owned by a consortium if at least 75% of the company's ordinary share capital is beneficially owned by other companies each of which beneficially owns at least 5% of that capital, and (b) the other companies each owning at least 5% of that capital are the members of the consortium. (3) In this section “control” has the same meaning as in Part 10 (close companies) (see sections 450 and 451).” (a) a company is owned by a consortium if at least 75% of the company's ordinary share capital is beneficially owned by other companies each of which beneficially owns at least 5% of that capital, and (b) the other companies each owning at least 5% of that capital are the members of the consortium.

Grounds of Appeal

[29]CESL’s grounds of appeal, as set out in its Notice of Appeal, are as follows:

Ground One

[30]“The correct interpretation of s.272(3), reading the provision purposively and in context, is that the term "extracting" (and "extracted" and “extraction") in that provision means only lawful extraction. Only COUK as production licence-holder can lawfully extract oil and gas. The physical extraction activity undertaken by CESL on behalf of COUK, as the person lawfully entitled to extract, is not within the section.”

Ground Two

[31]“In the alternative, even if the term "extracting" and related expressions might be read as including physical extraction, the correct interpretation of s.272(3), and the operation of other words in that provision, again reading the provision purposively and in context, is that it only brings within the ring fence (a) those who are lawfully entitled to extract (i.e. licence holders) and do so (i) themselves or (ii) through agents/sub­contractors, or (b) those who have the ability to cause lawful extraction by the licence-holder and who have an economic interest in what is extracted. CESL does not meet any such criteria and therefore does not carry on a ring fence trade.” Ground Three[32]“In the event that it is found that the Appellant does carry on a trade inside the ring fence, the activities that the Respondents have assessed as being part of this trade are too broad as they extend beyond the profits made from “oil extraction activities””.

CESL’s Submissions

[33]In summary Mr Peacock KC and Susanna Breslin make the following submissions on behalf of CESL:(1) Section 272 is concerned with profits made from the UK’s oil and gas resources rather than from services provided in relation to the extraction of such oil and gas. In other words, section 272 is not concerned with the physical extraction of the oil and gas but with who will profit from its extraction – whether as licence-holder or as funder of the licence-holder, who has a right to the oil and gas.(2) HMRC’s interpretation of section 272(3) fails to take into account the purpose and context of the legislations. Equally, it does not acknowledge the regulatory regime or legislative history of the ring fence in the context of the development of extraction activities in the UKCS.(3) The irrationality of HMRC’s approach is also illustrated by the disparity of tax treatment it occasions for subcontractors associated with the licence-holders versus independent subcontractors. On HMRC’s view, profits arising from the exact same services are taxed at much higher rates in the hands of associated subcontractors compared to independent subcontractors. There is no underlying policy rationale that could justify the difference in treatment that arises from HMRC’s interpretation.(4) In the alternative, if HMRC’s interpretation of section 272(3) is correct, the activities that HMRC have assessed as being part of CESL’s IRF trade are too broad. The calculation of payments it received for ‘extraction’ activities should only include payments made to CESL in respect of services provided by the CESL Production Operations Team, represented by cost-centre reference “Rough Offshore 3B Operations”.(5) Even then, not all of the activities undertaken by that team are services provided in extracting gas. Based on the assessment of CESL’s Operations Installation Manager, supported by sampling of employee shifts from 2017 to 2019, the Production Operations Team spent only 28% of its time on activities that directly related to extracting gas.

HMRC’s submissions

[34]In summary Mr Ewart KC and Barbara Belgrano make the following submissions on behalf of HMRC:(1) The statutory words, “[a]ctivities of a company in extracting …” do not require the company carrying out the “activities” to own the oil (or to have a beneficial interest in it). The focus is on the “activities” carried out by the company and whether, in carrying out those activities, the company is “extracting” oil. There is no requirement that the company extracts the oil for its own benefit.(2) “Extraction” bears its ordinary meaning. The Services Agreement provides that CESL carries out “all services and works required” in respect of the “necessary activities to produce all recoverable gas from Rough”. CESL is operating and maintaining the assets for COUK at Rough and is carrying out the oil extraction activities.(3) CESL carries out those activities under rights that authorise the extraction and which are held by an associated company, COUK, thus CESL meets the statutory conditions in section 272(3)(a) and (b).(4) This is the position based on the clear and unambiguous words used in the legislation but this meaning is also supported by the purpose and context of the legislation and the external aids to interpretation.(5) With respect to CESL’s third ground of appeal, under the terms of the Services Agreement COUK agrees to pay the expenses incurred by CESL +15% for the provision of the “Services required in respect of, in relation to and arising out of the Production Operations, on COUK’s behalf”. Since the “Services” must be necessary to produce recoverable gas from Rough, the whole of the Services Fees must be income arising from oil extraction activities as there is no contractual basis for COUK to pay CESL expenses that are not necessary to produce recoverable gas from Rough.

Statutory interpretation

[35]The parties agree that at the Relevant Time:(1) CESL operated and maintained the assets at Rough and physically extracted gas from Rough; and(2) CESL did so under rights which authorised the oil extraction and which were held by a company associated with it (i.e. COUK)[36]The difference between the parties is limited to what is meant by “oil extraction activities” in section 272(3) which provides that it means:
“(3) Activities of a company in extracting, or causing to be extracted for it, oil at any place in the United Kingdom or a designated area under rights which— (a) authorise the extraction, and (b) are held by it or by a company associated with it.”
[37]HMRC submit that we should simply apply the words of the legislation to the facts of this appeal with the result that the provision of the services by CESL to COUK under the Services Agreement clearly fall within section 272(3).[38]CESL submit that we must consider the historical context of the legislation to determine the purpose of the provision from which they say it is clear that Parliament intended that section 272(3) is only applicable to a company that holds the licence to extract the gas or has a beneficial interest in the gas that is extracted.[39]We were addressed by both parties on the relevant principles, supported by case law, that we should adopt when interpreting subsection 272(3).[40]The relevant principles of statutory interpretation were restated by Lord Hodge (with whom Lord Briggs, Lord Stephens, Lady Rose and Lady Arden agreed) at [29] – [31] of the Supreme Court decision in R (0) v Secretary of State for the Home Department 2023 [UKSC] 3 as follows:
"29. The courts in conducting statutory interpretation are "seeking the meaning of the words which Parliament used": Black-Clawson International Ltd v Papienverke Waldhof-Aschaffenburg AG [1975] AC 591, 613 per Lord Reid. More recently, Lord Nicholls of Birkenhead stated: "statutory interpretation is an exercise which requires the court to identify the meaning borne by the words in question in the particular context." (R v Secretary of State for the Environment, Transport and the Regions, Exp Spath Holme Ltd [2001] 2 AC, 349, 396.) Words and passages in a statute derive their meaning from their context. A phrase or passage must be read in the context of the section as a whole and in the wider context of a relevant group of sections. Other provisions in a statute and the statute as a whole may provide the relevant context. They are the words which Parliament has chosen to enact as an expression of the purpose of the legislation and are therefore the primary source by which meaning is ascertained. There is an important constitutional reason for having regard primarily to the statutory context as Lord Nicholls explained in Spath Holme, p397, "
Citizens, with the assistance of their advisors, are intended to be able to understand parliamentary enactments, so that they can regulate their conduct accordingly. They should be able to rely upon what they read in an Act of Parliament. 30. External aids to interpretation therefore must play a secondary role. Explanatory Notes, prepared under the authority of Parliament, may cast light on the meaning of particular statutory provisions. Other sources, such as Law Commission reports, reports of Royal Commissions and advisory committees, and Government White Papers may disclose the background to a statute and assist the court to identify not only the mischief which it addresses but also the purpose of the legislation, thereby assisting a purposive interpretation of a particular statutory provision. The context disclosed by such materials is relevant to assist the court to ascertain the meaning of the statute, whether or not there is ambiguity and uncertainty, and indeed may reveal ambiguity or uncertainty: Bennion, Bailey and Norbury on Statutory Interpretation, 8th ed (2020), para 11.2. But none of these external aids displace the meanings conveyed by the words of a statute that, after consideration of that context, are clear and unambiguous and which do not produce absurdity. In this appeal the parties did not refer the court to external aids, other than explanatory statements in statutory instruments, and statements in Parliament which I discuss below. Sir James Eadie QC for the Secretary of State submitted that the statutory scheme contained in the 1981 Act and the 2014 Act should be read as a whole. 31. Statutory interpretation involves an objective assessment of the meaning which a reasonable legislature as a body would be seeking to convey in using the statutory words which are being considered. Lord Nicholls, again in Spath Holme [2001] 2 AC 349,396, in an important passage stated: "The task of the court is often said to be to ascertain the intention of Parliament expressed in the language under consideration. This is correct and may be helpful, so long as it is remembered that the 'intention of Parliament' is an objective concept, not subjective. The phrase is a shorthand reference to the intention which the court reasonably imputes to Parliament in respect of the language used. It is not the subjective intention of the minister or other persons who promoted the legislation. Nor is it the subjective intention of the draftsman, or of individual members or even of a majority of individual members of either House ... Thus, when courts say that such-and-such a meaning 'cannot be what Parliament intended' they are saying only that the words under consideration cannot reasonably be taken as used by Parliament with that meaning."". “Such aids can explain the meaning of a statutory provision which is open to doubt and can themselves alert the court to ambiguity in the provision, but they cannot displace the meanings conveyed by the clear and unambiguous words of a provision construed in the context of the statute as a whole.”[41]HMRC submit that the meaning conveyed by the words of section 272(3) are clear and unambiguous. Further they submit that the statutory definition of ‘oil extraction activities’ does not require the company carrying out the oil extraction activities to own the oil or have a beneficial interest in the oil and that this interpretation is supported by the historical context and purpose of the legislation.[42]CESL submit that HMRC’s interpretation does not take account of the purpose and historical context of the legislation, which is to tax profits from oil extraction. It follows that a company will only be carrying out oil extraction activities if it has an interest in the oil being extracted.

discussion and our view

[43]We were very much assisted by the clear submissions both written and oral on behalf of both parties. However, although we have carefully considered all of the submissions made and the authorities referred to, we have not found it necessary to reference each and every argument advanced or all of the authorities cited in reaching our conclusions.

Grounds One and Two

[44]CESL submit that we must read in the word ‘lawfully’ before ‘extracting’ in 272(3) or limit its application to companies that have a beneficial interest in the gas extracted, because that is necessary to give effect to the purpose of RFCT which was to ensure that the profits from the exploitation of oil rights were taxed in the UK.[45]Counsel for CESL referred us to various external aids to interpretation which they say support their position. These included a 1973 report of the Public Accounts Committee (“PAC”), which then led to a White Paper dated 11 July 1974, which in turn led to the Oil Taxation Bill (“OTB”) introduced to Parliament in November 1974 and ultimately became the Oil Taxation Act 1975 (OTA 1975), Part II of which is the predecessor legislation to Part 8 of CTA 2010, with which we are concerned.[46]The PAC report stated at paragraph 14 that:
“in determining basic policy the following factors were taken into account: … (ii) The U.K. could gain substantially from the production of in- digenous oil or gas, providing an additional and secure source of primary energy and benefiting our balance of payments. Retained oil imports were then costing the U.K. about £300 million a year in foreign exchange.”
[47]In the Summary of Main Conclusions the PAC report finds at paragraph 97:
“(1) We regard it as unsatisfactory that U.K. tax revenue from continental shelf operations should be pre-empted by the tax demands of administrations elsewhere in the world; and that for tax purposes capital allowances on extraneous activities, such as tanker operations elsewhere, should be used to offset profits on continental shelf operations (paragraph 62). (2) Under the present arrangements the U.K. will not obtain either for the Exchequer or the balance of payments anything like the share of the “take” of oil operations on the continental shelf that other countries are obtaining for oil within their territories (paragraph 66).”
[48]The White Paper in 1974 proposes:
“15 It is proposed therefore that group relief should not be allowable against profits from North Sea activities. Correspondingly, the North Sea profits of a single company with other activities will not be reduced for tax purposes by losses or allowances arising from those other activities. Nor will a company with losses or excess allowances be able to use them to claim payment of the imputation tax credit on dividends receive from a company within its group and paid out of North Sea profits. The ring fence will apply to accounting periods ending after today’s date. 16 These tax proposals are necessary in the Governments view in order to ensure that in future the Exchequer derives a fair receipt from the profits of the oil industry, which between 1965 and the Public Accounts Committee Report on North Sea Oil and Gas paid only a negligible amount of United Kingdom tax on profits. At the same time the Government believe that they are fair to the industry itself.”
[49]Mr Peacock referred us to the accompanying notes on clauses for the OTB as introduced to Parliament in November 1974 under the heading “The Government’s objectives” which are stated as follows:
“The Government consider that the present licensing and tax arrangements leave the licensees with an unacceptably large part of the profits from exploiting an asset which is vested in the community. They therefore intend to increase the community’s share in these profits in three ways. First, it will be a condition of future licences that the Government shall be entitled to take a majority stake in existing licences. Second, it is proposed to put a ring fence round United Kingdom oil production profits so as to prevent the corporation tax on them from being eroded by extraneous losses and allowances (Part II of the Bill). Third, the Government propose an additional tax – PRT – on United Kingdom oil production profits (Part I of the Bill).”
[50]In relation to Part II of the Bill that introduces the ring fence, the notes on clauses state:
“1. Part II of the Bill contains provisions relating to: (i) the erection of a ‘ring fence’ round income from the winning of oil and gas in the United Kingdom, including the territorial sea and continental shelf, which for the purpose of this Note is described as ‘North Sea income’” … 3. The purpose of the ring fence is to prevent the corporation tax yield on United Kingdom oil production profits from being reduced by these or other means. The effect is to isolate North Sea income for all corporation tax purposes, from losses and allowances arising from any other sources. The ring fence will operate in one direction only; it will not prevent any losses and capital allowances attributable to United Kingdom oil and gas production (for example in the early stages of development of a field) from being set off against non-North Sea profits of the same group under the normal corporation tax rules.” (i) the erection of a ‘ring fence’ round income from the winning of oil and gas in the United Kingdom, including the territorial sea and continental shelf, which for the purpose of this Note is described as ‘North Sea income’”
[51]Mr Peacock concludes from the PAC report, White Paper and the accompanying notes on clauses to the OTB introduced to Parliament in 1974, that the purpose of the ring fence was to ensure that the profits from the exploitation of oil rights was subject to UK tax and therefore it was only ever intended that the party that had a beneficial interest in the oil or gas would be IRF.[52]The OTB was introduced into Parliament in November 1974. As introduced clause 9 established the separate (ring fenced) trade, and read as follows:
“9. —(1) Where a person carries on as part of a trade— (a) any oil extraction activities ; or (b) any of the following activities, namely the acquisition, enjoyment or exploitation of oil rights ; or (c) activities of both those descriptions, those activities shall be treated for all purposes of income tax, and for the purposes of the charge of corporation tax on income, as a separate trade, distinct from all other activities carried on by him as part of the trade. (2) Relief in respect of a loss incurred by a person shall not be given under section 168 or 177(2) of the Taxes Act against income arising from oil extraction activities or from oil rights except to the extent that the loss arises from such activities or rights.”
[53]Clause 14(1) defined oil extraction activities as follows: “"oil extraction activities" means any activities of a person—(a) in extracting or causing to be extracted for him oil at any place in the United Kingdom or a designated area under rights held by him authorising the extraction; or(b) in transporting or causing to be transported for him as far as dry land in the United Kingdom oil extracted at any such place not on dry land under rights held by him authorising the extraction;[54]It is clear from the above that under the OTB as introduced, only licence-holders carried out ‘oil extraction activities’, as defined by clause 14(1) and therefore non-licence-holders were not IRF. As introduced therefore the OTB would not have brought CESL’s activities IRF.[55]The notes on clauses also provide detailed notes on each clause. In relation to clause 9 the note states as follows:
“Subsection (1) treats as a separate trade (when read in conjunction with the definitions in Clause 14(1)) the activities of extraction or transportation carried on by the licensee, or of causing extraction or transportation to be effected for him by a contractor. Income from oil rights is also included; for example overriding royalties received by a non-licensee who has in effect bought a share of a licensee’s receipts. Contractors who are simply engaged for a job are excluded.”
[56]In relation to clause 14 and the definition of “oil extraction activities” the note states as follows:
“4. 'Oil extraction activities’ is defined so as to cover the activities from which a licensee's production profits arise; but not so as to charge the profits of a mere contractor.”
[57]The OTB then went on to be considered by the Standing Committee, after which it was published a second time on 6 February 1975. Clause 9 became clause 11 and clause 14 became clause 16 but both were materially identical to the previous version.[58]The OTB then went to Report Stage on 19 March 1975 at which point the Government proposed an amendment to what had become clause 16 and the definition of ‘oil extraction activities’ so that it would read as follows:
“"oil extraction activities" means any activities of a person— (a) in extracting or causing to be extracted for him oil at any place in the United Kingdom or a designated area under rights authorising the extraction and held by him or, if the person in question is a company, by the company or a company associated with it; or (b) in transporting or causing to be transported for him as far as dry land in the United Kingdom oil extracted at any such place not on dry land under rights authorising the extraction and held as aforesaid;”
[59]As a result of this amendment clause 16(a) is materially the same as the current section 272(3), including the reference to activities carried out “under rights authorising the extraction and held… by … a company associated with it.” Looking purely at the wording of the clause, this brings the oil extraction activities of CESL IRF, because CESL are carrying out those activities under rights held by COUK which is an associated company.[60]However counsel for CESL submit that this was not the purpose of this amendment and that the purpose concerned illustrative agreements.[61]An illustrative agreement is a contractual arrangement that was common in the North Sea oil and gas sector in the 1970s under which the licence-holding UK company extracts the oil, but the economic interest in the oil is held by an affiliated (often non-UK) company (“the Affiliate”). The Affiliate funds the extraction and has a contractual entitlement to the oil at the point of production, even though it is not the licence holder.[62]Counsel for CESL submit, that as originally introduced, clause 9 did not bring the Affiliate who had a beneficial interest in the oil or gas extracted by virtue of an illustrative agreement IRF and that the Report Stage amendment to what had become clause 16 was made to ensure that the Affiliate is IRF.[63]However this submission is not supported by the notes on clauses on the OTB as originally introduced or as amended. As originally introduced clause 9(1)(b) brought persons who acquired, enjoyed or exploited oil rights IRF (which has materially the same effect as section 274(b) together with section 279). Clause 14 as originally introduced defined oil rights as follows: "oil rights" means rights to oil to be extracted at any place in the United Kingdom or a designated area, or to interests in or to the benefit of such oil.”[64]The Government note on clause 14 states: 5. 'Oil rights' is defined in wide terms to cover any rights to oil extracted, both rights under a production licence, and rights conceded by the licensee to another person. These rights include those held by virtue of an illustrative agreement, ie, where the economic interest in the oil is held by an affiliate of the licensee; and those held by virtue of an over-riding royalty agreement whereby a certain proportion of the oil or proceeds from it is conceded by the licensee to another person.”[65]It is clear from the above that the Government considered that under the OTB as originally introduced, the Affiliate was IRF as a result of the definition of ‘oil rights’[66]in clause 14 and the application of clause 9(1)(b).[67]Further the explanation provided by the Government for the amendment to clause 16 at the time of its introduction at Report Stage was as follows:
“1. These amendments widen the definition of the ring fence so as to include a company's profits from extracting oil, or transporting it to the United Kingdom, where the oil was won under rights held by an associated company. As the Bill stands, the ring fence applies only where the rights were held by the company itself . 2. The amendments are in general likely to benefit the industry, since in a case where, say, a group uses a separate subsidiary to transport the oil to the United Kingdom, it will enable the capital allowances on the subsidiary's installations to be set against the production company's profits for corporation tax; Clause 11 [previously clause 9] would otherwise have prevented this.”
[68]Based on the clear wording in the legislation and the external aids to interpretation referred to above, we find that it is simply not credible that the Government’s purpose in making the amendment to what had become clause 16 was to ensure that the Affiliate was brought IRF. The Government’s purpose in making this amendment was, as explained by the Government at Report Stage, to bring associated companies of licence-holders IRF, when they are carrying out oil extraction activities under that licence.[69]This is further supported by the example provided by the Government at the time in paragraph 2 of the quoted Government explanation above. Further if we replace the word ‘transport’ with the word ‘extract’ in that paragraph 2 it would read: The amendments are in general likely to benefit the industry, since in a case where, say, a group uses a separate subsidiary to extract the oil, it will enable the capital allowances on the subsidiary's installations to be set against the production company's profits for corporation tax; Clause 11 [previously clause 9] would otherwise have prevented this.[70]This supports HMRC’s position that this amendment was intended to bring associated companies like CESL IRF. In our view the notes on clauses and Government statement at Report Stage on the purpose of the amendment clearly establish that the Government’s intention was that the amendment would cover exactly the activities of CESL in this appeal.[71]A further argument that counsel for CESL put forward against this interpretation is that it is contrary to the Government’s note on the definition of “oil extraction activities” in the OTB as it was introduced where it states that oil extraction activities:
“is defined so as to cover the activities from which a licensee's production profits arise; but not so as to charge the profits of a mere contractor.”
[72]Counsel for CESL submit that this note demonstrates that it was not the Government’s intention to bring companies such as CESL IRF as CESL is a ‘mere contractor’.[73]A contractor that is associated with the licence holder, is arguably not a mere contractor as it is both a contractor and a company associated with the licence holder. In any event this statement was made before the Report Stage amendment and therefore does not necessarily describe the definition as amended so should be read in conjunction with and subject to the Report Stage explanation for the amendment.[74]CESL further submit that there is no sensible identifiable policy goal in bringing an associated contractor IRF, while an unrelated contractor remains outside of it. CESL says that both types of company should be treated the same because neither of them is making a profit from oil rights, each of them is making a contractor profit.[75]However, as is clear from the external aids, the primary concern of the Government in 1974/75 was that oil and gas profits were being reduced by the offset of losses and allowances from other activities of the company or other companies within the group. Preventing such losses from being offset against oil and gas profits was the purpose of the legislation when it was introduced to Parliament in 1974.[76]The IRF profits were subject to the same rate of CT as ORF profits. It was not until the Supplementary Charge was introduced in 2002 that a higher rate of tax became payable on IRF profits than on any other profits. Subsequently the RFCT rate was increased above the main CT rate and more recently the Energy Profits Levy was introduced in 2022. Prior to 2002 however, whether a contractor was IRF or ORF had no impact on the tax payable on its profits.[77]The purpose of Part II of the OTA 1975 was not therefore to subject oil and gas profits to a higher rate of tax, but to limit the offset of losses and allowances, so that the normal CT rate of tax was paid on those oil and gas profits.[78]The policy goal in making the amendment was therefore, as explained by the Government when the amendment was introduced, to allow oil extraction activity losses of an associated company to be offset against the profits of the licence holder because they accepted that this was equitable, notwithstanding that the associated company did not hold the rights authorising the extraction, because the associated company would have incurred costs that were directly related to the oil and gas profits. An unrelated company could not offset their losses against the licence holder’s profits so there was no policy rationale for bringing an unrelated company IRF.[79]It follows that if an associated company is IRF for the purposes of offsetting its losses relating to oil extraction activities, it must be IRF for the purpose of profits relating to oil extraction activities. At the time of introduction and until 2002 that would have been of no consequence because the tax payable would have been the same for the associated company irrespective of whether it was IRF or ORF. However, the fact that the consequences have changed, cannot affect the original purpose and intention of Parliament or change the meaning of the legislation.[80]We therefore agree with HMRC that there is no doubt or ambiguity in the meaning of the words used in section 272(3) and that the external aids that we have been referred to, together with the history of the legislation, confirm that the clear and unambiguous meaning of the words was intended by Parliament and CESL’s oil extraction activities are therefore IRF.

Ground Three

[81]As we have found against CESL on Grounds One and Two we now consider CESL’s Ground Three which is that only a very small proportion of CESL’s 15% mark-up under the Services Agreement is ‘ring fence income’.[82]Section 275 defines ‘ring fence income’ as “income arising from oil extraction activities or oil rights.”[83]We must therefore establish the extent to which the services provided by CESL to COUK under the Services Agreement are oil extraction activities.[84]CESL submit that activities that are not directly related to physical extraction should not be included, such as administrative, engineering and technical support activities.[85]CESL rely on cost-centre data in the SAP-derived spreadsheets and Mr Foster’s written and oral evidence that describes what each cost-centre actually represents, to establish the extent to which the services provided by CESL under the Services Agreement are directly related to the physical oil extraction.[86]CESL submit that the services that they are contractually obliged to provide under Schedule 1 of the Services Agreement include the following support services which are necessary for the extraction in a practical sense, but they are not directly related to the physical extraction:(1) Administrative, accounting, HR, legal and compliance services(2) Data and IT services(3) Procurement, warehousing, stock management services(4) Consulting and technical support related to production, processing, marketing and transport services(5) Terminal services (Easington)(6) Miscellaneous services such as National Transmission System entry/exit fees.[87]CESL provided the Tribunal with a consolidated spreadsheet that shows for each cost-centre, whether HMRC accept in the Closure Notices that it is ORF or not, HMRC’s stated rationale, RF’s evidence and CESL’s proposed conclusion of whether it is IRF or ORF.[88]CESL conclude that the services provided under all but one of the cost-centres are ORF because they are providing services that are not directly related to physically extracting gas. Of the one cost-centre that it accepts carries out services that are directly related to physically extracting gas, CESL submit that only 28% of its activities are directly related to physically extracting gas and therefore only 28% of the services charged to COUK from this cost centre are IRF.[89]RF was a credible, reliable and well informed witness but he did not carry out the exercise to determine the proportion of the service charge that CESL submits is charged for actions directly related to physically extracting gas, so he was unable to fully explain the methodology used.[90]The apportionment exercise had been carried out at RF’s request by Gary Miller who is an Offshore Installation Manager for CESL. Mr Miller did not provide a witness statement or attend the hearing to give oral evidence. We attach limited weight to the apportionment exercise, both because its author was unavailable for cross-examination and because, for the reasons set out below, we do not consider that the exercise is necessary for the purpose of this appeal.[91]HMRC submit that the words “activities of a company in extracting…oil” bear their ordinary meaning to include everything that is required to physically remove the oil or gas from the ground. If an activity must happen for gas to be extracted, it is part of the extraction process, even if indirectly. This includes:(1) Operating the platform(2) Monitoring systems, alarms, and equipment(3) Maintenance and repairs(4) Ensuring safety and regulatory compliance(5) Transportation of workers (e.g., helicopters)(6) Catering and accommodation for workers on the rig(7) Any other activity necessary to allow extraction to take place.[92]HMRC further submit that as the Services Agreement provides that CESL will provide all services “required in respect of, in relation to and arising out of” the ‘Production Operations’ which is defined as “the necessary activities to produce recoverable gas from Rough”, it follows that all the services provided under the Services Agreement must be necessary to extract gas. Further Mr Foster acknowledged in cross-examination that all the cost-centres were “considered to be contributing to the extraction of gas.”[93]HMRC’s position, as articulated by counsel in their skeleton argumenta and at the hearing, has therefore changed since the Closure Notices were issued. In the Closure Notices HMRC accepted that some of the cost-centres, such as corporate support services, were not providing oil extraction activities. Their position now is that all the services provided under the Services Agreement are oil extraction activities, although they do not seek an increase in the closure notice, only a decision in principle from the Tribunal.[94]In our view there is no sensible dividing line beyond which the services provided under the Services Agreement are not ‘oil extraction activities’. While some of the services are more remote from the physical extraction than others, we find that all of the services provided under the Services Agreement are sufficiently proximate and operationally integral to extraction, initial treatment or transportation of the gas to constitute oil extraction activities within the meaning of section 272.[95]Accordingly if CESL were the licence-holder there would be no doubt that it could deduct all of the expenses it incurred in carrying out these activities when calculating its taxable ring fence profit. COUK did in fact obtain a deduction within its ring fence computation for the Services Fees.[96]Had CESL not been associated with the licence-holder COUK, its 15% mark-up would not be a ring fence receipt because it would not be IRF. However, because it is associated with the licence-holder COUK, all of its receipts for the provision of services under the Services Agreement are for oil extraction activities under that licence and are therefore IRF.

Conclusion

[97]For all the reasons set out above we dismiss the appeal.

Right to apply for permission to appeal

[98]This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. Release date: 10 April 2026