Timing of intra-group expenditure for capital allowance purposes

Tue 19 Dec 2017

The First tier Tribunal (FTT) has rejected a claim that an intra-group payment should be treated as incurred on the date of payment. The FTT decision proceeded from the fact that arrangements appeared to have been put in place to try to gain access to the special allowance for a ring fence trade (CAA 2001 s.164) at a particular time, and were not incurred to meet a capital expenditure commitment. The case is an interesting reminder of the importance of timing and commercial purpose when considering capital expenditure and capital allowances.

When expenditure qualifying for capital allowances is incurred

Capital allowance expenditure is treated as incurred for capital allowance purposes as soon as there is an unconditional obligation to pay for it (CAA 2001 s.5). This is so, subject to special rules, even if payment is not required until a later date. As demonstrated by this case, however, prepayment may be regarded under general tax principles as for another, non-commercial purpose, if it is intended to secure a tax advantage.

Generally allowances can be claimed in the accounting period in which the expenditure is incurred but the date capital expenditure is incurred can affect when the allowances are available. Claims may also need to be made within certain time limits.  Marathon Oil UK Ltd (MOUK) were seeking to claim special allowances for decommissioning expenditure in a ring fence trade for which, at the time, the allowances were only available if claimed for the period in which the expenditure was incurred.

Background to the case

MOUK made the payment to a group company Marathon Oil Decommissioning Services Ltd (MODS) in order to gain certainty for the Marathon Oil group as to its foreign tax credit position for the purpose of US federal income tax.  While it did not consider this was for an operational purpose, MOUK did consider it was for a commercial purpose.

The FTT took note that the legislation at the time did not specify when the amounts had to be spent, but merely required the expenditure to be ‘incurred’. However when considering the facts viewed realistically, the FTT held that the real purpose of the expenditure was to accelerate the special allowance, and not to meet decommissioning expenditure. It considered the longer term purpose of meeting future real-time decommissioning obligations, to be more remote and not the main or dominant purpose.  The economic effect of the arrangements was simply to put aside monies for future decommissioning costs in an earmarked fund within the group.

The legislation was amended for expenditure incurred on or after 22 April 2009 to the effect that the special allowance is only available on decommissioning expenditure carried out in the chargeable period.

Action points

The tax principles in the case may be appealed and considered by higher courts. In the meatime groups that incur significant expenditure, particularly with related business entities, should examine their control procedures for recording capital allowances to ensure they comply with the tax rules for claiming allowances on that expenditure .

To discuss the implications of the timing of expenditure qualifying for capital allowance purposes (corporate or unincorporated businesses) or the policy developments in this area, please get in touch with a member of the Mazars corporate tax or personal tax teams.