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Tribunal finds in favour of taxpayer confirming that payments are consideration rather than a subsidy for expenditure

20 September 2023.

In HMRC v Perenco UK Ltd [2023] UKUT 169 (TCC), the Upper Tribunal (UT) held that payments made for goods and services under an arm's-length contract were consideration rather than subsidy for expenditure, even though the payments were calculated to reflect such expenditure.


On 1 November 2012, Perenco UK Ltd (Perenco) acquired a package of assets from BP. This package included, among other things:

Dimlington gas terminal (the Terminal);
interests ranging from 50% to 100% in 15 oil fields in the West Sole offshore system (this system comprised 22 oil fields); and
rights and obligations under a number of transportation and processing agreements (TPAs).

Raw gas from the 22 oil fields in the West Sole offshore system underwent initial processing within that system before being transported by sub-sea pipelines to the Terminal. The gas was then further processed before being delivered via the national transmission system to various third-party gas distribution companies.

Perenco owned the Terminal and 15 oil fields in the West Sole offshore system, but the remaining 7 oil fields were owned by third parties including Babbage, Seven Seas and Johnston.

As a result of new regulations made in 2009 and 2011 (The Ozone–Depleting Substances (Qualifications) Regulations 2009, SI 2009/2016, and the Environmental Protection (Controls on Ozone-Depleting Substances) Regulations 2011, SI 2011/1543), Perenco was required to replace the cooling plant at the Terminal with a non-Freon cooling plant.

Perenco began the process of replacing the cooling plant in November 2012. In 2013, it reviewed all of its TPAs and determined that three of them (those relating to Babbage, Seven Seas and Johnston) allowed it to require the field owners to make additional payments in relation to the replacement works, on a pro rata basis, according to the proportion of the throughput at the Terminal that was attributable to each of those oil fields.

Babbage, Seven Seas and Johnston accepted this obligation and paid the additional contributions due of £6,286,146. This represented only a portion of the replacement costs which were £66,069,895.

Perenco claimed £12,771,089 as allowable Petroleum Revenue Tax (PRT) expenditure in the West Sole field. On 20 May 2016, HMRC disallowed £6,282,146 from the expenditure claim on the basis that the amounts received from Babbage, Seven Seas and Johnston fields should be treated as a "subsidy" under paragraph 8, Schedule 3, Oil Taxation Act 1975. HMRC argued that the expenditure claimed had been "met directly or indirectly" by the owners of the oil fields. The result of HMRC's decision was that Perenco were due to pay an additional £523,847.75 in PRT.

Perenco appealed the decision to the First-tier Tribunal (FTT). The FTT found that the additional payments due to Perenco by the third parties were part of the overall consideration paid for the provision of the services rather than a reimbursement of expenditures. On that basis, the FTT allowed the appeal.

HMRC appealed to the UT.

UT decision

The appeal was dismissed.

HMRC argued, among other things, that a proper construction of paragraph 8 provides that a person's expenditure could be "met" by simple or complex arrangements of any kind, including by contractual obligations, such as those in place in the present case.

In dismissing HMRC's appeal, the UT restated that paragraph 8 does not encompass a payment made in return for the provision of goods or services. It confirmed that if A pays a sum of money to B in order to receive goods or services in return on the basis of an arm’s length commercial contract, A’s payment is properly to be regarded as consideration for what A receives and not as a way of meeting B’s expenditure, even if A’s payment is calculated to reflect B’s expenditure attributable to those goods or services (with or without the addition of a profit margin).


This decision creates an important binding precedent restricting HMRC's ability to disallow expenditure in the oil and gas industry. The reasoning also has potentially broader implications particularly in relation to R&D relief. It is clear from the UT's decision that payment for goods and services under an arm's length contract should properly be regarded as consideration rather than a subsidy of expenditure. The argument advanced by HMRC in this appeal also failed in Quinn v HMRC [2021] UKFTT 437 (TC). Whether HMRC will now abandon this argument remains to be seen. 

The decision can be viewed here.