- This is an appeal concerning
Petroleum Revenue Tax (PRT), brought by the Commissioners of Inland Revenue
against a decision of the Special Commissioners dated 31 July 2000. By their
decision the Special Commissioners held that Amerada Hess was entitled to
deduct the costs of two abortive drill holes from the receipts in respect
of the Rob Roy field in the process of calculating the net amount on which
PRT has to be paid as regards the receipts from that field.
- PRT is charged under
the Oil Taxation Act 1975. It is a field based tax, in the sense that tax
is payable by reference to the net receipts of particular oil fields. It was
introduced in the early 1970's, and has gone through several phases in its
evolution. There was a major change in 1983, and then in 1993 there was a
further and even more substantial change, in that it was not charged on fields
discovered thereafter. Instead, oil companies are only chargeable to corporation
tax in respect of their profits, rather than also being subject to the special
regime. However, fields to which PRT already applied before 1993 are still
subject to it. This produced the potential for anomalies where one company
has a taxable field (such as Rob Roy is) but also looks for a new field within
the same licence area in the North Sea or elsewhere. That is what happened
in the present case. Amerada Hess is the leader of the consortium which holds
the licence for block 15/21 within which Rob Roy is situated. It bored two
drill holes within the licence area but some distance from the Rob Roy field,
hoping to find oil which would have been in a new field, but without success.
Because these two holes were within 5 kilometres of the Rob Roy field, they
contend, and the Special Commissioners held, that this abortive expenditure
is allowable against the profits of the Rob Roy field in determining the PRT
payable on that field, by virtue of section 3(1)(a) of the 1975 Act. If oil
had been found, the new field would not have been taxable to PRT and the cost
would not therefore have been deductible for PRT purposes against the receipts
of that field, though no doubt it would have come into a calculation for fiscal
purposes in relation to the company's profits in some way.
- I will first set out
the relevant statutory provisions, starting with the relevant parts of sections
1, 2 and 3.
"1(1) A
tax, to be known as petroleum revenue tax, shall be charged in accordance
with this Part of this Act in respect of profits from oil won under the authority
of a licence granted under either the Petroleum (Production) Act 1934 or the
Petroleum (Production) Act (Northern Ireland) 1964; and in this Part of this
Act "oil" means any substance so won or capable of being so won other than
methane gas won in the course of operations for making and keeping mines safe.
(2) For each
oil field [which is a taxable field] the tax shall, in the case of each participator,
be charged at the rate of [50 per cent] on the assessable profit accruing
to him in any chargeable period from that field, as reduced under section
7 of this Act by any allowable losses and under section 8 of this Act by reference
to his share, if any, of the oil allowance for that period, subject however
to the limit imposed in his case by section 9 of this Act."
"2(1) For
the purposes of the tax the assessable profit or allowable loss accruing to
a participator in any chargeable period from an oil field shall be computed
in accordance with the following provisions of this section.
(2) The
assessable profit or allowable loss so accruing in the period is the difference
(if any) between the sum of the positive amounts for the period and the sum
of the negative amounts for the period; and that difference (if any) is an
assessable profit if the sum of the positive amounts is greater than the sum
of the negative amounts, and is otherwise an allowable loss.
(3) For the
period
(a) the positive
amounts for the purposes of this section are the following (as defined in
this section), namely the gross profit (if any) accruing to the participator
in the period, his licence credit (if any) for the period, and any amount
to be credited to him for the period in respect of the expenditure; and
(b) the negative
amounts for those purposes are the following (as so defined) namely the gross
loss (if any) so accruing, his licence debit (if any) for the period, and
any amount to be debited to him for the period in respect of expenditure."
"3(1) Subject
to the provisions of this section and Schedules 4, 5 and 6 to this Act, the
expenditure allowable under this section for any oil field is any expenditure
(whether or not of a capital nature) which, not being expenditure to which
section 4 of this Act applies, is incurred by a person at or before the time
when he is a participator in the field to the extent [subject to subsection
(7) below] that it is incurred for one or more of the following purposes,
namely
(a) searching
for oil anywhere within the area of the field as subsequently determined under
Schedule 1 to this Act or not more than 5,000 metres beyond the boundary of
that area;
(b) making
to the Secretary of State any payment under or for the purpose of obtaining
a relevant licence, not being a payment by way of royalty or other periodic
payment;
(c) ascertaining
(whether before or after the determination of the field under Schedule 1 to
this Act) the extent or characteristics of any oil-bearing area wholly or
partly included in the field, or what the reserves of oil of any such oil
bearing area are;
(d) winning
oil from the field;
(e) measuring
the quantity of oil won or to be won from the field;
(f) in the
case of oil won from the field that was so won from strata in the sea bed
and subsoil of either the territorial sea of the United Kingdom or a designated
area, transporting it [to a place, the details of which do not matter for
present purposes];
(g) the initial
treatment or initial storage of oil won from the field;
(h) disposing
of any oil won from the field which is disposed of crude in sales at arm's
length;
[then follow provisions
inserted after 1975 and of no relevance for present purposes]
- In 1975 there was provision
for abortive exploration expenditure, in section 5, which was replaced in
1983 by a different provision, in the then new section 5A. I will quote from
section 5.
"5(1) Subject
to the following provisions of this section and Schedule 7 to this Act, the
abortive exploration expenditure allowable in the case of a person who is
a participator in an oil field is any expenditure (whether or not of a capital
nature) incurred on or after 1st January 1960 [and before 16th March 1983]
which
(a) was incurred
by that person or, if that person is a company, by that company or a company
associated with it in respect of the expenditure; and
(b) was incurred
wholly and exclusively for the purpose of searching for oil in the United
Kingdom, the territorial sea thereof or a designated area; and
(c) is not,
and is unlikely to become, allowable under section 3 or 4 of this Act for
any oil field,
but so that any
expenditure to which subsection (2) below applies shall not be allowable under
this section except to the extent that it falls by virtue of that subsection
to be treated as incurred wholly and exclusively for the purpose mentioned
in paragraph (b) above."
- Amerada Hess contends
that the case is simple. The abortive holes were drilled within 5000 metres
of the Rob Roy field, and section 3(1)(a) applies. The Commissioners argue
that this provision cannot have been intended to apply to exploration which
was not intended to relate in some way to the field, and that accordingly
the section should be read as subject to an implicit purpose test, as well
as the geographical test, and that purpose test, it is contended, could not
be satisfied.
- I will next set out the
material facts, for which I can summarise what was held by the Special Commissioners.
- Amerada Hess, together
with three other companies, is entitled to explore for and exploit oil and
gas from the area which includes the Rob Roy field under two licences granted
by the Secretary of State for Energy, for blocks 15/21a and 15/21b. The
four companies entitled under these licences are the same, and their shares
are the same under each. They are together referred to as "the participators".
For the purposes of this appeal, Amerada Hess represents the participators.
- The Rob Roy Field was
discovered in May 1984, formally determined by the Department of Energy
in February 1986 and developed over the period from 1986 to 1989. Production
commenced from the field in July 1989. Two other fields, the Ivanhoe and
Hamish fields, were discovered, respectively in October 1975 and January
1988 (and determined respectively in January 1986 and January 1990) within
close proximity of the Rob Roy field. All three fields are exploited using
a single semi-submersible floating production facility (called AH001) stationed
above the Rob Roy field. Amerada Hess is the operator of all three fields
on behalf of the participators and is the "responsible person" for the purposes
of PRT. The participators have continued to conduct exploratory drilling
in the area since determination of these fields.
- Pursuant to a Deed
of Variation to one of the Licences which was granted by the Department
of Trade and Industry in August 1993, the participators were allowed to
avoid the mandatory relinquishment of the licence that would have been required
in June 1993, on the basis that the participators undertook to drill five
further wells no later than June 1996. One of the two exploration wells
which gave rise to the expenditure at issue in this case, Well 53, satisfied
this obligation in respect of one of the wells. Well 53, located approximately
3.5 kilometres to the North-west of the Rob Roy field, was approximately
8,500ft deep. The participators approved the drilling of Well 53 during
the first half of 1994 and the necessary consents were obtained. Drilling
commenced on 28 August 1994. In mid-September 1994, in the light of disappointing
results, Amerada Hess obtained consent to the abandonment of Well 53 and
it was subsequently abandoned pursuant to such consent.
- Well 54, located approximately
2.2 kilometres to the East of Rob Roy field in the Rho B Prospect, was approximately
10,500ft deep. As in the case of Well 53, the intention was that commercial
oil reserves discovered could rapidly be brought into production by means
of a submarine pipeline to AH001, Amerada Hess' production facilities at
the Rob Roy field. The participators approved the drilling of Well 54 during
the second half of 1994 and the necessary consents were obtained. Drilling
commenced on 13 December 1994. At the end of January 1995, following disappointing
results, Amerada Hess obtained consent to the abandonment of Well 54 and
it was subsequently abandoned pursuant to such consent.
- The purpose of the
participators and of Amerada Hess as operator in drilling Wells 53 and 54
was in each case to search for commercial reserves of oil in satellite deposits
of hydrocarbons. Amerada Hess does not claim that the extension of the Rob
Roy field (or of any other existing field) was the purpose of the drilling
of Wells 53 or 54.
- According to evidence
before the Special Commissioners,
"If the Wells [53
and 54] had proven economic oil accumulations, it was understood from communications
with Amerada Hess that the discoveries would have been tied back to the
AH001 production facility on the Rob Roy field, either using these existing
Wells or by drilling dedicated production Wells. As hydrocarbons were not
found evacuation did not need to be considered, but if the Wells had proven
economic oil accumulations it appears likely that any proposals for production
would have led to the consideration of a new field or fields."
- The witness concluded
that:
"When the applications
for consent to drill Wells [53 and 54] were made, the mapping took account
of the geological information available between the field boundaries and
the untested prospects, and it was considered that the prospects were likely
to be entirely separate from the Ivanhoe and Rob Roy fields."
- Amerada Hess claimed
deductions for PRT purposes in respect of expenditure incurred by the participators
in relation to both Well 53 and Well 54. The expenditure involved was both
direct drilling expenditure and associated seismic costs. As regards Well
53 the claim was for £4,464,156 in relation to the PRT chargeable period
beginning 1 July 1994 and ended 31 December 1994. As regards Well 54 it
was for £2,603,085 in respect of the PRT chargeable period beginning 1 January
1995 and ended 30 June 1995. The Inland Revenue Oil Taxation Office disallowed
the entire amount of each claim.
- The provisions of the
1975 Act which I have set out above do not include those concerned with what
is a field, which are contained in section 12 and Schedule 1. Oil fields are
determined by the DTI based solely on geological criteria. An oil field is
a single geological petroleum structure. Its limits are determined by reference
to the known data as to the area of the oil deposit. It may be determined
at one stage and later redetermined. If later drilling shows that the deposit
extends over a larger area than had previously been thought, the area will
be redetermined with more extensive boundaries. Indeed in the case of exploration
within the relevant licence area, at one stage it was thought that Rob Roy
was more extensive, and it was provisionally redetermined as larger, but yet
further drilling showed that the newly discovered deposits constituted a distinct
field, which itself was then determined (as the Hamish field) and Rob Roy
was limited to its original area. Also, the Rob Roy field was originally determined
with a smaller area than it now has, because not all of the deposit lay within
a licensed area. On the grant of the later licence in 1987 for block 15/21b,
the balance of the field became available for exploitation and therefore also
for determination. By the time that Wells 53 and 54 were drilled enough was
known as a result of previous drilling for it to be clear that, if either
of the new wells showed the existence of oil deposits, it was unlikely that
they would be part of Rob Roy. It is to be borne in mind that a licence area
may contain all or parts of more than one field, and that while a field may
lie entirely within one licence area, it may also lie partly within two or
even more licence areas. The Rob Roy field does lie across the boundary of
two licence areas, 15/21a and 15/21b, but this makes no commercial difference,
as it happens, since those interested under the two licences are identical,
and their shares are also identical.
- Mr Brennan for the Commissioners
submitted that unless section 3(1)(a) is read as subject to an implicit limitation,
that the expenditure must be for a purpose related to the field in question,
it does not fit with the rest of the legislation as it stands or as it stood
in 1975, and makes no sense. He points to the fact that all elements of the
PRT regime are related to a particular field subject to few and explicit exceptions.
Section 5, as it stood from 1975 to 1983, was one exception as regards abortive
exploration expenditure, which he points out would have been capable of covering
the cost of drilling Wells 53 and 54, if incurred before 1983. A different
provision replaced this from 1983 to 1993, the details of which I do not need
to consider. By contrast he submits that every element of section 3(1) is
directed at the particular field. He submits that the point of the 5 km provision,
the halo as it was referred to in argument, is that expenditure on the original
finding of the field, and perhaps also on determining the boundaries of the
field, will not be limited to whatever turn out to be the geographical boundaries
of the field once fully known and determined, and the halo provision therefore
allows a margin within which there can be no question that expenditure, albeit
abortive, incurred in relation to the particular field, is allowable. Of course
if an exploratory well results in the finding of oil different questions arise.
If the oil is part of the field which has already been determined (which for
convenience I will label the principal field), that field's boundaries will
be redetermined, and the well will be within the boundaries, as subsequently
determined, rather than within the halo. If the oil is part of a new field,
the cost will relate to that new field, not to the principal field. He submits
that exploratory drilling carried out within the halo but not incurred for
the purpose of ascertaining the extent and boundaries of the principal field
cannot sensibly be understood as within the legislative purpose of section
3(1)(a) when, as regards work done up to 1983, it would have been available
for relief under section 5, and that therefore the halo provision must be
understood as subject to the implicit limitation which he puts forward.
- Of course, if there is
a purpose limitation such as Mr Brennan submits, it would not be necessary
also to have a geographical limitation, but there might nevertheless be some
point in having a hard and fast, if potentially arbitrary, limitation, such
as the 5 km rule, for simplicity and to avoid having to argue about what might
possibly be extreme and unlikely cases where expenditure incurred beyond the
5 km limit was suggested to have been incurred for the purposes of an existing
field, or a field later found, more than 5 km away.
- The Special Commissioners
held that no such purpose limitation is to be implied into the section. From
the citation to which they refer it seems to me that the arguments before
them must have been very similar to those before me. Accordingly I need not
refer separately to their decision.
- Mr Brennan submitted,
and it is not in dispute, that it is no longer correct to approach the proper
interpretation of a taxing statute on a purely literal basis, and that it
is essential to construe the provisions of the 1975 Act in context. He cited
the judgment of Sir John Vinelott in Chevron UK Ltd v. IRC [1995] STC
712 at 721, as follows:
"It can never be right
to look at a specific provision in a taxing Act, any more than in other legislation,
in isolation and to resort to the context and scheme of the Act as a whole,
only if that provision taken in isolation gives rise to an apparent equivocation
or ambiguity. The question whether a literal construction gives rise to an
absurd, unjust or capricious result can be answered only if the particular
provision under consideration is placed in its setting as part of the legislative
scheme. The question must always be whether it can be read in a way which,
taken as part of the Act as a whole, produces a coherent and reasonable result.
There may be cases where 'to achieve the obvious intention and produce a reasonable
result [the court] must do some violence to the words' (see Luke v IRC [1963] AC 557 at 577, 40 TC 630 at 646 per Lord Reid); or, without doing violence
to the words used, the court may be able to avoid an unreasonable result by
the importation of an implied restriction covering the scope of a particular
provision (as in O'Rourke (Inspector of Taxes) v Binks [1992 STC 703). There
is nothing new or revolutionary in this approach to construction, although
in recent years no doubt greater emphasis has been placed upon the need to
discern the legislative purpose and to fit the particular provision under
consideration into a reasonable and coherent scheme and less upon semantic
delicacy. It would be a very rare case when the court would feel compelled
to conclude that although the legislative purpose was clear the legislation
had 'missed fire'."
- He also cited passages
from the speech of Lord Steyn in IRC v. McGuckian [1997] 1 WLR 991
at 999-1000:
"During the last 30
years there has been a shift away from literalist to purposive methods of
construction. Where there is no obvious meaning of a statutory provision the
modern emphasis is on a contextual approach designed to identify the purpose
of a statute and to give effect to it. But under the influence of the narrow
Duke of Westminster doctrine [1936] AC 1, 19 tax law remained remarkably
resistant to the new non-formalist methods of interpretation. It was said
that the taxpayer was entitled to stand on a literal construction of the words
used regardless of the purpose of the statute: Pryce v. Monmouthshire Canal
and Railway Cos. (1879) 4 App. Cas. 197, 202-203; Cape Brandy Syndicate v.
Inland Revenue Commissioners [1921] 1 K.B. 64, 71; Inland Revenue Commissioners
v. Plummer [1980] AC 896. Tax law was by and large left behind as some island
of literal interpretation. ............ On both fronts the intellectual breakthrough
came in 1981 in the Ramsay case, and notably in Lord Wilberforce's seminal
speech which carried the agreement of Lord Russell of Killowen, Lord Roskill
and Lord Bridge of Harwich. Lord Wilberforce restated the principle of statutory
construction that a subject is only to be taxed upon clear words [1982] AC 300, 323 C-D. To the question "What are clear words?" he gave the answer that
the court is not confined to a literal interpretation. He added "There may,
indeed should, be considered the context and scheme of the relevant Act as
a whole, and its purpose may, indeed should, be regarded." This sentence was
critical. It marked the rejection by the House of pure literalism in the interpretation
of tax statutes."
- On this approach Mr Brennan
submits that there would have been no point in the "halo" provision if it
extended to all abortive expenditure, whether or not related to the principal
field, since in 1975 abortive expenditure would have been covered by section
5. He submits that every other element in section 3(1) is related to the particular
field, and submits that, for that reason, and because of the field-related
basis of PRT, and because of the lack of need for relief under section 3(1)(a)
for abortive expenditure which is not field-related, having regard to section
5 (as originally enacted), the "halo" provision should not be read only literally,
but must be understood as also being subject to a qualification of relation
to the principal field. The fact that the section 5 relief is no longer available
does not, he submits, affect the proper reading of section 3(1)(a), especially
when no other legislative purpose can be discerned for the "halo" provision
if it is not field-related.
- He accepts a point made
by the Special Commissioners, that his approach would result in the disallowance
of expenditure incurred in drilling for a field which is thought to lie below
the principal field. As I understand it the determination of fields is done
in two dimensions, though of course they exist in three. It is possible for
two oil fields to exist, one above the other. So far as I can see that particular
point is equivocal.
- Mr Brennan also put forward
anomalies that could result on the Special Commissioners' reading of the halo
provision. He postulated a principal field lying within one licence area of
which the licensees (and so the participators in the field) are H, J, K and
L. The 5 km radius extends into the next licence area, of which the licensees
are H, J, P and Q. The latter drill for oil within that part of their licence
area which is within the halo but do not find it. On a purely geographical
reading, H and J can claim the expenditure against the receipts of the principal
field, but P and Q cannot since they do not share in those receipts (see the
opening words of section 3(1): "is incurred by a person at or before the time
when he is a participator in the field"), and nor can K and L because they
have not incurred the expense. Before 1983 those who incurred the expense
could all have claimed relief under section 5. He submits that, since the
expenditure is not related to the principal field, none of the field participators
ought to be able to claim the abortive expenditure in relation to the profits
of the field, and the only possible claim should be under section 5, up to
1983, or its successor section 5A up to 1993. Other more elaborate examples
can be devised. The oddity of the results of different permutations is increased
by the process of legislative amendment, and in particular by the present
position where a newly discovered field is not subject to PRT at all, while
the principal field, if determined already by 1993, is a taxable field and
is subject to PRT.
- He also pointed out that
a claim for the allowance of expenditure has to specify the shares in which
the participators propose to divide between them the expenditure allowed on
a claim, which must accord with their respective interests in the oil field.
This arises under Schedule 5, which is the main provision for claims, to be
made collectively by the responsible person on behalf of all participators.
(There is also Schedule 6, but that only applies where one participator wishes
to put in its own claim so as not to have to reveal commercially confidential
material to the others.) That does seem to assume that the persons making
the claim to deduct the expenditure will be the same as participate in the
principal field, and that they will have borne the expenditure in the same
shares, which is inconsistent with the example given above.
- When considering the
application of section 3(1)(a) there are various different situations which
might arise. At the earliest stage, no oil has yet been discovered in the
relevant licence area. Exploration is carried out, including first seismic
tests and then drilling, which may not be within, or not entirely within,
an area which is eventually found to constitute an oil field, as later determined.
The halo provision means that all that exploration work, done within the 5
km radius of what is later established as the boundary of the principal field,
is allowable. Once a field has been determined, with given boundaries, exploration
work does not necessarily cease, some of which may be directed at finding
whether the field is more extensive, or simply at ascertaining as precisely
as possible the boundaries. Some of that may be outside the area of the principal
field, both as known and as eventually redetermined. In addition, exploration
work may be carried out near to the field but not in the expectation of finding
an extension to the field, but rather of finding a new field. Sometimes, as
mentioned above, if oil is found, it may not at first be clear whether it
is part of the principal field or a new one. Clearly the halo provision has
a relevance both to the case where a field has not yet been found at all,
but is later found and determined, and to the case where a field has been
found and determined, but may be redetermined later in the light of new data.
- It is fair to say that
every element of section 3(1) has a relationship with the principal field.
It is not correct to say that they are all exclusively related to the principal
field. Paragraph (b) for example covers payments for the licence for the area
which includes the principal field or part of it. A given licence area may
however include all or parts of more than one field (as block 15/21 does).
Likewise, paragraph (c) includes expenditure relating to an oil-bearing area
"wholly or partly included in the field", so again this is not solely related
to expenditure on the principal field itself. However, the licence fee, though
not necessarily related only to the principal field, is at least directly
related to that field, and cannot readily be divided up so that part of it
relates to one of the fields within the licence area and part to any other.
The allowance under (c) is also directly related to the principal field, even
though not necessarily only to that field. By contrast, on the purely geographical
reading, abortive drilling costs such as are at issue in the present case
have no relationship to the principal field other than proximity. On another
aspect of section 3(1) as context, Mr Peacock also pointed to the use of the
phrase "oil to be won from the field" in paragraph (e) and said that if the
legislature had intended to impose Mr Brennan's qualification, or something
like it, it could and would have used the phrase "searching for oil to be
won from the field" either to govern the whole of paragraph (a) or perhaps
only to govern the halo provision.
- Mr Peacock submitted
that the point of the halo provision was to encourage the efficient use of
expensive plant and equipment. As I have mentioned at paragraph 6 (iv) above,
the Rob Roy field is exploited with the use of a single semi-submersible floating
production facility, which is also used for the neighbouring Hamish and Ivanhoe
fields, and this facility could have been used for new fields discovered at
Wells 53 or 54. (Indeed, Ivanhoe, discovered in 1975, was not regarded as
commercially exploitable until Rob Roy was discovered nearby.) Such fields,
which use production facilities located above another field, are known as
satellites. Mr Brennan submitted that, so far from this being the reason for
the halo provision, the legislation first set out to encourage satellite exploration
in the 1983 regime, and I was shown some provisions applying to something
called tariffing, and, by contrast, others in the 1975 Act dealing with long
term assets. I do not find any of these clear enough to provide a sound basis
for any conclusion as to the underlying purpose of the halo provision.
- I accept Mr Brennan's
submission that the geographical interpretation permits the deduction of expenditure
which has no real connection with the principal field other than its proximity
and therefore the prospect that it might economically be exploited together
with that field. I do not accept his submission that, because of this consequence,
and because of the statutory context, section 3(1)(a) must be read as subject
to an implicit qualification that, at any rate, exploration costs incurred
within the halo have to be justified not only by reference to geography but
also as being incurred in relation to the principal field. I accept that the
provision is properly the subject of contextual interpretation. It is, however,
not in any way ambiguous on its literal terms, and therefore an unexpressed
qualification must be justified by some clear process of necessary implication
from the context of the legislative scheme: see Carr v. Armpledge Ltd
[2000] STC 410, Peter Gibson LJ at 416. The fact that the halo provision is
unlike all other parts of section 3(1), in that it can apply to expenditure
which does not have, and was never expected or intended to have, any real
commercial connection with the principal field, does not seem to me to be
a sufficient basis for imposing a limitation which is not expressed and which
would add a requirement for a commercial connection to the geographical criterion.
- I also see force in Mr
Peacock's submission that a purpose-related qualification would be likely
to be very uncertain in its operation in many cases (even if not in the present
case). Particular expenditure incurred in searching for oil in a given place
may be undertaken in the hope or expectation of finding oil which it is thought
would be a new field, or alternatively an extension to an existing field.
In either case oil may be found which is other than was expected. The history
of Rob Roy shows an example of something found and thought to be - even provisionally
determined to be - an extension later turning out to be, and being formally
determined as, a new separate field. Indeed, absent fiscal considerations,
or other external factors, it seems to me that it may often be the case that
a company will drill for oil hoping that it will be there but not necessarily
caring very much whether it is part of an existing field or an entirely new
field, so long as it is commercially exploitable. It is easy to see that,
as regards an operation as expensive as the drilling of oil wells, the possibility,
or otherwise, of a deduction for particular tax purposes of the expenditure
could play an important part in the commercial question whether to undertake
the expenditure in the first place. It would be unsatisfactory if, for example,
the relevant company or companies had to review the decision whether to carry
on with the drilling, possibly on a daily basis, according to the inferences
to be drawn from the results known up to date, depending on the light that
they threw on whether the result of the well, if successful, would be likely
to be a new field or an extension of an existing field.
- Mr Brennan did not seek
to express his proposed qualification in statutory terms. His formula in argument
was that the expenditure had to be for a field purpose, that is to say, for
a purpose related to the principal field. I have not sought to work out how
that might be expressed in appropriate statutory language. Mr Peacock put
forward the following (inserted words in italics) as an expression of Mr Brennan's
proposition:
"searching for oil where
(i) the searching takes place anywhere within the area of the field as
subsequently determined under Schedule 1 to this Act or not more than 5,000
metres beyond the boundary of that area and (ii) the oil is expected to
form a part of the geological petroleum structure which is that field"
- It may be that the purpose
related qualification has only to be satisfied where the searching is within
the halo, rather than within the area of the field itself (though that is
not Mr Brennan's submission), but either way I can accept that there would
often be difficult subjective questions of subjective intent or expectation
to be answered in relation to any drilling which does not achieve its hoped
for purpose. It seems to me that the operation of such a qualification as
Mr Brennan argues for would often be difficult to predict and difficult to
apply. By contrast a purely geographical qualification, confined to the express
terms of paragraph (a), while it may produce some anomalous differences between
otherwise similar cases, is at least certain in its application, for the benefit
both of the Revenue and of oil exploration companies.
- A purpose-related qualification
would itself be unlike anything else to be found in the Act in its application.
In my judgment it is not a legitimate reading of the section. There are a
number of oddities which can arise on the purely geographical interpretation.
Apart from the Revenue's main point on the facts of this case, identified
at paragraph 2 above, the principal examples are described in paragraphs 15
and 16 above. I do not find these sufficient to justify the implication for
which Mr Brennan contends. I conclude that the Special Commissioners' decision
was correct, and I will dismiss the appeal.
