Finance Bill

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Rob Marris: Very good.

Mr. Chope: As the hon. Gentleman says, that was very good, at the time. Unfortunately, however, it is entirely inconsistent with what is in the Bill, as a result of which some companies have already announced job cuts. BP has announced that it will be cutting 800 jobs from its North sea operations, following closely on the 500 job cuts made a few months ago. It is also in talks to dispose of its Thistle field and is considering whether to decommission its North West Hutton field early in order to save costs. The Government's approach is inconsistent with their energy review in discouraging new gas field investment.

The amendments are designed to mitigate the extremely adverse impact of the regime that the Government are introducing under clause 90 in increasing corporation tax by 10 per cent. I hope that

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they will realise that they have made a mistake. One way of pulling back from that position would be to accept the amendments, which, without going into more detail at this stage, I hope the Committee will do.

Mr. Davey: I welcome you to the Chair, Mr. Benton.

I support the amendments. I congratulate the Financial Secretary on her promotion. Many hon. Members have been aware of her career in the House and wish her well in it. We are especially glad that she now holds that position and is responding on behalf of the Treasury Benches. She is an experienced and distinguished economist who has studied and considered economics and its effect on business in particular. I am sure that she will be prepared to admit to the Committee that the Budget proposals for the North sea oil industry will only reduce investment. That is the crux of the argument that Conservative Members and my hon. Friends the Members for Gordon (Malcolm Bruce) and for West Aberdeenshire and Kincardine (Sir R. Smith) advanced in the debate of the Committee of the whole House. Both sides of the House have tried to advance that key argument and, worryingly, the Government have tried to dismiss it.

The Government have tried to pretend that there will be no huge tax increase, but according to the studies that Professor Kemp has undertaken for the industry, the increase will be equivalent to £8 billion over eight years. Surely there is no way that the Government can pretend that such a tax rise can do anything other than hit investment. I hope that the Financial Secretary will at least be more frank with the Committee than her predecessor on that point. That is why these amendments are important; they would go a small way to relieving the huge tax increase faced by that sector, which is important for north-east Scotland and the rest of the United Kingdom.

The Financial Secretary will want to show that she remains loyal to the Government and to ensure that she continues the arguments that they have used, but she could show some flexibility. She could consider this and subsequent groups of amendments and say that they may represent a way for the Government to make some amends for the huge tax impost. That might be one way of showing that the Government have been listening and appreciate the negative impact of the measure, demonstrated by the job losses that have been announced and the loss of confidence in the industry.

12.15 pm

Many of the press comments and some of the statements from the industry show that one of the most damaging impacts of the tax changes is the effect on confidence and on the good faith that the Government had previously built up with the industry. We must remember that the industry has to operate in the face of great instability, especially in relation to the oil price, which has fluctuated massively during the past 20 years. If the Government add extra instability to what is an inherently unstable economic system, they will tie British industry's hands in going about its

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business. They would compound the huge mistake that they have made if they fail to adopt some of the amendments in this group.

Amendment No. 99 would make small amends by enabling the writing-down allowances to be doubled in the next year or so. That would not involve huge amounts of money, but it would follow the logic of the clause by attempting to provide extra relief via capital allowances. It would also show that the Government recognise that their tax measures are in some way retrospective. Many of the investments that will be effectively taxed under clauses 90 to 92, which were debated on the Floor of the House, now face much reduced returns.

Although the investment decisions were taken under a different tax regime, those involved now face an extra impost. Introducing the proposed extra writing-down allowance would go some way towards recognising the extra burden imposed on those investments. I hope that the Government will agree to the amendment, which is supported by Labour and Opposition Members.

Mr. Jack: In following my hon. Friend the Member for Christchurch and the hon. Member for Kingston and Surbiton, I wish to underscore their arguments about the economic impact on North sea oil exploration. In dealing with the fields that are already in production, they have rightly drawn the Committee's attention to the fact that, in response to the request that I made when the issue was debated on the Floor of the House for the Government to justify why they wish to increase tax in this way, other members of the Committee and I received an economic case made out for a brand new oilfield that was immediately profitable at the end of its first year.

That case involved one of those wonderful bits of Treasury and Inland Revenue mathematics that are given to Ministers so that they have an illustration showing that a positive result can be achieved. By the magic of adjusting the cash flow for the field in relation to the tax allowances, bingo, they managed to create a result that suggested that the proposal would be beneficial to the oil industry. It just goes to show that, with the right sleight of hand, people can prove anything they want by means of statistics. If the impact of the measure is concentrated on an existing field, however, those arguments do not hold up. I congratulate the Financial Secretary on her promotion, which is justified, but I now expect her to deploy her expertise in demonstrating that the proposal will have no negative impact on existing fields.

In taxation matters, there is always the question of retrospection. Because the measure will have an impact on existing investment made under a different regime, I think that—as was said earlier—some further relief is justified. In all areas of investment in the oil business there is great sensitivity to changes in the oil price. While the industry has a certain expertise in taking the long-term view, in a mature field or a declining field—indeed, in certain parts of the North sea fields—short-term price changes can significantly affect decisions about whether any further investment

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is to be made in a currently active field, or whether it is worth using any of the new technologies to enhance oil extraction from fields that are approaching the end of their life. All that could well happen unless the amendments are accepted.

The Financial Secretary to the Treasury (Ruth Kelly): I am delighted to return to the Committee after the short recess, Mr. Benton, particularly now that it is under your able chairmanship. I welcome my hon. Friend the Member for Wentworth to his new position, and look forward to working with him. I am sure that he will make a great contribution to the debate, and to the making and communication of Treasury policies.

It is a pleasure to return to the debate on the North sea oil regime, which featured such enthusiastic and well thought-out contributions from Members on both sides of the Committee of the whole House. The quality of those speeches showed that Members take their commitments to their constituents seriously, and are acting as honourable representatives. At that time, however, the Opposition chose to decouple two parts of an extremely important package that I expect to create a stable, long-term fiscal regime for a significant part of the economy.

Mr. Jack: Will the Financial Secretary clarify what she means by ''long-term''?

Ruth Kelly: The right hon. Gentleman knows very well that, in the pre-Budget report and in past Budgets, the Government set out their intention of creating a long-term stable regime for the North sea which raises a fair share of revenue for the country. The Budget set out the operation of that regime in detail, and companies should now have the confidence to invest while knowing that they are not operating in a system that is clearly unsustainable and unfair to most taxpayers and citizens.

The clause and schedule introduce a new, generous system of 100 per cent. first-year allowances for capital expenditure incurred in the extraction of oil and gas in the United Kingdom and the United Kingdom continental shelf.The hon. Member for Christchurch described the new allowance as a ''sop'', but I completely reject the charge that it is a sop to the industry. The measure is very important because it will add to the industry's cash flow and provide additional incentives for the industry to invest. I do not agree with his analysis, or that expressed by the hon. Member for Kingston and Surbiton, although I welcome the kind remarks in his contribution.

I do not accept to any degree the charge that the investment allowance, which is part of the total package, will impact negatively on investment and jobs, because the package has been designed carefully. The investment allowance means that, even with the supplementary charge, companies investing in new projects will have higher post-tax rates of returns than under the previous rules. As I set out in the House when the clause was last debated, in terms of net present value the benefit of the allowance will

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outweigh the additional tax for marginal projects. The effect on marginal projects will turn the effect on investment, and marginal projects will be encouraged by the change. The increased tax is designed to reduce the net present value of the more profitable fields, but such work is likely to go ahead in any event. The overall impact on investment is likely to be positive rather than negative.

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