First-Tier Tribunal Allows Perenco Appeal: Reaffirming First-Year Capital Allowances and Section 198 Elections in Oil & Gas Transaction

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Case:	Perenco UK Limited v The Commissioners for His Majesty's Revenue and Customs
Court:	First-tier Tribunal (Tax Chamber)
Citation:	[2026] UKFTT 1096 (TC)
Date:	28 July 2026
Judges:	Judge Michaela Snelders and Catherine Farquharson
Subject:	First-year capital allowances for oil and gas ring fence trade expenditure and section 198 elections
Issue:	Whether capital expenditure incurred on acquiring onshore oilfield plant and machinery subsequently sold in part under a pre-determined agreement qualifies for 100% First-Year Allowances under sections 11(4) and 45F CAA 2001, and whether the section 197 anti-avoidance rule overrides a section 198 election fixing disposal value at $2.
Decision:	Appeal allowed (unanimously in favour of Perenco UK Limited); expenditure qualifies in full for 100% First-Year Allowances and section 197 does not override the section 198 election.

Executive Summary

In this significant decision from the First-tier Tribunal (Tax Chamber), Perenco UK Limited ("PUK") successfully challenged closure notices issued by HMRC that had reduced PUK’s 100% First-Year Capital Allowances ("FYAs") claim by £65.4 million and increased its corporation tax liability by £39.1 million across the 2011, 2012, and 2013 accounting periods.

The dispute centred on PUK's acquisition of BP's 67.5% operating interest in the Wytch Farm and Wareham onshore oilfields and its subsequent onward sale of a 17.2% interest to co-participant Premier Oil UK Limited ("Premier") pursuant to pre-emption negotiations. The Tribunal confirmed that PUK obtained full legal and equitable ownership of the plant and machinery, used it in its Ring Fence Trade ("RFT"), and that retaining capital allowances via a nominal $2 section 198 election was a legitimate commercial mechanism rather than a tax avoidance scheme under section 197.

Case Background

On 16 May 2011, PUK entered into a Sale and Purchase Agreement ("BASPA") with BP to acquire the "BP Interest" (comprising operating interests in the Wytch Farm, Wareham, and Kimmeridge onshore oilfields, associated licences, property, and plant and machinery) for $555 million, paying a $500 million deposit on signing. Schedule 2 of the BASPA allocated $386 million (sterling equivalent £250.4 million) to plant and machinery ("Field Facilities").

Following pre-emption assertions by minority co-participant Premier under the Joint Operating Agreements, PUK negotiated and signed an onward sale agreement ("POSPA") on 19 June 2011 to transfer a ~17.2% interest in the fields and Field Facilities ("Disputed Field Facilities") to Premier for $96 million. Because a full pro-rata price would have been ~$139 million, PUK and Premier agreed to bridge Premier's cash constraints by making an election under section 198 of the Capital Allowances Act 2001 ("CAA 2001") fixing the sale price of the Field Facilities at $2, enabling PUK to retain the economic value of the capital allowances.

Completion of the BASPA occurred on 14 December 2011, and completion of the POSPA occurred six days later on 20 December 2011. HMRC issued closure notices reducing PUK's qualifying expenditure from £250.4 million to £185 million.

Case for the Appellant (Perenco UK Limited)

PUK submitted four core legal propositions to establish its entitlement to 100% FYAs:

Entitlement to 100% First-Year Allowances: PUK argued that it incurred capital expenditure of £250.4 million on the provision of plant and machinery for use wholly in its Ring Fence Trade under section 45F CAA 2001.
Acquisition Equals Provision: Citing Samarkand Film Partnership, PUK contended that 'provision' means 'acquisition,' and its purpose in incurring expenditure under the BASPA was to acquire the assets for its operating oil trade.
Absolute Legal and Equitable Ownership: Relying on Melluish v BMI (No 3) Ltd, PUK submitted that acquiring full legal and equitable title on BASPA completion satisfied section 11(4)(b) CAA 2001, irrespective of economic risk allocations or the onward POSPA.
Efficacy of Section 198 Election: PUK argued that section 198 explicitly permits parties to agree on the allocation of fixture values up to historical cost, and that obtaining a tax advantage was not a main purpose of the transaction under section 197 CAA 2001.

Case for the Respondent (HMRC)

HMRC resisted the allowance claim on four alternative statutory grounds:

"Hollowed Out" Ownership: HMRC argued that PUK did not own the Disputed Field Facilities in a 'real and practical sense' under section 11(4)(b) because the benefits, burdens, and economic risks had been retrospectively allocated to Premier from 1 January 2011.
Lack of Sole Trade Purpose: HMRC submitted that PUK incurred the expenditure partly for the purpose of selling the assets on to Premier rather than using them wholly in its Ring Fence Trade under section 45F.
Clawback under Section 45G: HMRC contended that section 45G applied to treat the expenditure as never having been qualifying expenditure because PUK did not actually use the assets in its trade or used them to sell to Premier.
Anti-Avoidance Override under Section 197: In the alternative, HMRC asserted that the POSPA and $2 Election constituted a scheme or arrangement whose main purpose was obtaining a tax advantage, requiring disposal value to be replaced by the notional written-down value.

Key Findings & Judicial Reasoning

The First-tier Tribunal ruled in favour of HMRC on the point of timing but in the end this did not matter:

Timing of Purpose (Section 11(4)): Purpose must be assessed at the date the expenditure results in ownership, 14 December 2011 (BASPA completion) rather than the initial deposit date (16 May 2011).
Trade Purpose, Provision, and Ownership: "Provision" is synonymous with "acquisition". PUK became the absolute legal and equitable owner on completion. Retrospective contractual economic adjustments ("locked box" mechanisms) do not backdate ownership or negate legal title. PUK intended to and did operate the oilfields in its Ring Fence Trade during its six days of ownership (14–20 December 2011), satisfying the requirement that expenditure be "wholly or partly for the purposes of" its trade.
Ring Fence Trade Allowances (Sections 45F & 45G): An intention to sell plant on to a third party does not constitute a separate, non-trade "use" of the asset. The statutory mechanism for onward sales is bringing a disposal value into account under section 61. Because PUK actually used the Field Facilities in its Ring Fence Trade for six days prior to POSPA completion, section 45G did not apply.
Section 198 Election & Anti-Avoidance (Section 197): PUK was entitled to 100% FYAs, meaning its Notional Written-Down Value under section 197 (QE - A) was £0, which is less than the agreed $2 disposal value; section 197 therefore had no practical overriding effect. Subjectively, obtaining a tax advantage was not a main purpose of the POSPA and Election. The Election was a commercial "bargaining chip" to bridge Premier's purchase price shortfall and avoid disruptive pre-emption litigation.

Decision Table Summary for Section 198 Election

The table below details the Tribunal's specific rulings across each contested statutory provision:

Statutory Issue	HMRC Position	Perenco Position	FTT Final Ruling
Section 11(4) Timing of Purpose	Assessed continuously across conditional period up to BASPA completion.	Assessed on 16 May 2011 when $500m deposit was unconditionally paid.	Assessed on 14 Dec 2011 when expenditure resulted in legal/equitable ownership.
Section 11(4) Trade Purpose	Disputed expenditure was incurred to sell assets onward to Premier.	Incurred wholly for its Ring Fence Trade to acquire the entire BP interest.	Satisfied: Incurred at least 'partly for' RFT during period of ownership.
Section 11(4) Provision & Ownership	Expenditure was not 'on provision' and ownership was 'hollowed out' in practical terms.	Expenditure was on acquisition ('provision'); full legal and equitable ownership acquired.	Satisfied: 'Provision' equals acquisition; legal and equitable ownership is determinative.
Section 45F Ring Fence Trade FYA	Onward sale intention prevents facilities from being for use 'wholly' in RFT.	Entitled to 100% FYAs; onward sale is handled via section 61 disposal value.	Satisfied: Onward sale intention is not a separate use; 100% FYAs available.
Section 45G Clawback Rule	Facilities were not used in PUK's RFT or were used to sell to Premier.	Facilities were actually used in PUK's RFT for 6 days prior to POSPA completion.	Satisfied (No clawback): Facilities were used in RFT for 6 days and not for any other purpose.
Section 197 Anti-Avoidance Override	Scheme main purpose was obtaining tax advantage; overrides $2 election.	Valid $2 election; tax advantage was not a main purpose (commercial bargaining chip).	Not engaged / No effect: Notional WDV is £0 (QE - A = 0); obtaining tax advantage was not a main purpose.

Conclusion & Key Implications

This judgment provides robust commercial clarity for corporate acquisitions in the energy and natural resources sectors. By upholding PUK's appeal, the First-tier Tribunal confirmed that pre-determined onward sales and standard oil industry pricing mechanisms (such as economic effective dates) do not invalidate first-year capital allowances or absolute legal title.

Key Commercial & Legal Takeaways

Protection of Section 198 Freedom: The decision confirms that commercial parties remain free to agree fixture elections under section 198 to allocate capital allowances as part of overall deal pricing without automatically triggering section 197 anti-avoidance rules.

Commercial Context Matters for Main Purpose Tests: Utilising capital allowance retention as a 'bargaining chip' to bridge pricing gaps or settle pre-emption disputes does not make tax avoidance a 'main purpose' of the transaction.

Legal Title vs. Economic Risk: The decision reinforces that capital allowances follow legal and equitable ownership, rejecting HMRC's attempt to substitute economic risk allocation for strict legal title.