OT21069B - Corporation Tax Ring Fence: Losses and Group Relief: Change in Company Ownership: Examples

All of the examples provided here assume that there are no other material facts to the case.

Example 1

Company A carries on a ring fence trade with a 30%, non-operating interest in one oil field. It has trade losses brought forward. Company B acquires company A. This leads to a change in management in company A. A then acquires a further 40% of the license interest, and takes on operatorship because it believes it can reduce the field running costs, bringing it back to profit.

HMRC would not consider this to be a major change in the nature of the company’s trade.

Example 2

Company M has a small offshore production interest. It also has a 70% interest in a larger field which hasn’t yet started production. Company M has incurred losses as a result of developing this new field. 2 years after a change in ownership, the larger field’s FDP is approved and it moves into production.

HMRC would not consider this to be a major change in the nature of M’s trade.

Example 3

Company W owns a 50% share in one, producing field. It has losses brought forward. After being bought by company V, it acquires an interest in a further field, with an associated pipeline and terminal, which it operates. This results in a change of management in company W. It starts to receive tariffs from owners of other fields which use the pipeline and terminal. It sets its carried forward losses against its ring-fence profit.

HMRC would not consider this to be a major change in the nature of W’s trade.

Example 4

Company J previously had interests in 8 different fields, varying from 10-100%. It operated three of them. Due to a fall in the oil price, it started to make losses and so sold most of its license interest. It retained a 3%, non-operating interest in a small onshore field. It had no other significant assets, except for its tax losses. Company K acquired J, and over the following two years, as the oil price increased, J bought interests varying from 20%-60% in a further 5 fields.

HMRC would need to consider whether the trade had become small and negligible prior to the change in ownership. This will depend on the particular facts of the case. If the trade had become small and negligible, as the revival did not occur until after the change in ownership, the brought forward losses that accumulated before the change in ownership would be lost.

Example 5

Company R owns a 45%, non-operating interest in three oil fields in the northern North Sea, which it acquired mid-way through the fields’ lives. Two of the fields have already ceased production but are profitable from earning tariff receipts. The third is still producing but volumes have fallen by 90%. Following an uptick in the oil price, the field has returned to profit.

The company has brought forward losses which it built up over a number of years due to high costs and declining production. The existing management intend to continue earning tariff receipts for as long as possible, and then manage the cessation of the trade as effectively as possible before decommissioning in a cost-efficient manner.

R is acquired by S, which has recently developed a new gas field, which it expects will be highly profitable. S transfers its interest in the new gas field to R shortly before production commences. R then immediately sell the two profitable tariff earning field interests, and 40% of its interest in the third field that is still producing, retaining 5%.

R earns the profits from the new gas field, but no tax is payable due to the losses brought forward.

The application of CTA10/S673 will always depend on the precise facts. The cessation of production in two fields, and the 90% drop in volumes suggests that the trade could have become small and negligible, and following the change in ownership, changes were made to revive it. Where a trade had become small and negligible prior to a change in ownership, CTA10/S673 would apply, and relief for the brought forward losses would be denied.