Tax defeat lumbers Shell with £150m bill over gas contract

Shell appealed against an
assessment by HM Revenue
& Customs for petroleum revenue tax payable on gas obtained from the
Brent oil field in the North Sea from 2002.

Petroleum revenue tax came into effect at the end of June in 1975. It is
levied exclusively on oil and gas extracted from the North Sea and is calculated
using methods based on how the oil and gas is produced.

The oil group had entered into a contract with
British Gas in June
1975, just days before the deadline for an exemption from petroleum revenue tax,
to sell all the gas from Brent until 2002, when the field was expected to be
exhausted.

Subsequent re-engineering of the field extended its life, however, prompting
Shell and British Gas to renegotiate their original contract in 2002. The
revised contract acknowledged changes to gas pricing and the longer life of
Brent.

Shell contended that it should still be exempt from petroleum revenue tax, as
it had merely amended the original agreement to recognise pricing changes and
the re-engineering of the Brent field.

But the special commissioners ruled in favour of HMRC, which argued that the
contract had come to an end and that the amendments to the contract in 2002
meant gas was sold under a different contract to the one drawn up in 1975.

‘We conclude that the distinction between rescission and variation of a
contract is not relevant in this appeal. Even if the Appellant were right, and
the 1975 contract was varied, and not rescinded, by the 2002 agreement that does
not mean that the 2002 agreement becomes the 1975 contract or that the 1975
contract as varied by the 2002 agreement is a contract made before the end of
June 1975,’ special commissioners Dr Nuala Brice and John Walters QC said in
their judgement.

Shell is almost certain to appeal, sources said. The group is to meet with
lawyers in a fortnight to discuss how to proceed with an appeal.