The taxpayer companies at all material times carried on oil-related activities within the meaning of the Corporation Tax Act 2010, the income from which represented ring fence profits on which corporation tax was charged. In addition, pursuant to section 330 of the 2010 Act, a supplementary charge was levied on adjusted ring fence profits. By section 7 of the Finance Act 2011 the rate of supplementary charge increased from 20% of adjusted ring fence profits to 32%. That change took effect in relation to accounting periods beginning on or after 24 March 2011. Both companies had an accounting period which ran from 1 January to 31 December 2011 and so straddled the point at which the supplementary charge was raised. Section 7(4) of the 2011 Act provided for a company’s adjusted ring fenced profits for the straddling period to be apportioned by time, with the period falling before 24 March 2011 (“the earlier period”) and the period falling on or after that date (“the later period”) treated as separate accounting periods, and the company’s adjusted ring fence profits for the straddling period apportioned to the two separate accounting periods in proportion to the number of days in those periods. Section 7(5) further provided that if that basis of apportionment would work unjustly or unreasonably in the company’s case, the company could elect for its profits to be apportioned on another basis that was just and reasonable and specified in the election. The companies each sought to make an election pursuant to section 7(5), adopting a basis of apportionment which considered the earlier and later periods independently, as if they were two separate accounting periods, and allocating income, expenditure and allowances to the periods according to when they arose. That approach resulted in all their adjusted ring fenced profits for the 2011 accounting period being allocated to the earlier period rather than to the later period and so in their escaping the 32% rate of supplementary charge. However, the revenue did not accept that the alternative basis of apportionment specified by the companies was just and reasonable and suggested a different basis of apportionment which it contended would be just and reasonable. The companies having declined to accept the revenue’s proposals, the revenue issued notices to the claimants charging additional tax. The First-tier Tribunal allowed the companies’ appeal and the Upper Tribunal allowed the revenue’s appeal.
On the companies’ appeal—
Held, appeal allowed. The existence of the default position in section 7(4) of the Finance Act 2011 did not assist in determining when the requirement in section 7(5) would be satisfied. Any company which earned profits at a significantly faster rate in the earlier period than the later period, and so stood to be materially prejudiced by time apportionment, could avail itself of section 7(5). It did not matter whether the differential profitability arose from the exceptional or routine. Section 7(5) thus applied to all companies, including those in the present case, whose profits were not smoothly spread throughout the year, but whose profits differed greatly from one part of the year to the other, and who could be disadvantaged by a change of tax rate part way through an accounting period. Accordingly, the companies in the present case were entitled pursuant to section 7(5) of 2011 Act to elect for its profits to be apportioned on the basis they adopted, which was just and reasonable (paras 33–40, 41, 42).
Laurent Sykes QC (instructed by Vinson & Elkins llp) for the taxpayer companies.
Michael Jones (instructed by General Counsel and Solicitor to HM Revenue and Customs) for the revenue.