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7.15 pm
Mr. Mark Hoban (Fareham): Even those of us who have not had a long association with the oil industry, unlike many hon. Members who have spoken today, have learned a great deal from the discussions about taxation of North sea oil during the progress of the Bill. The matter has dominated discussions both on the Floor of the House and in Committee, on which I had the good fortune to serve.
Two key facts emerged from the discussions of oil taxation. The first was the high preponderance of international companies that are based in the North sea—two thirds of the companies operating on the UK continental shelf are foreign-owned. The second was the great flexibility and mobility of assets in the North sea. The UK continental shelf is perceived as having a highly liquid market for its assets. As a consequence, foreign companies investing in that market can adopt a portfolio approach to the way in which they manage assets across the world, and move in and out of oil-producing areas, depending on the costs that they would incur by doing business in those areas. Clearly, tax costs must be taken into account in that equation.
It is interesting to compare the present debate with the one that we had on the previous new clause, where we were rightly concerned about subsidising an industry that was footloose in the way in which it moved its operations around the world. In this case, we are discussing a change in the taxation regime which acts as an incentive for companies to leave this country and conduct their operations elsewhere. That is a quite different situation from the one that we discussed a little earlier.
Given the extent to which many independent companies are dependent upon debt finance to exploit oil reserves, my concern is that the way in which the supplementary charge is structured—excluding debt finance from costs that are allowable to offset the liability—means that we are penalising companies that invest in the market. New clause 1, which gives the opportunity to offset those debt finance costs against the revenues that companies earn and which are covered by the supplementary charge, is a valuable amendment to the Bill.
Coupled with that, companies paying the supplementary charge will have difficulty in getting credit for the additional supplementary charge in tax computations submitted in the United States or France. Ensuring that interest is deductible from the computation of the supplementary charge will make the process of deducting the tax in the companies' home country's tax computations much easier.
It is disappointing for the industry that the Government did not seek advice from the Internal Revenue Service much earlier in the process. Before they introduced a charge in the UK, they should have thought in much greater depth about the international impact of that charge, and obtained clearance from the US.
An interesting aspect of the rationale for the supplementary charge was identified by the hon. Member for Aberdeen, Central (Mr. Doran), when he mentioned that a few years ago it was inappropriate to introduce a windfall tax because oil prices were low, but now that they are high, it is okay to do that. That is a convenient justification. It reinforces the argument for a sunset clause on the supplementary charge that is the subject of other new clauses.
The new clauses would limit the timing of the operation of the supplementary charge, and would bring it to an end when oil prices are low, and when the good times that North sea oil companies are apparently enjoying at the moment have come to an end. We could then consider afresh the impact of the supplementary charge. In the meantime, we could see whether the United Kingdom
Offshore Operators Association was right when it said that this tax will have a negative impact on jobs, or whether the more optimistic forecasts by the Government and the hon. Member for Dundee, East (Mr. Luke) are correct and that, miraculously, a tax that takes £0.5 billion out of our economy every year will be neutral and will create jobs.The new clauses address some of the issues at the heart of the supplementary charge. The Government would do well to listen to the concerns that we have raised, reflect on them and consider whether the new clauses are the right measures for us to take to ensure the future vitality of the North sea oil industry.
Chris Grayling: I support these amendments and new clauses with slight misgivings, because although they will take the sting out of a thoroughly unwelcome measure, I still believe that this new taxation is ill-thought-out, and I would much rather that it was not in the Bill.
My biggest concern about and lack of understanding of what the Government are trying to do involve the impact that this tax will have on the manufacturing sector. This industry employs 300,000 people across the United Kingdom, and it represents 6 per cent. of Scotland's work force alone. The new tax is being introduced at a time when manufacturing in Scotland is at an historically low level, and when manufacturing across the UK has been through a number of years of extremely difficult business circumstances. The industry has suffered from the adverse value of the pound and a deluge of regulation and ill-thought-out measures from central Government, and it operates in a world in which it is increasingly easy for manufacturing companies to relocate to other parts of the globe where the cost bases are fundamentally different from those in the UK.
Malcolm Bruce: What the hon. Gentleman is saying is obviously true, but it is even easier than he suggested, because many of these companies have already relocated to other parts of the globe. It does not take much to switch the investment. It does not require a major switch of funds. It is merely a matter of redeploying their existing assets.
Chris Grayling: The hon. Gentleman is right.
Mr. Luke: Not only is it easy to redeploy assets, but many of the companies in the North sea oil industry took corporate decisions well before the Budget to shift to much more profitable fields where the higher costs are covered by the larger profits that they will make out of fields that are easier to access.
Chris Grayling: The point that I was making about manufacturing is that, as well as the oil operators, there is in the UK a substantial industrial sector that provides the industry with components, support and other services and products. Inevitably, the consequence of levying a charge on the industry of hundreds of millions, if not billions, of pounds, thus reducing its margins and making business ventures less viable and less economic for companies to pursue, is that they will seek ways to cut their costs. One way to do that is to source the components that they use from other parts of the world where the cost bases are lower. That will have an adverse effect on employment and manufacturing businesses across the UK.
Hon. Members should not take my word for it. The chief executive of the Aberdeen and Grampian chamber of commerce said:
- "There is no doubt that there will be a knock on effect on jobs. These changes will not just affect the oil majors but the countless small businesses operating in the supply chain."
The Government's approach in levying this new tax is ill-thought-out. I fear that the consequences will be far greater than they pretend. I listened to Labour Members who defended the tax, and realised that they do not understand the consequences of what is happening. It is simple maths. They cannot levy hundreds of millions of pounds on an industry, reduce its margins, as will happen as a result of this tax, and expect that not to have an effect on investment and jobs. That is basic business arithmetic. Our manufacturing sectors have suffered badly in the past few years, and many companies are under pressure, so this is precisely the wrong moment to take such an adverse tax step.
Sadly, I am certain that the Government will not change their approach, but I hope that at the very least they will take note of these new clauses and amendments, which would take the sting out of this measure. They would put a time limit on the effects of the taxation, so investment decisions over the long term could be taken in the context of a point of termination. I urge the Minister, for the sake of manufacturing industry in different areas of the country, not just in Scotland, to accept the new clauses and take the sting out of what is otherwise a thoroughly unwelcome measure.
Sir Robert Smith: I welcome a chance to take part in the debate. These new clauses have allowed us to return to this subject on Report. It was discussed in Committee on the Floor of the House and in the Standing Committee, and this is a welcome opportunity to see how the debate has moved on. The vocal support of Labour Members at the start of the Budget debates seems to have melted away on Report. We have heard far more thoughtful contributions, and even those who support the Government's general approach seem ready to recognise that some of these amendments make serious points and raise serious issues.
The hon. Member for Epsom and Ewell (Chris Grayling) made a valid point about the importance of the supply chain to the North sea oil industry—the manufacturing that is supported by it and the onshore jobs not just in Scotland but throughout the United Kingdom. Some companies are finding life difficult. They do not necessarily want to be named, but some companies in my constituency are already concerned. When orders are cancelled, the cash flow of manufacturing companies is hit.
The Treasury needs to understand more about the structure of the industry. When major companies are hit by indecision and uncertainty about whether royalties will be abolished, investment decisions are put on hold. For those companies, that is a nuisance, an irritation,
a frustration and a worry, and it affects their bottom line, but they survive because their cash flow can take such a hit. Down below them in the supply chain are many companies whose everyday cash flow is crucial. They cannot switch off the business for a few months while the Government sort out the tax regime and the major investors decide whether to invest. The Government must consider the knock-on effect on the many small businesses that supply the industry. There has been much more outsourcing of functions. Investment houses are much more involved, and the supply chain is much more dependent on a continued flow of business.Many hon. Members have referred to the fact that this measure has been a surprise and a shock to the industry. The Treasury still seem to be under the illusion that that is a fiction or an elaborate hoax, and that it was not a shock or a surprise because the industry saw it coming and understood what was happening. I assure the Treasury that there could not be that many well-paid actors giving such a consistent message from many levels of management and from many different businesses in the industry. Many people have worked closely with PILOT, with Logic and with the taskforce. There is genuine shock and surprise, and it would be helpful if the Treasury recognised that. Whether it intended to surprise the industry, or whether it thought that it had surprised the industry, the reality is that it has surprised it.
There must now be some damage limitation, and some undoing of that damage. That is what these new clauses would do. New clauses 2 and 3 on termination and new clause 4 on transition would relieve the shock and the sense of betrayal. They would also deal with the fiscal instability by getting the message across that if companies made the investment last year because of what they got out of PILOT, this year they can get some of the relief on that investment against the new tax. Similarly, a three-year period gives a chance for further consultation with the industry, a chance to address these concerns and not to have hit the immediate Red Book figures. My hon. Friend the Member for Gordon (Malcolm Bruce) made a very valid comparison with whisky, in that overtaxing can kill the goose that lays the golden egg.
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