Oil royalties are subject to UK tax

The taxpayer RBC made loans through its Canadian head office to a Canadian oil company S to fund exploration in the UK continental shelf. That company sold its interests to the BP group in exchange for various sums including an entitlement to contingent royalty payments on production from the oil field. S went into receivership and its rights to future payments were assigned to RBC. BP later sold its interests to another company T Ltd which then became responsible for making the payments. It accounted for these as a deduction from its ring-fenced profits of its UK oil exploitation trade. The bank which had written off the loan treated the payments as recovery of the bad debt. HMRC considered the payments were taxable in the UK as profits of a ring-fence trade.

The First-tier Tribunal dismissed the bank’s appeal.

The Upper...