Shell UK Ltd v Revenue & Customs [2007] UKSPC SPC00624 (02 August 2007)

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URL: http://www.bailii.org/uk/cases/UKSPC/2007/SPC00624.html
Cite as: [2007] UKSPC SPC00624, [2007] UKSPC SPC624, [2007] SPC 00624

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Spc00624

PETROLEUM REVENUE TAX – legislation provides an exemption from tax for gas sold to British Gas under a contract made before the end of June 1975 - Appellant entered into a contract with British Gas on 27 June 1975 and Revenue agreed that gas sold under that contract was exempt from tax –the period of the 1975 contract ended on 31 October 2002 – in March 2002 the Appellant and British Gas entered into an agreement which took the form of amendments to the 1975 contract and which extended its term by ten years – whether gas sold after 31 October 2002 was sold under "a contract made before the end of June 1975" – no – appeal dismissed – OTA 1975 s 10(1)(a)

THE SPECIAL COMMISSIONERS

SHELL UK LIMITED

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS

Respondents

Special Commissioners: DR A N BRICE

JOHN WALTERS QC

Sitting in London on 16 – 24 May 2007

Graham Aaronson QC with Michael Bools, instructed by Herbert Smith Solicitors, for the Appellant

Sean Wilken with Jess Connors, instructed by the Solicitor for HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

The appeal

Shell UK Limited (the Appellant) appeals against assessments to petroleum revenue tax for the six chargeable periods between 31 December 2002 and 30 June 2005 inclusive. The assessments were made by the predecessors of the Commissioners for Her Majesty's Revenue and Customs (the Revenue) because they were of the view that gas sold after 1 November 2002 by the Appellant to British Gas was not exempt from petroleum revenue tax because it was not gas sold under a contract made before the end of June 1975 within the meaning of section 10(1)(a) of the Oil Taxation Act 1975. We were informed that the amount of tax in issue was about £150M.

The legislation

The Oil Taxation Act 1975 (the 1975 Act) imposed a new tax in respect of profits from substances won under the authority of licences under the Petroleum (Production) Act 1934 (the 1934 Act). Section 1(1) of the 1975 Act provided that petroleum revenue tax was charged in respect of profits from oil. Oil was defined as meaning any substance won under the authority of a licence under the 1934 Act. Thus oil includes natural gas. Section 1(2) of the 1975 Act provided that for each oil field the tax was to be charged at the rate of 45 per cent on the assessable profit accruing in any chargeable period from that field. Section 1(3) provided that a chargeable period was half a year. Section 2 contained provisions about the calculation of assessable profits and allowable losses for the purposes of the tax.

The relevant parts of section 10 provided:

"10 (1) In computing under section 2 of this Act the gross profit or loss (if any) accruing to a participator in any chargeable period from an oil field –

(a) any oil consisting of gas sold to the British Gas Corporation under a contract made before the end of June 1975 shall be disregarded; …

and in the following provisions of this section any oil which falls to be disregarded under this subsection is referred to as "excluded oil".

Thus the scheme of the legislation is to charge tax on assessable profits from oil fields. In computing those profits any gas sold to the British Gas Corporation under a contract made before the end of June 1975 is disregarded. We refer to this provision as an exemption from tax as it is referred to in that way in subsequent legislation (namely, in the Gas Levy Act 1981).

Since the enactment of section 10(1)(a) the British Gas Corporation has changed its name twice. Throughout this Decision we refer to it as British Gas.

The issue

The Appellant entered into a contract with British Gas on 27 June 1975 (the 1975 contract). The contract had a fixed term of twenty years beginning with a first delivery date. The first delivery date was 1 November 1982 and so the term of the contract ended on 31 October 2002. The Revenue agreed that all gas sold under the 1975 contract before the end of October 2002 was exempt from petroleum revenue tax. Towards the end of 1999 the Appellant and British Gas entered into negotiations about sales of gas after October 2002 and reached an agreement in March 2002 (the 2002 agreement). The 2002 agreement took the form of amendments to the 1975 contract; in particular, it changed the provisions about price and the quantities of gas to be sold and it extended the term of the contract from twenty to thirty years.

The Appellant argued that gas sold to British Gas after October 2002 was gas sold under the 1975 contract and so was exempt from petroleum revenue tax. The Revenue argued that, as a matter of statutory construction, the purpose of the 1975 Act was to exempt from tax gas sold under contracts which were being negotiated at the time of the passing of the Act. In their view the 2002 agreement was not the same contract as the 1975 contract because its terms were fundamentally different; accordingly gas sold to British Gas after October 2002 was not gas sold under the 1975 contract and so was not exempt from petroleum revenue tax.

Thus the issue for determination in the appeal was whether gas sold to British Gas after October 2002 was "sold under a contract made before the end of June 1975" within the meaning of section 10(1)(a) of the 1975 Act and so was exempt from tax (as argued by the Appellant) or was not "sold under a contract made before the end of June 1975" and so was not exempt (as argued by the Revenue).

The evidence

There was an agreed statement of facts. Twenty-two bundles of documents were produced by the parties. At the hearing reference was made to many of the documents in bundles A1, A2 and A3 and C1, C2, C3 and C4. Very little reference was made to the other bundles.

A witness statement prepared by Mr Philip Lowery, the General Manager of Shell Gas Direct Limited, was admitted in evidence on behalf of the Appellant. Oral evidence was given on behalf of the Revenue by Mr Tony Chanter, a petroleum revenue tax technical specialist employed by the Revenue and by Mr Malcolm Phelps who was also employed by the Revenue.

Expert evidence on behalf of the Appellant was given by Ms Gay Wenban-Smith, B.Sc, M.Sc. Since 1995 Ms Wenban-Smith has been a Managing Consultant and Senior Associate with Gas Strategies Consulting. Before 1995 she spent twelve years with British Gas. Her main report was signed on 14 March 2007 and a supplementary report was signed on 4 April 2007.

Expert evidence on behalf of the Revenue was given by Mr Niall Fitzgibbon Trimble, Managing Director of the Energy Contract Company. Mr Trimble is the author of The Energy Company's UK Gas Market Review and before 1983 he spent some time with British Gas. His main report was dated 28 February 2007 and his supplementary report was dated 4 April 2007.

The facts

From the evidence before us we find the following facts. We have also found it convenient to refer to some relevant legislation within the context of the events at the time when it was enacted.

1964 – The Continental Shelf Act and natural gas

The Continental Shelf Act 1964 (the 1964 Act) contained provisions dealing with the exploration and exploitation of the continental shelf. Section 9(1) contained provisions about the use and supply of natural gas "gotten" in pursuance of a licence under the 1934 Act. Section 9(2) provided that the holder of the licence should not, without the consent of the Minister of Power, use the gas in Great Britain or supply it to any other person at premises in Great Britain. Section 9(3) provided that the Minister of Power should not give such consent unless satisfied that the Area Board (of British Gas) had been given an opportunity of purchasing the gas at a reasonable price.

Although section 9(3) gave British Gas the right of first refusal, in practice the effect of these provisions was that the only purchaser of natural gas in the United Kingdom was British Gas and that natural gas had to be sold to British Gas at a "reasonable price". These provisions were not repealed until the Gas Act 1986. Thus until 1986 the whole British market for natural gas was effectively controlled by British Gas who was the monopsony buyer for the wholesale market, the transporter of natural gas within the United Kingdom, and the distributor and seller of natural gas. As British Gas was owned by the government until privatisation in 1986, the wholesale price of gas was heavily influenced by the government. There was then no spot market for gas and traded wholesale prices for gas were not available.

1968 - the Leman and Indefatigable contract

On 14 December 1968 the Appellant entered into two contracts with British Gas to sell natural gas from the Leman and Indefatigable fields. The Leman contract provided that it was to continue in force up to and including 30 September 1993 "and thereafter until terminated by either party by two years' prior written notice given to the other and timed to expire either on or after 30 September 1993". The Indefatigable contract had a similar provision save that termination was to be on 30 September 1994. Both contracts were subsequently amended and extended.

1970 - the Brent oil field

The Brent oil field is located in the United Kingdom North Sea and is about 150 miles north east of Aberdeen. It was discovered in about 1969 and on 29 July 1970 the Appellant, together with Esso Exploration and Production UK Limited (Esso), became joint licensees of the Brent field under a production licence. Each of the Appellant and Esso hold a 50% working interest in the Brent field. The Brent field is primarily an oil field but natural gas is produced in association with the oil.

1972 – 74 – negotiations leading to the 1975 contract

In October 1972 negotiations began for the sale of natural gas from the Brent field by the Appellant to British Gas. Separate negotiations were conducted between Esso and British Gas with which we were not concerned. During the negotiations with the Appellant, British Gas indicated that it wanted to buy all of the gas from the Brent field which could economically be brought to the mainland and the Appellant indicated that it also wanted the option of selling to British Gas gas from other small fields near the Brent field.

The duration of the contract was also discussed. British Gas wanted a contract for twenty-five years and the Appellant wanted a contract for fifteen years. One provision of the contract was to be that the Appellant would construct a very expensive pipeline to transport the gas from the Brent field to the mainland, and dedicate the use of that pipeline solely to gas sold to British Gas. The Appellant was reluctant to commit to the exclusive use of the pipeline by British Gas for a long period, especially as the price which British Gas was prepared to pay was low by market standards. At that time it was thought that the Brent reserves would justify dedication of the pipeline for about fifteen years. Ultimately a term of twenty years was agreed commencing on a date called the first delivery date.

At that time the Appellant wanted the price and its escalation to be indexed to a mixture of competitive fuels, and to that extent, market-related. However, British Gas pointed out that the "reasonable price" payable under the 1964 Act was not market-related nor cost-related but was a reasonable price which would give the Appellant a good return on its investment and that was all that was required to be reasonable. In the view of British Gas a reasonable price lay somewhere in the low end of the margin between bare cost and market value. It was appreciated that, even if there were to be an escalation provision related to oil or wholesale prices, the price payable would increasingly fall short of the market value of the gas.

We saw a gas production forecast for the Brent field prepared in June 1974 which showed that it was then expected that sales would start in 1978, that production volumes would peak in 1980 and that thereafter volumes would decline until 1990 when sales would cease.

1974 –early 1975 - the proposals for a petroleum revenue tax

The negotiations between the Appellant and British Gas were at an advanced stage when, in August 1974 a representative of the Appellant met the Paymaster General who said that there would be consultation with the oil companies about the structure of a proposed new petroleum revenue tax. On 26 October 1974 the Department of Energy wrote to HM Treasury to say that the Appellant had agreed terms with British Gas (for the sale of gas from the Brent field) yielding no more than a reasonable profit and had asked for assurances that the contract would be sheltered from the forthcoming petroleum revenue tax. The reason why the Appellant asked for these assurances was that the price under the contract had, under the 1964 Act, to be a reasonable price and that was lower than the market price at the time. Also, the tax was primarily addressed to sales of oil, whose price had increased rapidly, but the price of gas was constrained by the 1964 Act.

A meeting was held on 19 November 1974 between representatives of the government and representatives of the gas industry. This was followed by an internal meeting held in the Paymaster General's office on 20 December 1974 when it was reported that the Appellant felt strongly that gas from the Brent field should not be subject to petroleum revenue tax because the price payable by British Gas bore no relation to its energy value because of the monopsony position of British Gas. The proposed contract was to run for twenty years and if it had to be renegotiated there would be further delay. There was a meeting between a representative of the Appellant and representatives of the Paymaster General on 22 January 1975 when it was reported that, if the Appellant did not get exemption from petroleum revenue tax, it would expect the government to instruct British Gas to give the Appellant a higher price. It was noted that the effect of giving an exemption from tax in respect of contracts with British Gas concluded up to some forward date would give the Appellant the option of concluding its contract on the basis of the existing heads of agreement in time to benefit from the exemption or it could let the deadline pass and re-negotiate the price with British Gas. The date of 30 June was suggested as the forward date.

In January 1975 the Oil Taxation Bill was considered in Standing Committee D of the House of Commons. The Tenth Sitting was on 30 January 1975 when the Paymaster General tabled a new clause the purpose of which was to exempt from petroleum revenue tax gas supplied to British Gas under contracts concluded with it by 30 June 1975.

An internal meeting was held at the Department of Energy on 17 February 1975 when it was explained that the 30 June deadline for the petroleum revenue tax exemption was meant to allow time for the conclusion of the final Brent contract with British Gas and it was explained that the already comprehensive heads of agreement could probably be converted quickly into a full contract. On 2 May 1975 the Minister of State at the Department of Energy wrote to the Appellant referring to the statement of the Paymaster General on 30 January 1975 regarding the exemption from petroleum revenue tax of gas supplies which were contracted with British Gas before 30 June 1975.

May 1975 – the 1975 Act

The 1975 Act received the Royal Assent on 8 May 1975 and sections 1, 2 and 10 are briefly summarised in paragraphs 2 and 3 of this Decision. Schedule 2 contained the provisions about the management and collection of the tax. Most of the provisions of the Taxes Management Act 1970 were stated to apply with some alteration. For each chargeable period (of six months) each participator had to deliver a return to the Revenue stating the quantity of oil delivered, the person to whom the oil was disposed of, and the price received or receivable. If it appeared to the Board that an assessable profit had accrued to a participator they made an assessment and gave notice of it to the participator. If the Board were satisfied that the information given in the return was correct the assessment was made in accordance with the return; if the Board were not so satisfied then the assessment was made to the best of their judgment. The tax was payable four months after the end of any chargeable period or, if later, 30 days after the notice of assessment.

The rate of petroleum revenue tax remained at 45% until 1978; in 1979 it was 60% and in 1980 and 1981 it was 70%. From 1982 to 1993 it was 75% and in 1993 it became 50%. It has remained at that rate. After 1993 petroleum revenue tax was not charged on new fields.

27 June 1975 – the contract

The negotiations between the Appellant and British Gas were finalised by a contract signed on 27 June 1975. The parties called this contract the Brent Principal Agreement but we call it the 1975 contract to distinguish it from the 2002 amending agreement. The 1975 contract was an agreement for the sale and purchase of all the natural gas from the Brent field and from some other fields. The gas was to be transported by the Appellant, by a pipeline to be built by the Appellant, from the Brent field to an onshore terminal at St Fergus, Scotland. The maximum rate of delivery was to be one thousand one hundred million (1,100,000,000) cubic feet per day.

The 1975 contract is a very lengthy document of ninety pages. As is to be expected, much of it is of a very technical nature. The main provisions of relevance in this appeal were in:

Article 1 which contained the definitions. Article 1.28 defined "the pipeline" as the pipeline for the transportation of natural gas which was to be established by the Appellant from the Brent field to St Fergus in Scotland.

Article 2 which dealt with the period of the contract. Article 2.1 provided that the contract should come into force on the date it was signed. Article 2.2 provided that the Appellant was to give British Gas not less than three years' notice of the date on which the Appellant anticipated that it would be able to deliver natural gas on contract terms. There was to be a run-in period of not less than ninety days to test the facilities which run-in period should end after thirty consecutive days of continuous delivery. After that the first delivery date was to follow immediately. Article 2.4 provided that the contract should remain in force for a period of twenty years from the first delivery date but could be terminated earlier by either party when it could be shown that the quantities of natural gas available were no longer sufficient to justify the continued operation of the delivery facilities. (It was later agreed between the parties that the first delivery date was 1 November 1982. That meant that the contract period of twenty years ended on 31 October 2002). Unlike the Leman and Indefatigable contracts, there was no provision in the 1975 contract for the contract to continue after the expiry date until terminated by written notice.

Article 3 which dealt with the agreement to sell and the source of supply. It provided that the Appellant agreed to sell and deliver, and British Gas agreed to accept and pay for, all the natural gas to be produced from the Appellant's interest in the Brent field during the contract period. Article 3.2 stated that the recoverable reserves were then estimated at between two million million cubic feet and 3.5 million million cubic feet and the Appellant covenanted that during the contract period it would not sell gas from the Brent field to any other person. Article 3.3 and 3.4 provided that the Appellant had an option to supply gas under the agreement from sources other than the Brent field; the Appellant had to give twelve months' notice of its intention to make such supplies and, once the notice had been given, the Appellant was subject to the same exclusive commitment to supply to British Gas as applied to supplies from the Brent field. Article 3.4(3) provided that British Gas was not obliged to accept delivery of gas from accumulations not associated with oil at rates which exceeded one hundred million cubic feet a day unless the terms (other than price) relating to such supply should have been amended by agreement to terms which were more appropriate. Article 3.5(2) provided that during the contract period the Appellant would not transport natural gas through the pipeline except for gas supplied to British Gas.

Article 6 which dealt with quantities to be sold under the contract. Very briefly, the quantities were initially either five hundred million cubic feet a day or such larger amount not exceeding six hundred and fifty million cubic feet a day as the Appellant should notify to British Gas. Thereafter the quantity for one year was to be the same as for the previous year or such other amount as the Appellant should notify to British Gas being not less than five hundred million cubic feet a day.

Article 9 which dealt with price. Article 9.2 provided that the price should be the arithmetic average of (1) a stated price per therm adjusted by the wholesale price index (output of broad sectors of industry – home sales – all manufactured products) and (2) the lesser of the first price and a second price being the same stated price per therm adjusted by the wholesale price index and further adjusted by 30% of the wholesale price of kerosene as published in "The Petroleum Times", 40% of the price of heavy fuel oil for burning in the electricity industry and 30% of the net selling value of electricity. The effect of these provisions was that there was no increase in price if the wholesale price index did not increase but the price of the other energy indexes did. Conversely, if the other energy indexes fell then that fall was reflected in the price.

On the basis that the recoverable reserves were as stated in Article 3, namely, two million million cubic feet, and that one thousand one hundred million cubic feet were delivered each day (the maximum rate of delivery) the Appellant calculated that the reserves would have been delivered in 1,818 days or 4.98 years. On the basis that the recoverable reserves were 3.5 million million cubic feet then, at the same rate of daily delivery, the reserves would have been delivered in 3,181 days or 8.71 years. If the gas were to be delivered at the maximum rate over twenty years, and if the recoverable reserves were two million million cubic feet, then only 24.9% of the capacity of the pipeline would be used; if the recoverable reserves were 3.5 million million cubic feet and the gas were delivered at the maximum rate over twenty years, then only 43.5% of the capacity of the pipeline would be used.

It was agreed that the price payable under the 1975 contract for natural gas was much lower than the market price for oil. We accept the evidence of Mr Trimble that the price payable by British Gas under the 1975 contract was slightly more than half of the price for gas payable in the international market in 1977/78.

After 27 June 1975 – the construction of the pipeline

After the contract was signed the Appellant started to construct a pipeline to transport gas from the Brent field to an onshore terminal at St Fergus, Scotland. The pipeline is called the Far North Liquids and Associated Gas System pipeline (the FLAGS pipeline). The FLAGS pipeline can transport natural and liquid gas but not oil. The capacity of the pipeline has at all times been greater than that required to transport the natural gas supplied from the Brent field alone. Accordingly, between 1975 and 2001 the Appellant exercised the option in Article 3.3 of the 1975 contract in respect of a number of other fields, including the North and South Cormorant fields, and connections were made to the FLAGS pipeline for the transportation of gas from those fields. However, the volumes of these reserves were small and the gas from the Brent field was 93.6% of all gas delivered by the Appellant to British Gas through the FLAGS pipeline.

The Gas Levy Act 1981

On 18 July 1979 the Price Commission published a report entitled "British Gas Corporation – Gas Prices and Allied Charges". Paragraph 4 stated that in the year 1978-1979 the profit of British Gas before interest and taxation was estimated at £433 million, being 14.7% of total turnover. Profit after interest but before taxation in the same year was estimated at £353 million which represented 12 per cent of total turnover. In paragraph 5.27 the report stated that all the profit on gas activities was forecast to come from non-domestic markets as domestic gas prices had fallen in real terms at a time when the purchase price for gas was increasing rapidly and non-domestic gas prices were being raised in line with oil prices.

On 19 March 1981 the Gas Levy Act 1981 received the Royal Assent. This Act imposed a levy on British Gas in respect of gas purchased by it under a tax-exempt contract which was defined as a contract made before the end of June 1975 for the sale to British Gas of gas won under the authority of a petroleum revenue licence. The purpose of the levy was described in a press release issued by the Department of Trade and Industry on 17 March 1988. The press release stated that the cost to companies (for example, British Gas) of purchasing gas supplies under a contract made before the end of June 1975 was historically substantially less than the prevailing market price. The purpose of the gas levy was to capture for the Exchequer the bulk of the advantage (the economic rent) which would otherwise accrue to purchasers (like British Gas) from buying gas at below market prices.

By 1988 current and expected future gas market prices were relatively low and so the levy was repealed by section 165 of and Schedule 27 to the Finance Act 1998.

1982 to 1986 – privatisation and competition

In the early 1980s the United Kingdom government came to believe that consumers would benefit from the introduction of competition. The Oil and Gas (Enterprise) Act 1982 removed British Gas's statutory right of first refusal to purchase gas and provided for other entities to have access to the pipelines of British Gas. The Gas Act 1986 privatised British Gas; removed its monopoly of supply to large customers, and obliged British Gas to transmit gas through its pipelines for competitor suppliers. It took some years before a significant volume of gas was supplied by new entrants in the British gas market but by 1992 other companies were competing for market share and introducing additional supplies of gas.

1995 – claims for relief for long term asset expenditure

Between 1992 and 1995 very substantial expenditure was incurred by the Appellant in changing the technical methods by which the Brent field was exploited. The redevelopment involved substantial new technological changes to field operations in order to increase overall production. This made it possible for the Appellant and Esso to extract considerably more gas from the Brent field while still maximising the amount of oil which could be recovered. In 1995 the Appellant claimed relief for long-term asset expenditure in respect of the developments in the Brent field.

Section 2 of the 1975 Act described assessable profit for the purposes of the Act. Briefly, this was the difference between gross profit and allowable expenditure. Section 3 provided that allowable expenditure for any oil field was expenditure (whether or not of a capital nature) incurred in a number of stated activities which include searching for oil, making payments under licences, ascertaining the characteristics of any oil-bearing area, winning oil, and closing down the field. Section 4 gave an allowance for expenditure on long-term assets and applied to expenditure (whether or not of a capital nature) in acquiring, bringing into existence or enhancing a capital asset whose useful life would continue after the end of the claim period in which it was first used. After defining excluded oil section 10 went on to provide that excluded oil was not deemed to be oil for the purposes of the allowance of expenditure in sections 3 and 4.

Thus the effect of the 1975 Act was that all expenditure (including capital expenditure) was allowable as a deduction from profit so long as the expenditure was attributable to gas which was not exempt from petroleum revenue tax.

The question then arose as to how much of the long term asset expenditure incurred by the Appellant in the Brent field should be attributable to gas which was not exempt from petroleum revenue tax. The matter was discussed between the Appellant and the Revenue and during those discussions it was assumed that the 1975 contract would come to an end in October 2002 and that thereafter the gas remaining in the Brent field would not be sold under the 1975 contract to British Gas. Shell was then developing its own gas trading arm, Shell Gas Direct Limited (Shell Gas Direct) a wholly owned subsidiary of the Appellant which sold gas to industrial and commercial markets. The gas could have been sold direct to the market through Shell Gas Direct or it could have been sold to British Gas under a contract other than the 1975 contract. In a letter written to the Oil Taxation Office on 10 September 1993 the Appellant referred to "the certainty that the Brent Principal Agreement [the 1975 contract] will terminate no later than 1 November 2002". Accordingly, for the purposes of deciding whether the expenditure on long term assets was allowable expenditure it was then assumed that the capital expenditure was attributed to gas which would be sold after 2002 and which would not be exempt from petroleum revenue tax. Thus the expenditure was allowable expenditure. We were told that the amount of relief which was in fact allowed to the Appellant was £39M.

The Revenue accepted that the attribution of this expenditure to gas which would not be exempt from petroleum revenue tax had been undertaken bona fide and without negligence at the time and there was no provision which would permit them to claw back the expenditure that had then been allowed.

The market for gas after 1995

As noted above, by 1992 new companies were competing for market share in the British gas market and introducing additional supplies of gas. This led to an over supply of gas. Also, the new entrants to the market had lower costs because they did not have commitments to long term contracts and were able to take advantage of the low prices resulting from the surplus. Competition then developed rapidly and the price of gas fell in 1995. This meant that the price payable by British Gas under the 1975 contract became higher than the market price for gas. British Gas started to renegotiate a number of its long term gas contracts but did not, at that stage, seek to re-negotiate the 1975 contract with the Appellant.

1996 –charges for access to the national transmission network

In 1996 a new Network Code was introduced regulating the transportation of gas in the United Kingdom from the beach terminal to the end consumer through the pipes comprising the national transmission system. Access charges were published. Any person (such as British Gas) introducing gas into the system had to ensure that he took out each day the same volume of gas as he had introduced to the system and a penalty was payable if there were any imbalances. Entry capacity at the point of entry into the system had to be booked in advance and the cost of capacity varied according to demands on the system at the time. The charges to introduce gas into the national transmission system at St Fergus were high and were, of course, payable by British Gas.

1997 – the short term trading market and the price indices

By the mid-1990s traded gas prices became collected in a systematic way. A company owned by a Mr Patrick Heren initiated gas market price reporting (known as the Heren Index). In early 1997 the International Petroleum Exchange began to publish end of the day prices (the IPE index) and created a natural gas futures contract. Also in 1997 a short term trading market was established.

The amendments to the 1975 contract

Between 1975 and 2002 the 1975 contract was amended on more than seventy occasions. The parties agreed that it was commonplace for amendments to be made to long term gas sales agreements. On 24 June 1985 the Appellant supplied the Revenue with copies of all previous amendments to the 1975 contract and thereafter, on some occasions, notified the Revenue in advance of intended amendments. Sometimes the Appellant requested confirmation that the proposed amendments would not adversely affect the exemption from petroleum revenue tax. On no occasion before 2002 did the Revenue notify the Appellant that a proposed amendment would adversely affect the exemption. However, the 2002 agreement was not referred to the Revenue before it was signed.

Four of the earlier amendments to the 1975 contract were referred to in the 2002 agreement. These were amendments made on 19 November 1982 (the Brent Field Letter Agreement); 11 July 1986 (the Brent Overdeliveries Letter Agreement); 11 July 1986 (the Wobbe Index Quality Side Letter); and 4 November 1987 (the Differential Removal of Constituents Letter Agreement).

At the hearing reference was made to two other amending agreements. One was made on 10 June 1993 and was called the kerosene agreement. The purpose of this agreement was to incorporate into the 1975 contract the provisions of an agreement made to settle a dispute known as the Brent kerosene dispute. This agreement made substantial amendments to Article 9 of the 1975 contract as it concerned the second price. The references to kerosene were taken out and the method of calculating the second price was changed. We accept the evidence of Mr Phelps that he could not find any documentation to support the view that the Revenue had been asked to comment on these changes.

We also looked at another amending agreement dated 1 December 1997. We were told that this formally incorporated the 1993 kerosene agreement. The 1997 agreement stated that it recorded the settlement of a dispute which had arisen out of the pricing provisions in Article 9 of the 1975 contract. For the contract years 1994/95 and 1995/96 British Gas was to pay the Appellant the amounts of £358,321 and £2,028.710 respectively and with effect from 1 October 1996 Article 9 of the 1975 contract was to be deemed as deleted and replaced with a new Article 9 as set out in a schedule to the 1997 agreement. Briefly, the effect of the agreement was that the first price in Article 9 was changed to the producer price index published by the Office for National Statistics. An alteration was also made to the second price which became a stated price adjusted by 35% of the gas oil price, 35% of the fuel oil price, 15% of the retail electricity index and 15% of the producer price index

The negotiations leading up to the 2002 amendments

As a result of the substantial field development undertaken by the Appellant in the early 1990s the recoverable gas reserves in the Brent field proved to be larger than was anticipated at the time of the 1975 contract. In 1997 it was thought that Brent gas could last until 2010 although it was considered more likely to be depleted sometime between 2008 and 2010. On the revised field life calculations it was apparent that gas would still be available for supply from Brent after 31 October 2002.

At the beginning of 1998 British Gas mentioned to the Appellant that British Gas would be interested in extending the term of the 1975 contract. At a meeting on 12 February 1998 between the Appellant and British Gas the representatives of the Appellant said that a simple renegotiation or extension of the 1975 contract was not an option. At that time the Appellant did not give much thought to an extension but in 1999 the Appellant began to think about the position after 2002. At that time three possible options were considered, namely, an extension to the 1975 contract; no extension and the sale of the gas by the Appellant on the spot market; and no extension and the sale of the gas by the Appellant under short-term contracts. In November 1999 British Gas again approached the Appellant about extending the 1975 contract and mentioned that value could be gained for both parties if that allowed them to keep Brent gas free from petroleum revenue tax. British Gas wanted to move to a market-based figure for price.

In 2000 the Appellant was considering another option, namely a sale of the Brent gas to Shell Gas Direct. It was then thought that it might be possible for Shell Gas Direct to sell gas to British Gas on the spot market. It was also thought that a sale to Shell Gas Direct had a number of advantages one of which was that it removed the risk of having a long-term contract in a changing world. On balance, however, the extension of the 1975 contract was preferred.

At that stage Esso decided that it did not want to enter into any further negotiations with British Gas.

26 March 2002 – the amending agreement

The 1975 contract was due to end on 31 October 2002. On 26 March 2002 the Appellant and British Gas signed an amending agreement which amended the 1975 contract as previously amended. The 2002 amending agreement is a lengthy document of 36 pages. In form it made amendments to many of the Articles in the 1975 contract as previously amended and this form of agreement was designed to ensure that, as far as possible, the exemption from petroleum revenue tax continued. The main changes of relevance to this appeal were:

The period of the contract - Article 3.1 of the 2002 agreement provided that Article 2 of the 1975 contract should be amended by the deletion of the words "twenty years" and their replacement by the words "thirty years". Article 3.2 of the 2002 agreement added a new provision to the effect that either party could terminate the 2002 agreement at any time on not less than twelve months' written notice to the other provided that no such notice could take effect prior to 1 October 2002.

The agreement to sell and the source of supply – Article 4 of the 2002 agreement amended Article 3 of the 1975 contract in minor respects and did not amend the main executory provisions which therefore remained as in the 1975 contract. However, Article 4.3 of the 2002 agreement amended Article 3.5 of the 1975 contract. The provision in Article 3.5(2) of the 1975 contract, that the Appellant would not transport any natural gas through the pipeline except for gas sold to British Gas, was removed and after 2002 the Appellant was free to transport any natural gas through the pipeline even if it were not sold to British Gas.

The quantities to be sold - Article 5 of the 2002 agreement made extensive changes to Article 6 of the 1975 contract as subsequently amended. In particular, there were changes to the system under which the Appellant could request to supply more than the agreed contractual quantity of gas or British Gas could request to take less than the agreed contractual quantity of gas.

The price – Article 8 of the 2002 agreement amended Article 9 of the 1975 contract by providing that the old Article 9 should be deleted and replaced with a new Article 9. The parties intended that so far as possible the new price should be the average market price. The price became the average of the IPE index and the Heren index less the volume weighted average entry price for all monthly capacity bids for entry at St Fergus. From that was to be deducted a discount which was defined in new Article 9.3 as being calculated on delivered volumes of relevant gas. Relevant gas was defined in Article 2.1 as gas which was excluded oil within the meaning of section 10 of the 1975 Act. Thus the discount was only available to British Gas if the gas it purchased was not chargeable to petroleum revenue tax; if it were so chargeable then there was no discount from the price. New clause 9.3(1)(c) provided that in the event that petroleum revenue tax was abolished the discount would not apply.

The 1975 contract – Article 13.1 of the 2002 agreement provided that, save as expressly amended by the 2002 agreement, the 1975 contract remained in full force and effect.

Events after 2002

After 2002 the quantities of gas recoverable from the Brent field declined.

The expert evidence

The expert evidence for the Appellant

For the Appellant Ms Wenban–Smith had been asked to consider two questions. The first was the extent to which gas sales agreements such as the 1975 contract were common in the United Kingdom gas market and the extent to which such agreements would necessitate subsequent variation in order to reflect changes in the commercial environment during their term. The second question was the extent to which the various amendments made by the 2002 agreement served to update the 1975 contract so as to reflect changes in market circumstances and field conditions rather than to effect any fundamental change in the commercial bargain struck between the parties when entering into the 1975 contract.

The opinion of Ms Wenban-Smith was that long term gas sales agreements were created to provide a robust and predictable framework for gas production by the seller and for payments by the buyer. The producer needed to develop a long term arrangement with the buyer in order to secure finance for the major investment required. The buyer needed to supply his customers on a continuing basis. When a long term agreement is made it is only possible to estimate the recoverable gas and no one can be sure when the supply will terminate. There are two types of long term gas supply agreement, namely the depletion contract and the supply contract. Under a depletion contract gas is supplied from a named dedicated reserve and the seller contracts to sell all of those reserves. Under a supply contract the seller will undertake to supply specified quantities of gas to the buyer and the seller does not depend upon any named reserves to do so; he can source the gas where he likes. In a depletion contract a force majeure event can excuse a failure by the seller to provide the gas; in a supply contract a force majeure event does not excuse a failure to supply. In both types of contract the buyer takes the volume risk, that is, he has to pay for all the volumes of gas he has contracted to buy. The price is set to ensure that the buyer can always place his gas in the market and to that extent the seller carries most of the price risk. Ms Wenban-Smith told us in oral evidence that the first supply contract that she knew of in the United Kingdom was made in 1992.

Ms Wenban-Smith was also of the opinion that there was no such thing as a standard long term contract but the key terms were the duration of the contract, the quantities and the price. These were common to both depletion contracts and supply contracts but in depletion contracts the duration of the supply, the profile of the annual quantities and the definition of force majeure events would differ. The duration of the contract could be for up to twenty or thirty years and a depletion contract terminated when it was no longer economic to produce the gas. A supply contract would have a fixed termination date or possibly a fixed total contract quantity. Termination dates could be extended if the parties agreed. The purpose of the price clause was to ensure that the contract remained workable over its intended life and for that reason the price had to change over the term of the contract to ensure that the gas remained marketable by the buyer. Also the seller had to receive a price which represented market value when viewed against competing sources of energy.

As far as changes to long term contracts were concerned Ms Wenban-Smith was of the view that it was normal for events to occur which meant that the parties needed to agree changes to maintain commercial and operational feasibility. At the time of the 1975 contract the parties would have appreciated the need for future variations. In continental agreements there was usually a contractual right for one party to call for price negotiations. This was not common in the United Kingdom which instead contained an indexation mechanism linked to the price of oil and similar products and inflation.

Turning to the changes made in the 2002 agreement, Ms Wenban-Smith was of the view that when competition in the United Kingdom gas market became serious in the mid 1990s the price structure of the 1975 contract was in danger of leaving British Gas "out of the market". Also the changing rules about charging for access to the national transmission system affected the total cost of delivered gas. In addition, the extension of the life of the gas reserves in the Brent field meant that amendments to the 1975 contract were needed to manage the run-down of production. She concluded that the 1975 contract needed amendment from time to time to reflect changes in market circumstances and, in her view, the amendments made by the 2002 agreement served to update the 1975 contract rather than to effect a fundamental change in the bargain between the parties.

Ms Wenban-Smith had prepared a graph (figure 7) comparing the contract price calculated in accordance with the 1975 contract and the contract price calculated in accordance with the 2002 agreement. This showed that the price under the 1975 contract remained at all times relatively flat but the price under the 2002 agreement was always more volatile and fluctuated around the flat price, being sometimes more and sometimes less. However, after January 2004 the amended 2002 price started to climb and by January 2006 the price under the 2002 agreement substantially exceeded that under the 1975 contract. She concluded that, in amending the price formula in 2002, the parties did not then intend to change the commercial balance of the 1975 contract with regard to price.

The expert evidence for the Revenue

For the Revenue Mr Trimble had been asked to compare the terms under which the Appellant sold gas to British Gas from the Brent field before 2002 with the terms for such sale after 2002 and to give his opinion on the extent and the significance of any differences.

In the opinion of Mr Trimble the changes made between 1975 and 2002 were mostly fairly routine and did not fundamentally change the nature of the deal between the parties which remained essentially unchanged until 2002. However, the differences between the 1975 contract and the 2002 amendments were substantial, especially as concerned price where the basis of the calculation had changed entirely; the 2002 changes to price were much greater than any of the previous changes. Other significant changes were the new rights in 2002 for both parties to terminate the contract before the end of the contract period; the reduction of the right of British Gas to determine daily quantities and the increase of the Appellant's right to do so; and the ending of the exclusive dedication of the FLAGS pipeline to sales to British Gas.

Mr Trimble concluded that the terms under which the Appellant sold gas to British Gas after 1 November 2002 were significantly different from the terms before that date and that the contractual changes introduced by the 2002 agreement were much more significant than any changes introduced before that date.

The views of both experts

Both expert witnesses accepted that, when the 1975 contract was entered into, the Brent field had a life expectancy for gas of between thirteen and fifteen years. Both accepted that subsequent changes in technology, and the development work undertaken by the Appellant in the early 1990s, made it possible to extract larger quantities of gas than had been thought possible in 1975. And both accepted that between 1975 and 2002 there was a major change in the market for gas moving from British Gas being a monopoly purchaser with regulated prices in 1975 to free competition with prices based on a quoted market in 2002.

The "Zielinski Baker" point

Shortly after the hearing, on 1 June 2007, our Clerk wrote to the parties informing them that since the hearing we had noticed the case of Customs and Excise Commissioners v Zielinski Baker & Partners Ltd. [2004] UKHL 7; [2004] STC 456 and that that case dealt with the construction of a statutory formulation – the definition of "protected building" in Note (1) to Group 6, Schedule 8, VAT Act 1994. The parties were informed that it had occurred to us that the approach of the House of Lords in that case might be relevant to the question of statutory construction arising in this appeal and they were invited to make any written submissions on this point which they thought it appropriate to make.

In response, we received written submissions on this point from both parties, sent on 22 June 2007. We comment on them below.

The arguments for the Appellant

For the Appellant Mr Aaronson's primary argument was that, as a matter of the law of contract, the 2002 agreement was the same contract as the 1975 contract and gas sold under the 2002 agreement was therefore gas sold under the 1975 contract. The essential nature of the 1975 contract was that the Appellant would sell to British Gas all the reserves of gas in the Brent field and the assumption in 1975 was that all the reserves would have been delivered well within the term of twenty years. When it became clear that, as a result of the field improvements made by the Appellant in the late 1990s, more reserves were available, then the 1975 contract was amended in 2002 so as to extend its term and that was consistent with the underlying intention of the 1975 contract.

In support of this argument Mr Aaronson contended that the 1975 Act had been introduced into an existing system of common law with principles for determining whether an existing contract was varied or was rescinded by a new agreement. He cited Morris v Baron [1918] AC 1; British and Beningtons Limited v North Western Cachar Tea Company Limited [1923] AC 48; Royal Exchange Assurance v Hope [1928] Ch 179; United Dominions Corporation (Jamaica) Ltd v Michael Mitri Shoucair [1969] AC 340; and British Broadcasting Corporation v Kelly-Phillips [1998] 1 All ER 845 for the principle that, although as a matter of strict logic any variation of a contract might be seen as a new contract, nevertheless if the parties bona fide intended the original contract to continue then a variation, or extension of the term of, a contract would be treated as the amendment of the original contract and not the creation of a new contract; the intention of the parties to create a new contract could either be express or would be implied if the variation went to the root of the original contract so that the new contract was inconsistent with the original contract. He distinguished Samuel v Wadlow [2007] EWCA Civ 155 (CA) where the distinction between the variation and the rescission of a contract had little commercial relevance; in the present appeal it had a great deal of relevance.

With those principles in mind Mr Aaronson argued that, in this appeal, the parties had expressly intended not to create a new contract and the 2002 amendments merely up-dated the 1975 contract so as to reflect changes in developments of the Brent field and in the gas market. It was the intention of the parties that the 2002 agreement was a variation and not a rescission. Next Mr Aaronson argued that the creation of a new contract could not be implied because the 2002 changes did not go to the root of the 1975 contract and were not inconsistent with the 1975 contract and the expert evidence of Ms Wenban-Smith supported that view. Also, the 2002 amendments were not executory and (in order to function contractually) the 2002 agreement required the executory clause in the 1975 contract.

Mr Aaronson went on to argue that, following Prudential Assurance Co Ltd v Inland Revenue Commissioners [1993] 1 WLR 211 and HSBC Life (UK) Ltd v Stubbs [2002] STC (SCD) 9, if the parties had genuinely chosen one route to effect a transaction, rather than a different route, then tax should be assessed according to the route they had chosen. He also relied upon Welsh Development Agency v Export Finance Co Ltd [1992] BCLC 148 for the principle that the nature of an arrangement could not be determined by the label used by the parties but had to be determined by its effect as a matter of commercial law; it was necessary to examine the agreement as a whole and the nature of the relationship created by the parties.

Finally (so far as his submissions at the hearing were concerned) Mr Aaronson cited Mellhuish v BMI (No.3) Ltd [1996] 1 AC 454 at 481E and Regina v Secretary of State for the Environment, Transport and the Regions, ex parte Spath Holme Ltd [2001] 2 AC 349 for the principle that one could only refer to Hansard if the language of the legislation was ambiguous or would lead to absurdity and if there was a ministerial statement which addressed the issue and determined it. He argued that in the present appeal the language of the legislation was clear and not ambiguous and did not lead to any absurdity. Further there was no ministerial statement which addressed the question whether an amendment or extension of a contract, which had been made before the end of June 1975, was covered by section 10(1)(a). He accepted that Hansard contained some interesting background information but argued that it should not affect our decision.

In relation to the "Zielinsky Baker" point, the written submissions of Mr. Aaronson and Mr.Bools were in summary as follows. Ascertaining what is the appropriate purposive reading of section 10 of the 1975 Act is very unlikely to be assisted by consideration of the approach adopted by Lord Walker in ascertaining the meaning of certain provisions in the VAT Act 1994. The well-known statement of Romer LJ in Bullock v Unit Construction (1959) 38 TC 712 at 371 was cited in support (as follows):

"Judicial language is only authoritative insofar as it is directed to the particular subject-matter which is present to the speaker's mind; and whatever its apparent width, it has no force, even persuasive, outside the limits of its intended application"

The statutory provision falling to be construed in Zielinsky Baker was the definition of "protected building" in Group 6, Schedule 8, VAT Act 1994. The definition was as follows:

"A building which is designed to remain as or become a dwelling or number of dwellings … and which … is – (a) a listed building, within the meaning of the Planning (Listed Buildings & Conservation Areas) Act 1990"

Mr. Aaronson and Mr. Bools noted that the majority in the House of Lords regarded the statutory language as compelling and that it required the building concerned to be (or become) a dwelling and also a listed building. They held that the definition of "protected building" imposed these cumulative requirements.

Referring specifically to Lord Walker's analysis, Mr. Aaronson and Mr. Bools noted that he had said (at ibid. [40]) that the statutory requirements for zero-rating in this context had three elements, or, as he termed it, 'pieces' or 'integers'. A "protected building" meant (1) a building; (2) which was designed to remain as or to become a dwelling; and (3) which is a "listed building" within the Planning (Listed Buildings & Conservation Areas) Act 1990 ("the 1990 Planning Act").

Lord Walker had noted that element or integer (2) – the dwelling house requirement – could not be satisfied on the facts of Zielinski Baker unless element or integer (1) – the building – was to be given the same extended meaning (to treat as a single building all buildings within the same curtilage) which applied to element or integer (3) – the requirement that the building should be a "listed building" within the 1990 Planning Act.

Lord Walker's conclusion was that relating the statutory fiction inherent in element or integer (3) to element or integer (1) was not justified either by the language or purpose of the relevant zero-rating legislation. As to language, he described the operation that would be involved in reflecting that fiction back on to element or integer (1) as amounting to an extension "in an unusual and awkward fashion" of the natural meaning of the simple expression "a building". As to purpose, the majority of the House of Lords had agreed that zero-rating was to be permitted primarily in relation to housing, with support of the national heritage being a subordinate objective (ibid. at [42]).

Mr. Aaronson and Mr. Bools submitted that any relationship between the statutory provisions under consideration in Zielinski Baker and those in section 10 of the 1975 Act can only be by way of contrast. They noted that the three elements in section 10 are (1) oil consisting of gas; (2) a sale of that gas to British Gas; and (3) the sale to be under a contract made before the end of June 1975. They argued that the key point is that the recognition of the concept of varying a contract rather than entering into a new contract is inherent in the provisions of section 10 and that, therefore, the only real issue so far as concerns the interpretation and application of section 10 is whether the particular amendments which were made in 2002 were of such a nature as to require the conclusion that the previous contract was brought to an end and a new contract was then entered into. They submitted that this exercise does not involve any deeming or statutory fiction or any extension "in an unusual and awkward fashion" of the statutory concept (to quote Lord Walker in Zielinski Baker). It involves instead the application of legal principles which were settled law at the time when section 10 was enacted, and which remain settled law. They submitted that, by contrast with the provision in issue in Zielinski Baker, in the present case the language is clear, the relevant contract law principles are clear, and applying the meaning of the statutory language against the relevant contract law background leads to a conclusion which is consistent with the intention of Parliament.

The arguments for the Revenue

For the Revenue Mr Wilken argued that this appeal raised a matter of statutory interpretation and that it had not been the intention of Parliament, when enacting section 10(1)(a) of the 1975 Act, to exempt from petroleum revenue tax gas sold under the 2002 agreement. The terms of the 2002 agreement were fundamentally different from those of the 1975 contract especially as regards price, quantities and term and the 2002 agreement introduced wholly new obligations. Indeed, the 2002 agreement assumed that petroleum revenue tax might be payable in respect of gas sold under the 2002 contract because the amended Article 9 gave a discount to British Gas which was only payable if the exemption from tax applied. He concluded that the 2002 agreement was a contract on its own and gas sold under the 2002 agreement was not gas sold under a contract made before the end of June 1975 within the meaning of section 10(1)(a).

Mr Wilken's primary argument was that, as a matter of statutory construction, section 10(1)(a) was not ambiguous. He cited Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51 at [28] to [32] for the principle that one should have regard to the purpose of a statutory provision and interpret its language, so far as possible, in a way which best gave effect to that purpose. He argued that the purpose of the section was to exempt from tax contracts which were being negotiated in 1975, specifically the then proposed contract between the Appellant and British Gas. It was then known that the 1975 contract would bind the Appellant to supply gas for twenty years and no longer from which it followed that gas supplied after the end of the 1975 contract (that is after 2002) was not gas sold under a contract made before the end of June 1975. Also, the 1975 contract had no provision for its extension and, in his view it was a supply contract and not a depletion contract unlike the Keman and Indefatigable contracts. Also, the 1975 legislation was enacted on the basis that the price would be a regulated price whereas after 2002 the price was a market price. Mr Wilken relied on the fact that, when claiming the expenditure for long term assets in 1995, the Appellant had been of the view that gas sold after 2002 would not be exempt from petroleum revenue tax. He referred to section 1 Finance Act 1999

Mr Wilken then went on to argue that the suggestion of the Appellant, that the section should be construed in the light of the then existing contract law, could mean that the section could be regarded as ambiguous in which case he relied upon Pepper v Hart [1993] AC 593 at 620C to G and 634C to F for the principle that reference was permissible to Parliamentary material as an aid to statutory construction where legislation was ambiguous. He argued that all the references he wished to make consisted of a minister speaking to what became section 10 and so the strictures in Mellhuish did not apply. He distinguished Spath Holme which concerned the construction of a discretionary power which was not relevant in the present appeal.

Mr Wilken accepted that the parties intended to amend the 1975 contract because they wanted to save tax but argued that such intention did not mean that the 2002 agreement was the same contract as the 1975 contract; the fact was that the 1975 contract expired on 31 October 2002 and contained no provision allowing for its extension. He distinguished Morris v Baron, Beningtons, Hope and Shoucair because in those cases one party to a contract desired to terminate it and relied upon the technical argument of unenforceability to evade his obligations. The judgments of the courts had been given in those circumstances. The position in this appeal was different because here the contracting parties agreed to amend their contract in order to save tax. Mr Wilken relied upon the judgment of Lord Devlin in Shoucair at 347C for the principle that the Morris v Baron line of cases were addressing the problem of unenforceability (which was not relevant in this appeal) and should be confined to that problem. He relied upon Samuel v Wadlow, a very recent judgment of the Court of Appeal, for the principle that the application of the principles in Morris v Baron should not be extended. He also argued that there was nothing in the Morris v Baron line of cases that said that, where there was an amendment, the amended terms were treated as made at the time of the original contract nor was there anything which said that the amendments were to be treated as always being there.

However, Mr Wilken argued that, even if the Morris v Baron line of cases did apply, then in this appeal the variations in the 2002 agreement went to the root of the 1975 contract and were inconsistent with it; it was impossible that both contracts could be performed together. Mr Wilken distinguished Hope which, he argued, turned on matters of insurance law for which he relied upon the speech of Lord Hanworth at page 191 where he stated that the subject-matter of the risk was not changed. He also distinguished Kelly–Phillips on the ground that it concerned a particular section in the Employment Rights Act.

Mr Wilken accepted that, if so permitted by the legislation, a taxpayer could do something in a tax-efficient way.

Mr. Wilken and Ms. Connors made submissions in writing on the "Zielinsky Baker" point. They submitted that in Zielinski Baker their Lordships had declined to give statutory words which had an ordinary meaning, an artificially extended meaning imported from another area of law and that Zielinsky Baker supports the Revenue's case in this appeal, especially as adopting the ordinary meaning of the words of section 10(1)(a) of the 1975 Act, rather than an artificially extended meaning imported from the law of contract, does not produce odd or unreasonable results. They contended that Zielinski Baker was inconsistent with the approach contended for by the Appellant.

Mr. Wilken and Ms. Connors accepted that the 1975 Act and the VAT Act 1994 are not in parallel terms and are not to be read together, but they submitted that guidance as to the correct approach to be adopted to the arguments in this appeal was to be derived from Zielinski Baker.

In particular, they submitted that rather as section 1(5) of the1990 Planning Act gave an extended meaning to the word "building", Morris v Baron may be said to give an extended meaning to the word "contract" in a case where a contract is amended by a subsequent contract of variation and the changes made by the contract of variation do not go to the root of the original contract.

They submitted that the parallels between the case put forward by the Appellants in this appeal and the case put forward by the unsuccessful taxpayers in Zielinski Baker were clear. The taxpayers in Zielinski Baker had to say that the extended meaning of "building" from section 1(5) of the 1990 Planning Act was to be imported into the definition of "protected building" with the result that alterations to an outbuilding within the curtilage of a listed building which was a dwellinghouse were to be treated as alterations to the listed building. So, they argued, the Appellant must say that the extended meaning of "contract" from Morris v Baron is to be imported into section 10(1)(a) of the 1975 Act, with the result that gas sold under a contract which did not exist at the end of June 1975 is gas sold under a contract made before the end of June 1975.

Mr. Wilken and Ms. Connors submitted that, in the same way as the draftsman of the definition of "protected building" in the VAT Act 1994 had directed the reader's attention to the building which was the subject of the approved alteration, so the draftsman of section 10 had directed the reader's attention in the first place to the gas itself, that is, the actual gas won by the Appellant and sold to British Gas. The Revenue's case is that the ordinary meaning of "gas sold under a contract made before X date" requires that the relevant sale obligations must have been present in a contract which was made before X date. In contrast, Mr. Wilken and Ms. Connors argue, the Appellant's case is that we should undertake a "heroic piece of deeming" (to quote Lord Hoffman in Zielinsky Baker) and "infect" the ordinary meaning of the words in section 10(1)(a) with the extended concept, derived from Morris v Baron, that an amended contract is the same contract (for relevant purposes) as an unamended contract.

Adapting Lord Walker's analysis in Zielinsky Baker, Mr. Wilken and Ms. Connors submit that the Appellant's approach requires that the third integer, that the contract of sale was made before the end of June 1975, must be satisfied either by backdating the date of the amended contract from 2002 to 1975, on the basis that it is to be treated as the same contract as the 1975 contract as that contract stood at the end of June 1975, or by treating the obligations in the amended contract as reflected back into the unamended 1975 contract. They submit that that argument ought to be rejected because the expression "sold under a contract made before X date" is a simple expression with a natural meaning and the exercise on which the Appellant relies (as explained in the previous sentence) extends the natural meaning of that simple expression in an unusual and awkward fashion, and there is no good reason for adopting such an unnatural construction.

Reasons for decision

The issue for determination in the appeal is whether gas sold to British Gas after October 2002 was "sold under a contract made before the end of June 1975" within the meaning of section 10(1)(a) of the 1975 Act and so was exempt from tax (as argued by the Appellant) or was not "sold under a contract made before the end of June 1975" and so was not exempt (as argued by the Revenue).

The ordinary meaning of the statutory words

We first state that, in our view, the ordinary meaning of the words "a contract made before the end of June 1975" does not include an agreement made in October 2002. Under the 1975 contract the Appellant had to sell and deliver gas to British Gas up to the contract quantities until 31 October 2002. That obligation came to an end on 31 October 2002. Thereafter gas was sold under the 2002 agreement and not under the 1975 contract.

A purposive construction

In approaching the arguments of the parties about the a construction of section 10(1)(a) we have followed the guidance of the House of Lords in Barclays Mercantile (2005) at paragraphs 28 to 32. There Lord Nicholls summarised the modern principles of statutory construction. One must have regard to the purpose of a particular provision and interpret its language, as far as possible, in a way which best gives effect to that purpose (paragraph 28). The courts are not confined to a literal interpretation and words should be considered within the context and scheme of the relevant Act (paragraph 29). The essence of the new approach is to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction answers to the statutory description (paragraph 32).

Applying those principles to the facts of the present appeal we first ask what was the purpose of section 10(1)(a)?. At the time of the enactment of the 1975 Act it was known that, as a result of the 1964 Act, British Gas was a monopsony purchaser of gas in the United Kingdom. It was also known that British Gas could purchase gas at a "reasonable price" which at the time was less than the market price. It was also known that some contracts to supply gas to British Gas were in the course of negotiation and that, if the tax were to become chargeable, the agreed price might have to be re-negotiated. Thus it is clear that the purpose of section 10(1)(a) was to exempt from tax gas sold under a contract with British Gas where the price was not the market price but was the regulated price under the 1964 Act and where the price had been negotiated before the impact of the tax was known. That was the transaction to which section 10(1)(a) was intended to apply.

We then ask whether the 1975 contract as amended in 2002 answers the statutory description and we do not think that it does. The 2002 agreement was freely negotiated at time when British Gas was only one of a possible number of purchasers. Also, at that time there were no restrictions on the price payable for the gas. The parties agreed that the price should be the market price and were at liberty to take account of the tax in fixing the price payable under the agreement. If the 1975 contract had been signed on 1 July 1975 and not on 27 June 1975 then the gas sold under the contract would not have been exempt. In our view there is no statutory reason for treating gas sold under the 2002 agreement in any way differently from gas sold under an agreement signed on 1 July 1975.

We therefore conclude that a purposive construction, where the words of section 10(1)(a) are considered within the context and the scheme of the 1975 Act, leads to the conclusion that the words "a contract made before the end of June 1975" do not include the 2002 agreement.

Mr Aaronson, for the Appellant, relied upon Regina (Quintavalle) v Secretary of State for Health [2003] UKHL 13 for the principle that, in applying legislation to facts which could not have been envisaged when the legislation was introduced, the courts could not ask what Parliament would have enacted if it had known of future developments. He argued that in 1975 Parliament would have intended the exemption in section 10(1)(a) to apply to the 2002 agreement because it would have thought that British Gas, as an arm of the Government, would not enter into an amending agreement if the government did not wish to extend the exemption. Mr Wilken for the Revenue distinguished Quintavalle on the ground that in this appeal the answer was to be found in the terms of the Act itself; it was not necessary to fill any gaps in section 10(1)(a).

Quintavalle concerned the interpretation of the Human Fertilisation and Embryology Act 1990 (the 1990 Act) which prohibited the licensing of the creation of a cloned human embryo by substituting the nucleus of a fertilised egg with the nucleus of an adult human cell, which was then the only known method of creating a cloned human embryo in vitro. After the date of the legislation scientists developed a method of cloning by which an embryo was created by introducing a nucleus from an adult human cell into an unfertilised egg from which the nucleus had been removed. This was called cell nuclear replacement and regulations were introduced to licence the creation of such embryos. The issue was whether the creation of embryos created by cell nuclear replacement were prohibited, or regulated, by the 1990 Act. At paragraph 6 Lord Bingham considered the approach to interpretation and at paragraph 10 he referred to the guidance given by Lord Wilberforce in Royal College of Nursing of the United Kingdom v Department of Health and Social Security [1981] AC 800 at page 822 where Lord Wilberforce said:.

""In interpreting an Act of Parliament it is proper, and indeed necessary, to have regard to the state of affairs existing, and known by Parliament to be existing, at the time. … when a new state of affairs, or a fresh set of facts bearing on policy, comes into existence, the courts have to consider whether they come within the parliamentary intention. .. In any event there is one course which the courts cannot take, under the law of this country; they cannot by asking the question "What would Parliament have done in this current case – not being one in contemplation – if the facts had been before it?" attempt themselves to supply the answer, if the answer is not to be found in the terms of the Act itself."

We are assisted by the words of Lord Hoffmann in Quintavalle at page 705D paragraph 36 where he said that a decision about whether a statute applies to unforeseen circumstances does not involve speculation about what Parliament would have done; it is a decision about what best gives effect to the policy of the statute as enacted. Again at paragraph 39 Lord Hoffmann said that the search is for what Parliament did intend, not what it would have intended had it foreseen later developments.

In our view the policy of the 1975 Act when enacted was to exempt from tax gas sold under a contract negotiated and made before the end of June 1975 with the then monopsony purchaser, British Gas, where the price payable was the statutory "reasonable price" which had been negotiated before the impact of the tax was known. The policy was not to exempt from tax gas sold under an agreement freely negotiated in 2002 to a purchaser (British Gas) who was one of a number of possible purchasers at what was a market price negotiated at a time when the impact of the tax was known.

Is the difference between variation and rescission relevant?

Mr Aaronson, for the Appellant, relied very heavily on the argument that, in interpreting section 10(1)(a) we should assume that Parliament intended that the existing contract law about the rescission and variation of contracts would be applied. It was his argument that the 2002 agreement was a variation, and not a rescission of the 1975 contract; it was, therefore, the same contract. In deference to the heavy reliance placed on these arguments we therefore consider the authorities cited to us to see what principles they establish.

In Morris v Baron (1917) the issue was whether a written contract for the sale of goods, which was required by section 4 of the Sale of Goods Act 1893 to be evidenced in writing, could be rescinded by a parol agreement or whether the parol agreement, being unenforceable, had to be wholly disregarded and the original contract maintained. In that case there had been a written contract to supply 500 pieces of cloth and later the contract was altered by a parol agreement. The House of Lords held that a written agreement could be rescinded by a parol agreement, even though the latter was unenforceable, so long as there was a clear intention to rescind as distinguished from an intention to vary the written contract while leaving it subsisting. There was considerable discussion as to the differences between the rescission of a contract on the one hand and a variation of a contract on the other. At page 19 Lord Haldane, talking of "a total abandonment or rescission" said:

"What is, of course, essential is that there should have been made manifest the intention in any event of a complete extinction of the first and formal contract, and not merely the desire of an alteration, however sweeping, in terms which still leave it subsisting."

At page 25 Lord Dunedin said:

"The difference between variation and rescission is a real one, and is tested to my thinking by this: in the first case [variation] there are no such executory Articles in the second arrangement as would enable you to sue on that alone if the first did not exist; in the second [rescission] you could sue on the second arrangement alone and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject matter as the first but in a different way, it is impossible that the two should both be performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself."

At page 31 Lord Atkinson said:

"Moreover, rescission of a contract, whether written or parol, need not be express. It may be implied, and it will be implied legitimately, where the parties have entered into a new contract entirely or to an extent going to the very root of the first [and] inconsistent with it."

And at page 37 Lord Parmoor said:

"It is necessary … to inquire whether the conditions have been so changed in their essential character that there is a substantial inconsistency, such as to lead to the inference that the parties did intend to rescind the earlier contract … ."

From these passages we derive the principles that, for there to be a rescission as distinct from a variation, the parties must have intended the complete extinction of the original contract. Such an intention will be implied where the new contract either entirely or to an extent goes to the very root of the first contract and is inconsistent with it. If there are no executory clauses in the second contract it will be a variation rather than a rescission. It also appears that there will be a rescission where the second contract deals with the same subject matter as the first but in a different way so that it is impossible that the two should both be performed or where the conditions in the first contract have been so changed by the second contract that there is a substantial inconsistency between the two.

In Beningtons (1923) the issue also was whether a parol agreement operated as an implied rescission of a written contract for the sale of goods, which was required by section 4 of the Sale of Goods Act 1893 to be evidenced in writing. There were written agreements by sellers of tea to supply tea in London but the place of delivery and the price were later altered by oral agreement. The House of Lords applied the principles in Morris v Baron and held that, as there was no evidence of any intention to rescind the original contract, the parol agreement did not operate as a rescission. At page 62 Lord Atkinson said:

"A written contract may be rescinded by parol either expressly or by the parties entering into a parol contract entirely inconsistent with the written one, or, if not entirely inconsistent with it, to an extent that goes to the very root of it."

At page 68 Lord Sumner held that the original contracts were, at most, intended to be subjected to a variation or alteration as to the manner and measure of performance of the original terms; the change did not go to the very root of the original contract nor was it inconsistent with them He added:

"It was, however, argued before your Lordships that, even so, the old contracts were discharged because a varied contract is not the old contract, and as you cannot have a new and varied contract regulating the same thing at the same time, the old contract, like other old things, must be disregarded. As a matter of formal logic, this may possibly be so, but such was not the view taken by this House in Morris v Baron since, if their Lordships had thought that any variation whatever would make a new contract and discharge the old one they would have said so expressly and would not have dealt with the extent and completeness of the changes, as they did. The variation maybe a new contract, so as to make writing duly signed indispensable to its admissibility for this is a matter of form and of the words of the statute, but the discharge of the old contract must depend on intention tested in the manner settled in Morris v Baron."

In Royal Exchange Assurance v Hope (1927) an assured assigned the benefit of an insurance policy to pay a sum in the event of his death before 31 July 1926. In July the insurance company, by endorsement on the policy, extended the term of the policy to 31 October 1926. The assured did not assign the extension and died on 1 October 1926. The issue was whether the assured's executors or the assignee was entitled to the benefit of the policy. The executors argued that the extension of the policy was a new contract which had not been assigned. The Court of Appeal held that that the extension of the policy was not a new contract of insurance but a variation of the original contract and that the assignee was entitled to the sum assured. At page 191 Lord Hanworth MR said:

"It is, in my opinion, impossible to hold that the insurance for the later three months was a new and separate contract. The terms offered and accepted were for a short extension of the contract of insurance which was then in being and unexpired. No suggestion was made for a new and independent policy. There was no fresh stamp, as there must have been if a new policy was effected. There was no new number assigned to the fresh contract; but the old policy was indorsed with a new time limit for the risk and the old limit was "altered". This alteration is subsidiary to the main purpose of the contract as it stood originally – the subject-matter of the risk was not changed. … The variation may be in strict logic a new contract, but the discharge of an old contract is a matter of intention. So far as it was possible to indicate it, the insured and the Society appear to me to have expressed an intention to maintain the old contract, to continue and to extend it."

At page 195 Sargant LJ concurred and said:

"Had the policy run out at the time when the payment by [the assured] was agreed to and made [the assignee's] position would be a more difficult one. In that case a completely new contract of insurance might have been necessary. But it is clear that both the agreement and the payment were effected while the policy still had a day or two to run; and in my judgment they amounted to a variation for the benefit of the assured of the existing policy, a variation which was subsequently formally expressed in the memorandum endorsed on the policy "

In Shoucair (1969) the Moneylending Law of Jamaica required, for the enforceability of a loan bearing interest at more than ten per cent, a written memorandum containing all the terms of the loan with the borrower's signature. A bank lent money at nine per cent secured by a mortgage which was enforceable. Later it sent a circular letter to borrowers raising the rate of interest to eleven per cent; the letter was unenforceable. The bank wanted to enforce the original mortgage at nine per cent. The Privy Council held that the question whether an unenforceable agreement avoided the original mortgage depended upon the intention of the parties and, as there was no intention to rescind the original mortgage, it remained in force unamended.

At page 347C, in a passage relied upon by Mr Wilken, Lord Devlin outlined the problem which arose from the concept of unenforceability. The problem was that, if there were an original enforceable contract, and a subsequent unenforceable variation which could not be enforced, the original contract was no longer the real contract between the parties but that was the only contract which could be enforced. One solution would be to treat any variation as a rescission of the old contract in which case, after an unenforceable variation, the original contract could not be enforced. Although possibly correct as a matter of formal logic, the disadvantage of that view was that a minor variation might destroy the whole effect of the contract. An alternative view was to apply the intention of the parties. If they could not have what they wanted, namely the original contract as amended, then the court had to decide which came nearer to their intention: the original contract unamended or no contract at all. That had been the reason for the distinction between rescission and variation. If the intention was to rescind the original contract it was rescinded and there was no contract at all to enforce; if the intention was not to rescind, then the original contract was varied but only the original, unvaried, contract could be enforced.

Kelly-Phillips (1998) concerned the issue of unfair dismissal under employment law. The legislation allowed an employee to waive the right to claim for unfair dismissal if there was a contract for a fixed term of one year or more and if the dismissal consisted only of the expiry of the term without it being renewed. An employee entered into a contract of employment for one year and waived her right to claim for unfair dismissal. Before the contract ended its term was extended for three months. The employer then wrote to the employee to say that the contract would come to an end at the end of the three months and the employee took proceedings for unfair dismissal. The issue was whether the fixed term referred to in the legislation was the whole of the period of employment, namely the term of the original contract as varied (in which case the legislation applied) or was the extended period alone (in which case the legislation did not apply). The Court of Appeal held that, having regard to other provisions of the relevant legislation, the legislation applied to the contract which had been varied by the extension of its term and the employee had waived her right to claim for unfair dismissal. At 858a Evans LJ said:

"There is a clear distinction in law between an agreement which varies an existing contract and one which replaces an existing contract, which ceases to have effect. In employment law terms, "renewal" is distinguished from "re-engagement" and the concept is the same. Whilst it is sometimes clear into which category a particular agreement falls, the distinction can be notoriously difficult to draw. That was demonstrated by old authorities such as Morris v Baron [1918] AC 1 and it has reappeared in more modern decisions on the statutory provisions with which we are concerned … . "

In Samuel v Wadlow [2007] EWCA Civ 155 a singer entered into a management agreement and agreed to pay the manager a commission of 20% on fees for activities entered into, negotiated or procured during the currency of the agreement, Later the singer and manager entered into a settlement agreement. This stated that the management agreement was terminated but that the manager remained entitled to his commission on activities negotiated during its term. A dispute arose about the entitlement of the manager to continuing commission and one argument for the singer was that the management agreement was voidable for undue influence and that the management agreement had been varied by, but not superseded by, the settlement agreement which was therefore also voidable. Toulson LJ summarised the approach of Lord Devlin in Shoucair and said in paragraph 39:

"39. However, it may not be easy to determine whether the parties "intended" that the original contract should continue to exist as a matter of legal analysis but in varied form, or whether as a matter of legal analysis it was intended to be discharged and replaced, since the distinction is one of legal theory which might have little commercial meaning for the parties."

He went on to hold that in that appeal the settlement agreement was intended to supersede the management agreement but it was not clear whether it intended to extinguish it because it imported parts of the management agreement. He continued:

"45. It is a fine question. I consider that it also a sterile question. The law about undue influence is based on broader concepts and I do not believe that its application to the present case should be affected by whether technically the settlement agreement discharged the management agreement.

The principle in Morris v Baron was brought into existence to deal with the technical problems produced by legislation analogous to the Statute of Frauds. The less that it is brought into other parts of the law to deal with problems of a different nature which do not require a formalistic approach, the better."

In the event the settlement agreement was found to be enforceable.

We have dealt with these authorities at some length because substantial reliance was placed upon them by Mr Aaronson. However, we are of the view that they are not determinative of this appeal. The issue in this appeal is not one of enforceability. Both the 1975 contract and the 2002 agreement are enforceable. In this appeal it is possible to let the parties have what they want, namely, the original contract as amended. There is no need to decide whether they should have the original contract unamended or no contract at all. The parties would not want either; what the parties want is the 1975 contract as amended.

It was Mr Aaronson's argument that, because the 2002 agreement was a variation, and not a rescission, of the 1975 agreement that meant that the 2002 agreement was the same contract as the 1975 contract and so the supplies under the 2002 agreement were supplies under the 1975 contract. We cannot go that far. Even if the 2002 agreement is a variation, and not the rescission, of the 1975 contract, that is not the same as saying that the 2002 agreement is the same contract as the 1975 contract. Under the 1975 contract the Appellant had to sell and deliver gas to British Gas up to the contract quantities until 31 October 2002. That obligation came to an end on 31 October 2002. Thereafter gas was sold under the 2002 agreement, not under the 1975 contract. For the purpose of applying the statutory language we have to identify the contract which was made before the end of June 1975. That was the 1975 contract without the 2002 amendments.

We also accept the argument of Mr Wilken that none of the authorities state that the varied contract should be treated as if it was entered into at the date of the original contract and none state that obligations assumed under the amended contract are to be treated as though they were present in the original contract.

Accordingly, 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. Returning to the statutory language, gas sold after October 2002 under the 1975 contract as amended in 2002 is not gas sold under a contract made before the end of June 1975.

If relevant, was there a rescission or a variation?

However, in case we are wrong, and the distinction between rescission and variation is relevant in this appeal, we turn to consider whether the 2002 agreement was a variation or rescission of the 1975 contract and, if it was intended to be a variation, whether the changes were so inconsistent as to go to the root of the 1975 contract and thus impliedly rescind it. .

In favour of a conclusion that the 2002 agreement was a variation of the 1975 contract is the fact that the executory clauses are in the 1975 contract and not in the 2002 agreement; that there is no doubt that the parties intended a variation and not a rescission, not least for tax reasons; and that there had been at least seventy other variations which had not been treated as rescissions. Also the contract was still for the supply of Brent gas by the Appellant to British Gas.

Dealing specifically with the previous amendments, we accept that the 1975 contract was amended on a number of occasions before 2002. However, the only amendment at issue in this appeal is the 2002 agreement. Further, none of the previous amendments made alterations to the duration of the contract. Although some made alterations to the price these appear to have been alterations to indexes used to calculate the price and not a move to a full market price.

The main changes in 2002 were for the extension of the duration of the contract and the method of calculating the price. The Appellant argued that these amendments carried out the basic philosophy of the 1975 contract which was that the supply should be worthwhile to the seller and to the purchaser having regard to whatever change occurred either in the marketplace or in the production profile of Brent field. The Revenue argued that the changes made in 2002 were so substantial that it could not be said that gas supplied after 2002 was supplied under the same contract as the 1975 contract. In our view the changes made in 2002 about the term of the contract and the price did go to the root of the contract in the sense that they were crucial changes and that it was impossible for both the 1975 contract and the 2002 agreement to be performed together. The obligations under the 1975 contract, and the "reasonable price" ceased in 2002; after 2002 there were new obligations and the price was the market price.

We therefore conclude that, if the distinction between rescission and variation is relevant then the changes made in 2002 went to the root of the 1975 contract so as in effect to rescind it and to make the 2002 agreement a new contract.

The principles about references to Hansard

The Revenue's primary argument was that the words of section 10(1)(a) of the 1975 Act were neither ambiguous or obscure. However, they disagreed with the Appellant's argument that Parliament must have intended the importation into the section of the existing contract law about rescission and variation and to resolve that ambiguity they sought to rely on Hansard.

The principles we should apply in deciding whether to refer to Hansard are that we should only refer to Hansard if the statutory language is ambiguous or obscure or would lead to absurdity and if there is a clear and unequivocal ministerial statement which would settle the issue in the appeal. In Mellhuish v BMI (No.3) at 481F Lord Browne-Wilkinson stated that:

"the only materials which can properly be introduced are clear statements made by a minister or other promoter of the Bill directed to the very point in question in the litigation. "

In our view the statutory language of section 10(1)(a) is neither ambiguous nor obscure. However, in case we are wrong about that we have considered the references to Hansard made by the Revenue

Hansard

In January 1975 the Oil Taxation Bill was considered in Standing Committee D of the House of Commons. The Tenth Sitting was on 30 January 1975 when a new clause was tabled to exempt from petroleum revenue tax gas supplies to the British Gas Corporation under contracts concluded with it by 30 June 1975. At Col 475 the Paymaster-General referred to his meeting with the industry on 19 November 1974 and said:

"This exemption will thus apply to existing contracts and to supplies in respect of which there are at present heads of agreement if these have been taken to the contract stage by 30 June.

The gas covered by this decision can, I think, be differentiated both from North Sea oil and from other gas supplies because these contracts were entered into, or the heads of agreement drawn up, before PRT was launched and because … none of them, as things stand, has experienced the same escalation in selling price as is reflected in the present price level for oil. These grounds would not necessarily hold good in the event of substantial changes in gas prices or in respect of contract provisions drawn up in the knowledge of the present legislation."

At Col 480 the Paymaster-General was asked how long the contracts entered into before the end of June 1975 would last because when they expired there would be a substantial change in the gas price (when the exemption from tax would also expire). At Col 481 the Paymaster-General stated that the exemption applied only to sales to the British Gas Corporation and that it would be many years before the contracts would run out.

The new clause was debated on 6 February 1975 and at Col 696 the Paymaster-General stated:

"The gas is sold to the British Gas Corporation under low price long-term contracts concluded before there was any question of there being a petroleum revenue tax. These contracts include some provision for price escalation but it is relatively small and much less than the full oil-related price escalation. …

However, arising out of the consultations which took place on 19 November the companies pointed out to us that there would still be a PRT charge on this gas which was not warranted by the scale of their profits under the contract with the British Gas corporation. At my request they supplied data which showed that the original provisions of the Bill did not fulfil the Government's intention. In view of that and the persuasive nature of the calculations that they provided, we decided that the best thing to do was to provide an exemption from PRT for gas sold to the British Gas Corporation under contracts concluded with the Corporation by 30 June 1975. This is what the new clause achieves"

The Paymaster-General was questioned on the effect on gas prices which would result from the fact that gas sold under contracts made after 30 June 1975 would not be exempt from the tax. At Col 703 he said that the different treatment for contracts made at different dates was not arbitrary.

"It is based on the principle that one should not impose a new tax on contracts made at a time when the likelihood of there being a petroleum revenue tax was not known."

And at Col 704 he said:

Here again, it seems reasonable that PRT should be borne provided –that is the point we accept in the clause – that at the time the contracts are drawn it is known that gas will be subject to PRT."

As mentioned we do not think that the words of section 10(1)(a) are obscure or ambiguous. However, if we are wrong about that then a reference to Hansard would confirm our view that it was the intention of Parliament to exempt from tax only gas sold under the 1975 contract and not gas sold under the 2002 agreement. The 2002 agreement was negotiated in a free market and included a market price; the 1975 contract, on the other hand, was entered into after lengthy negotiations which were at an advanced stage when the tax was introduced and was made with a monopoly purchaser at a statutory reasonable price.

The "Zielinsky Baker" point

In agreement with the written submissions of Mr. Wilken and Ms. Connors, we consider that the approach of the House of Lords in Zielinsky Baker suggests that the conclusion we have reached above on the construction of section 10 of the 1975 Act is correct.

We bear in mind the note of caution struck in the submissions of Mr. Aaronson and Mr. Bools, that we should not be quick to treat judicial statements directed at certain provisions of the VAT Act 1994 as authoritative in relation to a question of construction of the Oil Taxation Act 1975. However we consider the subject matter of the point at issue in Zielinsky Baker was in reality the question of how to construe a statutory provision which required cumulative conditions to be satisfied, where one of those conditions had an artificial or technical meaning, which might arguably affect the meaning to be given to another or others of those conditions.

Thus, in Zielinsky Baker, the House of Lords had to consider whether the condition that a protected building should be a "listed building" within the definition in the 1990 Planning Act could affect the meaning to be given to the other conditions in the definition of protected building, namely that it must be a building designed to remain as or become a dwelling. So here, we have to consider whether the meaning of the conditions that there must be gas sold under a contract with British Gas is to be affected by a rule of law that a variation of a contract does not entail the rescission of the original contract.

Mr. Aaronson and Mr. Bools argue that that rule of law is inherent in the provisions of section 10 of the 1975 Act, and is not to be regarded as a deeming or statutory fiction or any extension "in an unusual and awkward fashion" of the simple expression "a contract made before the end of June 1975".

We disagree. It seems to us that the heavy reliance placed by the Appellant on the assumed intention of Parliament in enacting section 10 of the 1975 Act that the existing contract law relating to rescission and variation of contracts would be applied in the interpretation of the statutory formula amounts to a case that the simple expression "a contract made before the end of June 1975" should be construed, we would say in an unusual and awkward fashion, as if it included a contract made later which amends (but does not rescind) a contract made before the end of June 1975.

We make the point by way of contrast that gas sold before 2002 was indeed sold under a contract made before the end of June 1975 (which expired on 31 October 1982) notwithstanding that the 1975 contract was amended on numerous occasions before the 2002 agreement was entered into. This is because (1) the Appellant had promised to deliver the gas which was sold before 31 October 2002, and (2) British Gas had promised to pay for that gas, and in both cases the promises were made in the 1975 contract.

Thus we consider that the Appellant's argument does import an artificially extended meaning for the simple expression "a contract made before the end of June 1975" from another area of law and is to be rejected for the reasons given by the House of Lords in Zielinsky Baker. This is an additional reason for our decision, and would have been an additional reason for us to dismiss the appeal, even if we had concluded that the 2002 agreement was a variation of the 1975 contract and did not rescind it.

Decision

Our decision on the issue for determination in the appeal is that gas sold to British Gas after October 2002 was not sold under a contract made before the end of June 1975 and so was not exempt from petroleum revenue tax.

That means that the appeal is dismissed.

NUALA BRICE

JOHN WALTERS QC

SPECIAL COMMISSIONERS

RELEASE DATE: 2 August 2007

Sc 3077/2006

.07..07

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You are here: BAILII >> Databases >> United Kingdom Special Commissioners of Income Tax Decisions >> Shell UK Ltd v Revenue & Customs [2007] UKSPC SPC00624 (02 August 2007) URL: http://www.bailii.org/uk/cases/UKSPC/2007/SPC00624.html Cite as: [2007] UKSPC SPC00624, [2007] UKSPC SPC624, [2007] SPC 00624