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The first matter on which we wish to probe the Economic Secretary is why the Government argue that the costs of financing developments should be excluded from the calculation. I am sure that the Minister is aware that the presumption that all oilfield developments are financed as equity is a long way from the truth. Many companies, especially smaller ones, finance their development by borrowing. That is a legitimate part of the cost of developing the fields, and if it is not allowed it will substantially alter the profile, the rate of return and even the viability of the developments. The Economic Secretary must explain why that should be the case.
Let me anticipate a possible answer. The hon. Lady may say that, using such pieces of information, companies could present a case that amounts to a spurious tax relief. The counter argument is that there is also a real cost. The relationship between the oil and gas industry and the Government is quite intimate. Despite the problems that have been alluded to in recent debates and the breakdown of confidence and trust, the reality is that relatively small companies deal daily with the Treasury and the Department of Trade and Industry. It seems perfectly within the ability and capacity of the Government and the industry to work out a formula that achieves a fair and proper balance. Indeed, the Economic Secretary has been keen to address the question of fairness.
When the corporation tax rate is running at 30 per cent., financing charges are deductiblebut not, apparently, against the extra 10 per cent. of a windfall tax. It has been put to us that in some cases the debt finance could amount to 70 per cent. of the project cost. Clearly, it is a significant factor, and simply to discount it could lead to considerable difficulties and destroy the viability of some projects.
It has been suggested that some of the smaller companies are having difficulties highlighting the problem that the Government's proposals present, because if they make a public indication of the difficulties imposed it could have an adverse effect on their share price or,
The point about United States companies has already been made. If this is not allowable, they could effectively be caught twice as it may not be a legitimate charge or tax. However, the Economic Secretary has indicated that the Government intend to address that issue.
The reality is that for the very companies and projects that the Government claim they wish to encourage, the costs are real and are financed from external sources. I suggest that if the Government feel uncomfortable about opening up total allowance, they could agree on a notional allowance. They could accept that borrowing and debt finance are legitimate and negotiate a deal on which both parties could agree. The Minister will acknowledge that that is not abnormal practice; it has been done in many other sectors.
I hope that the Minister will accept that the amendment, which may not be perfectly phrased, is designed to address what is perceived by companies in the industry as a real problem. If it is not addressed, it will seriously undermine the very objective that the Government claim to be pursuingnamely, to encourage small companies to develop some of the more innovative fields that they do not have the equity finance internally to develop but can develop in partnership with financial companies. I hope that the Economic Secretary will accept that this is a serious and real issue to which the industry needs answers.
Mr. Blizzard: I want to emphasise the point made by the hon. Member for Gordon (Malcolm Bruce). The presence of small companies working in the North sea province is most important; they are the key to making the most of the mature stage of its development.
As we know, finance charges form a major part of the exposure of small companies. My hon. Friend the Economic Secretary made it clear that much study has been devoted to examining individual fields. I hope that we can identify the companies and modify the measure to address their problems. We do not want to put off such companies; we want to attract them.
We heard earlier that smaller, new entrant companies would not necessarily be able to benefit fully from the 100 per cent. capital allowances, as they have no tax against which to offset them. We should consider the matter seriously and try to find a way of allowing financing costs to be offset against the supplementary charge for the smaller companies, which hold the key to the future investment and success in the North sea that we all want.
It was argued that some relief for financing purposes would encourage development. The Economic Secretary has already heard the figures for exploration and appraisal drilling in the North sea, which are a matter of huge concern. The figures went down by more than 50 per cent. over the past five years, despite the fact that the success rate25 per cent.is good. That must be a substantial argument for some additional uplift for exploration and appraisal drilling. I am sure that the hon. Lady will agree
The hon. Lady told us that the tax changes would have a positive impact. I am sure that she wants to listen to these points, as she will soon be replying to them. She cited a mysterious analysis, which has been produced but cannot be published. In fact, it is so secret that it was not available to the Secretary of State for Scotland when she spoke yesterday about minimising the impact of the changesshe thought that they would have a negative effect.
Why is the analysis so secret that it remains in the Treasury? Have its benefits been shared with other Ministers? If so, would not the correct way forward be to publish the analysis, hold genuine consultations and debate, and then decide what to do about the taxation regime? The Government say that they have taken that course in respect of other taxation changes, so as this matter is of such importance they should adopt it in this case.
If the Economic Secretary is correct and the tax changes are so positive, the Government would attract massive support for their position during that debate. However, if we are correct in suspecting that £1 billion a year cannot be taken from the North sea industry to any beneficial effect, the hon. Lady will have a great deal to worry about in that debate.
I have a question for the hon. Lady about the financing costs. Am I right to believe that, under current taxation proposals, if an oil company chooses to transport gas through the FLAGS system to St. Fergus, it will be taxed at 70 per cent.; if it goes to Bacton, it will be taxed at 40 per cent.; and if it goes to Zeebruggewhich, as she knows, is in the Netherlandsit will be taxed at 30 per cent? Is that the current situation? If so, can she justify it? How will it benefit the Scottish economy, the English economy and the economy of the Netherlands?
Are the Government trying to encourage companies to bypass Scotlandeven to bypass Bactonto go to Zeebrugge and then transport their gas through the interconnector? It is a simple point; the hon. Lady can either confirm or refute it. If she confirms it, no doubt she will be able to give us an explanation.
We have had an interesting debate on a matter of enormous importance to many of our constituents. The Economic Secretary will forgive me when I say that I was not persuaded by a secret analysis that cannot be published or discussed, but that somehow shows that the industry will benefit from taking so much money out of it.
If it is true that the tax changes will have a positive impact, why were they withdrawn when the oil price was low? Surely if the changes were positive, the Economic Secretary should have introduced them when the oil price was low in order to boost the industry. The oil industry knows and workers in the industry know that she is engaged in levitation economics. It is simply impossible
Sir Robert Smith: The hon. Member for Banff and Buchan (Mr. Salmond) makes the valid point that the two sides of A4 placed in the Library do not provide hon. Members with a substantial reassurance of the foundation of the Treasury's analysis. There must be some greater analysis that can be placed in the Library without breaching confidentiality.
The analysis presented in the table that we have betrays an assumption based on equity financing. Has any analysis been conducted based on debt financing? We understand that that there can be up to 70 per cent. debt financing, especially for smaller companies.
On ensuring that the right debts are attributed to the right income so that the Treasury gets its share, the briefing that we have all received from the industry suggests that the Oil Taxation Office already has sufficient powers to audit allowable charges and various methods to protect against excessive debt, which are outlined in the OTO ring-fence corporation tax manual. Consequently, the industry does not believe that there is any reason to disallow this measure.
A point was made earlier about Kerr McGee, which has also written to me, and I have dealt with the company before. The argument seems to be that, because of the specific measure that we seek to delete under the amendment, the United States authorities do not recognise this tax as being allowable for double taxation relief. Although the Economic Secretary will approach the Americans, I am sure that the United States will not necessarily change its tax regime, so it might be more sensible to try to accommodate financing costs in handling and assessing this tax. I understand that France may similarly treat the tax as not being allowable for double taxation relief because of the financing charges.
I should like the Economic Secretary to address those points, especially the concern that we all feel about the need for far greater openness and clarity so that the Treasury's analysis is put in the public domain to reassure our constituents, because we are concerned about their jobs and future investment.