UK: Tax Reform, Captive Insurance Companies and Capital Allowances - Recent Developments

Last Updated: 11 October 2002

Emma Nendick of Herbert Smith’s Taxation Department takes a look at three recent developments in UK tax law affecting energy companies, namely changes that are likely to flow from a current Inland Revenue consultation; tax changes affecting captive insurance companies, and the significance of a Court decision relating to capital allowances.

UK may extend accounts-based taxation to all assets

In August 2002 the UK Inland Revenue published a consultation document which proposes significant changes to the UK company tax system. We have outlined below how the changes may affect oil and gas companies, utilities and financiers.

UK oil and gas companies and UK utilities

The main effects of the proposals:

  • The move to an accounts-based system of tax depreciation will prejudice companies which do not depreciate equipment or land on their balance sheets or who write them down at a slower rate than they currently claim capital allowances (4% per annum straight line basis for assets with an economic life exceeding 20 years, 25% per annum reducing balance for other equipment).
  • The taxation of all returns on land, buildings and equipment, including sale proceeds, as income will mean that indexation allowance (an allowance for inflation) will no longer be available on the sale of an asset. This will have the effect of increasing the tax liability on the sale.
  • Revaluations reflected in the accounts would be taxable.
  • It is possible that a form of "rollover" relief on disposals may be available, which would allow companies to defer paying tax on a sale provided the proceeds were reinvested in other land, buildings or equipment.

Non-UK companies with North Sea interests

The consultation document makes no explicit reference to non-resident companies. However, gains made by nonresidents on the sale of North Sea assets are already within the UK tax net. On that basis, the effect on non-resident North Sea operators may be similar to those outlined under "UK oil and gas companies and UK utilities" above.

Other overseas companies

The absence from the consultation document of specific reference to non-resident companies makes it difficult to be definitive in this area. Overseas companies with a UK branch or permanent establishment ("PE") are currently subject to UK tax on gains on assets located in the UK and used in the trade of the UK branch/PE. It is logical that those assets would also be brought into the new accounts-based income regime.

Arguably of more concern is the position of overseas companies without a branch or PE in the UK. Currently such companies are not subject to UK tax on the disposal of capital assets located in the UK, such as land and buildings. By contrast, non-residents are generally taxed on UK source income. The proposal to tax gains as income could therefore for the first time expose non-UK resident companies with interests in UK land, buildings, equipment or certain shares to a UK tax charge on sale of the assets.

Leased assets

The impact of the proposals on leased assets is not covered in the consultation paper and is explicitly made the subject of further consultation. It is clear however that a move to an accounts-based depreciation regime may have considerable impact on the economics of finance leasing.

What is the timing of these changes?

A transitional regime for the move to an accounts-based system of taxing capital assets is clearly contemplated. The document suggests that companies which acquire assets on or after the commencement date for the new regime would be taxed under the new rules in respect of those assets. Assets already held on the commencement date would continue to be taxed under the existing capital gains regime, unless the company marks the asset to market. This means that companies with long-term interests in land, buildings or shares may be subject to a long transitional period, with compliance cost implications.

That said, the document gives no indication of when or in what order any changes may be introduced. Overall, the document is short on detail in many places, particularly on the implications for non-residents and for finance leasing. This first consultation phase closes on 29 October 2002 and the proposals will almost certainly be refined as a result.

The key proposals in the document are:

• All profits from land, buildings and equipment, including profits on a sale, to be taxed as income in line with the accounting treatment, rather than under the current capital gains tax regime. This treatment would also apply to certain financial assets, such as shares which are not covered by the new exemption for disposals of substantial shareholdings.

• Tax relief for depreciation to be given in accordance with the way in which expenditure is written down in the accounts, rather than under the existing system of capital allowances.

Other proposed changes include streamlining the categorisation of income for tax purposes, which may accelerate the use of tax losses in certain cases, and bringing the tax treatment of investment companies (including property investment companies) into closer alignment with the more favourable tax regime which applies to trading companies.

Captive insurance companies – UK tax changes

The use of captive insurance companies is relatively common in the oil and gas sector. Recent UK tax changes may make captive insurance companies located in Ireland less attractive.

Captives are often located offshore in order to take advantage of relatively benign tax and regulatory regimes. However, a UK company with an interest in a captive will need to ensure that the UK’s controlled foreign companies ("CFCs") rules do not have an adverse effect on the structure. If the CFC rules apply, the UK company will be taxed on its share of the profits of the CFC. The CFC rules confer automatic exemption where the overseas company is located in certain specified jurisdictions. This used to include Irish companies which satisfy certain conditions – Ireland has therefore been a popular location for captives.

From 11 October 2002, companies located in Ireland will no longer be automatically exempt from the UK CFC charge. The change has been made as a result of changes to Irish tax rules.

Companies with captives located in Ireland therefore need to consider whether they may qualify for another CFC exemption, or alternatively, consider moving the captive to another exempt jurisdiction.

In the longer term, the UK proposals to tax all gains as income (see "UK may extend accounts-based taxation to all assets" above) may increase the CFC tax charge on all UK companies with an interest in a CFC which does not qualify for an exemption from the CFC charge. This is because currently only the income of a CFC is subject to the CFC charge – gains are excluded. Bringing remaining gains within an income regime may therefore result in a greater CFC tax charge.

Are capital allowances still available for finance leasing? The Barclays Mercantile v. Mawson Case

The UK High Court has recently decided in this case that capital allowances were not available to the finance lessor of a gas pipeline because, in the Court’s view, the lessor did not incur the expenditure on the provision of the pipeline. Instead the expenditure was incurred on creating a network of financial obligations such that the lessor would receive cashflows over a number of years which would recoup its outlay, plus a profit.

This decision has sent shockwaves through the leasing industry, but is it as bad as it seems?

The facts of the case are complex and the reasoning difficult to follow in places. That said, it appears that the key factors which tipped the balance against availability of capital allowances were:

  • The lessor did not provide "upfront" finance for the acquisition of the pipeline – the transaction was effectively a sale and lease-back as the pipeline was already owned by the lessee. Upfront finance leasing would therefore seem to be largely unaffected by the decision.
  • Nor was the transaction, it seems, a refinancing of borrowings originally taken out by the lessee to acquire the pipeline. The sum received by the lessee was not used to repay existing debt or to finance transactions or activities of its business. Such "bona fide" refinancings would also seem to be unaffected by the decision.
  • Both the upfront capital money flows and the income cashflows during the primary period of the lease were almost completely circular. This degree of circularity is therefore best avoided.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.