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Session 2003 - 04
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 691

Standing Committee A

Tuesday 22 June 2004


[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39)

Clause 270


Question proposed [this day], That the clause stand part of the Bill.

2.30 pm

Question again proposed.

Mr. Howard Flight (Arundel and South Downs) (Con): I welcome you to chair our deliberations this afternoon, Mr. McWilliam.

I shall make only two points as we come to the end of the pension fund provisions. First, the clause provides for the Treasury to implement what it sees fit, when it sees fit. Does it intend to implement any of the measures ahead of A-day?

Secondly, and a related point, the Green Paper stated that the changes would come into effect a year earlier. The Minister will be aware that the changes are of considerable import to those aged 74 or 75. I have received many letters from people saying that they had expected to be able to make use of some of the changes relating to not having to buy an annuity at 75, but now, because the changes have been postponed for a year, they are just outside. Will the Government at least consider advancing the new option not to have to buy an annuity—admittedly it is specifically designed for certain religious groups—to a date earlier than the present start date of April 2006?

The Economic Secretary to the Treasury (John Healey): I welcome you to the Chair this afternoon, Mr. McWilliam.

As the hon. Member for Arundel and South Downs (Mr. Flight) said, we have reached the final clause on pensions simplification and, as I am sure my hon. Friend the Financial Secretary would have said if she had been here this afternoon, in many ways we have reached the end in the Committee proceedings. However, in a sense this is the point at which the next stage of pensions simplification starts, because the clause sets out the date when the new regime will take effect.

I accept what the hon. Gentleman says about the importance of these issues, but it will take some time to prepare some of the schemes for such radical simplification. My hon. Friend considered all the arguments and the 2004 Budget before deciding to move implementation to April 2006. It was not a move that she took lightly, but we want to see the benefits of the new regime as soon as possible.

The hon. Gentleman asked whether the fact that only parts of the pensions simplification legislation come into force on 6 April 2006 means that we might

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bring the start date forward. I assure him that we do not intend to do so. The new simplified regime for pensions will come into effect, as announced, on 6 April 2006 and not sooner.

The provision to allow orders or regulations made under the pensions simplification provisions at any time after the passing of the Bill is intended to ensure that any orders or regulations that are necessary to give effect to the simplified regime for pensions taxation can be made in advance of 6 April 2006.

Perhaps I may conclude, as I believe my hon. Friend the Financial Secretary might have done, in the way that she started the debates on pension simplification. She quoted the words of Geof Pearson, Sainsbury's pensions manager, who said:

    ''Although we helped shape the policy, it needs a Government that listens to the pensions industry. Sometimes we need to congratulate politicians and civil servants and now is the time."

I commend the clause to the Committee.

Question put and agreed to.

Clause 270 ordered to stand part of the Bill.

Clause 271

Certain receipts not to be tarrif receipts

Question proposed, That the clause stand part of the Bill.

Mr. Flight: As the Committee will be aware, clauses 271 and 272 are the results of consultation with the oil industry, and they are broadly what it expects. Some issues have been raised about their impact on how companies in the sector do business. I cannot resist making the point that when debating the extra 10 per cent. oil tax we said that it was not a particularly sensible way of optimising a depleting oil reserve and a changing corporate structure that was likely to exploit it, so we are pleased that the clauses and schedule 35 go some way towards addressing those concerns.

Clause 271 is intended to reduce the price of extracting the smaller reserves in the North sea by making certain receipts exempt from tariff pricing. The expectation is that savings will be passed on through the supply line, thereby increasing the attractiveness of extraction. The industry expects it, and thinks that it is the best it can get.

There is a potential drawback. The Revenue is embarking on a review of the costs outside the tariff scheme to ascertain whether they are all allowable for tax. That could put costs back into the system, so I would welcome the Economic Secretary's comments on that.

John Healey: As the hon. Gentleman said, the clause is the result of extensive consultation with the industry, and it is broadly what it expects and welcomes. I do not want to reopen the debate on the supplementary charge, but I am pleased to see, as part of the package that we have introduced alongside the charge, strong signs that the level of exploration, activity and investment in the North sea is increasing.

Clause 270 and schedule 35 are good examples of the Government and industry working together to achieve a joint aim, which is to ensure the maximum

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economic recovery of oil and gas reserves from the North sea. We recognise that the North sea is entering a mature phase where future developments depend on extending the life of existing infrastructure. Officials and Ministers have spent considerable time consulting the industry over exactly what types of new business need to benefit from this measure.

New finds are usually smaller and often need to pay tariffs to use the existing infrastructure of bigger, older fields that can represent up to 60 per cent. of the total operating costs. Some new fields are only marginally profitable. The change to a lower tariff charge will improve the economics of those marginal projects and so ensure their development.

Where the offering of services to older fields is truly new business, we want those projects to benefit from the removal of petroleum revenue tax. The legislation contains rules to ensure that such new business will benefit, while existing business that has already been found to be economic will not. It ensures that help is provided where it is needed without unnecessarily reducing benefits to taxpayers. New business that will be eligible for the reduction means business under contracts agreed after 9 April 2003, which was the date of the 2003 Budget.

We also want to encourage new business from overseas, such as the importing of gas from Norway. The provisions will help in that respect, too. The measure has been warmly welcomed by the industry, and I commend the clause to the Committee.

Question put and agreed to.

Clause 271 ordered to stand part of the Bill.

Schedule 35 agreed to.

Clause 272

Petroleum extraction activities: exploration expenditure supplement

Question proposed, That the clause stand part of the Bill.

Mr. Flight: The clause gives a credit for the costs of exploration if they cannot immediately be deducted for tax. The industry has expected the clause and believes that it is the best that it will get, but the credit is of value only if the field under exploration is profitable, something that obviously cannot be guaranteed because of the very nature of exploration. Therefore, there is some question as to whether the credit will encourage any of the major operators, although some of the smaller operators may feel that they will benefit.

Question put and agreed to.

Clause 272 ordered to stand part of the Bill.

Schedule 36 agreed to.

Clause 273

Restrictions on expenditure allowable

Question proposed, That the clause stand part of the Bill.

Mr. Flight: This is an anti-avoidance measure designed to stop connected-party transactions, which

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increase the cost of qualifying expenditure. I am advised that the tax planning that it addresses possibly did not work anyway, and that there is therefore no particular objection from the industry to the proposal.

Question put and agreed to.

Clause 273 ordered to stand part of the Bill.

Clause 274

Terminal losses

Question proposed, That the clause stand part of the Bill.

Mr. Flight: Again, this is an anti-avoidance measure. It is designed to correct an imbalance in the rules on terminal losses. It had been possible to circumvent the intended restrictions on loss carried back by transferring fields to operators for a short time during which they were guaranteed to make a loss. The industry views the proposal as sensible.

Question put and agreed to.

Clause 274 ordered to stand part of the Bill.

Clause 275

Supplies to producers of commodities

Question proposed, That the clause stand part of the Bill.

Mr. Andrew Tyrie (Chichester) (Con): The clause is seemingly innocuous and inoffensive. Its purpose, which is to avoid the double taxation on certain fuels that is a consequence of the introduction of the climate change levy, is certainly sensible. However, a few points must be made about it.

The reason that we need the clause is the ever-increasing complexity of the levy itself. Many argue that it was designed the wrong way round. If its purpose really is environmental, the means of achieving the objective would be to put a tax on carbon-rich energy sources and to tax the producers of energy according to the pollution that they produce. It would also be worth examining the use of the tax system to affect the production of so-called greenhouse gases. However, because the Government did not do that, they now find themselves in a mess and introducing clauses such as this one.

The Government avoided introducing certain taxes because they did not want to hit domestic customers, so they went for a tax on firms. I believe that they were ultimately interested in revenue raising, despite their protestations of revenue-neutrality. The tax was designed back to front, which is why we have complexity.

Edward Troup, the head of business tax policy at Customs and Inland Revenue—the new joint department—has advised Governments of both political persuasions. He recently said something that has a bearing on this clause:

    ''Once the Government started down this particular road''—

the climate change levy road—

    ''from the wrong end of town, the complexities, dead ends and diversions it would find itself in were inevitable.''

Clause 275 is one of those complexities.

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2.45 pm

The Engineering Employers Federation made a similar point. It said:

    ''we have highlighted numerous anomalies and market distortions arising from the current design of the climate change levy and presented survey evidence on the impact''.

It is also worried about the issue. In previous years, we had lengthy debates about the climate change levy in Committee and on the Floor of the House. I do not think that the broader issues need to be reopened. The only point that needs and should be made at this juncture is that this complexity is an attempt to iron out the anomaly that is directly caused by the design of the tax. It is almost certainly not having the effects that were intended, or at least announced as the intention, when the Government introduced the tax.

I suspect that we will find, as time goes by, that the philosophy of the tax is askew, and sooner or later we will need a fundamental rethink. In the meantime, we will have to make do with letting clauses such as this through to try to mop up some of the more egregious difficulties, anomalies and complexities.


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