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Session 2006 - 07
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Public Bill Committee Debates

Draft Oil Taxation (Market Value of Oil) Regulations 2006



The Committee consisted of the following Members:

Chairman: Mr. Eric Martlew
Brennan, Kevin (Lord Commissioner of Her Majesty's Treasury)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Evennett, Mr. David (Bexleyheath and Crayford) (Con)
George, Mr. Bruce (Walsall, South) (Lab)
Goldsworthy, Julia (Falmouth and Camborne) (LD)
Goodman, Mr. Paul (Wycombe) (Con)
Gummer, Mr. John (Suffolk, Coastal) (Con)
Healey, John (Financial Secretary to the Treasury)
Heathcoat-Amory, Mr. David (Wells) (Con)
Hollobone, Mr. Philip (Kettering) (Con)
Hopkins, Kelvin (Luton, North) (Lab)
Jenkins, Mr. Brian (Tamworth) (Lab)
McCarthy-Fry, Sarah (Portsmouth, North) (Lab/Co-op)
Malik, Mr. Shahid (Dewsbury) (Lab)
Spellar, Mr. John (Warley) (Lab)
Stuart, Ms Gisela (Birmingham, Edgbaston) (Lab)
Mark Egan, David Slater, Committee Clerks
† attended the Committee

Fifth Delegated Legislation Committee

Tuesday 5 December 2006

[Mr. Eric Martlew in the Chair]

Draft Oil Taxation (Market Value of Oil) Regulations 2006

The Chairman: I have received a request that Members should be allowed to remove their jackets. I am agreeable to that.
4.30 pm
The Financial Secretary to the Treasury (John Healey): I beg to move,
That the Committee has considered the draft Oil Taxation (Market Value of Oil) Regulations 2006.
The Chairman: With this it will be convenient to consider the draft Petroleum Revenue Tax (Attribution of Blended Crude Oil) Regulations 2006.
John Healey: Welcome to the Chair, Mr. Martlew. Thank you for permitting us to take off our jackets, although I reassure members of the Committee it is not a sign that I intend to delay them any longer than necessary. I look forward to serving under your chairmanship.
This is an important twin set of regulations to follow up our discussions on the Finance Bill earlier this year. The regulations provide detailed rules to ensure that the value and price of oil that is returned for tax purposes by oil producers reflects the full value of that oil that is produced in the United Kingdom or on the UK continental shelf. The legislation has been introduced because companies were exploiting weaknesses in the law, creating losses to the public purse totalling some £160 million a year. At the same time, they were distorting commercial behaviour as a result and creating a degree of unfair competition for companies that did not follow such practices. As the hon. Member for Wycombe rightly said in the middle of June when we discussed these provisions in the Standing Committee on the Finance Bill:
“It is important to eradicate attempts to take unfair advantage of the tax rules.” —[Official Report, Standing Committee A,13 June 2006; c. 544.]
We had three concerns about the rules. They meant that some oil companies could pick and change between arm’s length and non-arm’s length prices for the disposal of the oil that they produced—in other words, between the prices from open sales on the market and those from selling within the group. The second problem was that they could pick and choose between a range of arm’s length prices using forward contracts to find the lowest price for tax purposes. Thirdly, a flaw in the existing rules meant that companies could pick and choose at a receiving terminal from which field or fields blended oil was deemed to be extracted in order to reduce the allocation to taxable fields in terms of what was reported to Her Majesty’s Revenue and Customs.
The regulations have something of a pedigree. HMRC published a discussion paper in July 2005 that set out the three problems and proposals for solving them. We confirmed in the pre-Budget report the plans that are contained in the first set of regulations before us—the draft Oil Taxation (Market Value of Oil) Regulations 2006. We confirmed in the Budget the plans to deal with the other two problems, one of which is covered in the other set of regulations. Primary legislation was included in the Finance Bill and, throughout the period, HMRC has worked closely and discussed in detail with the companies the approach to be taken. We have adjusted the thinking and the solution as we have gone along.
The market value of oil regulations deal with the first flaw in the system. They do so by providing new rules for determining the market value of non-arm’s length disposals of oil for the purposes of petroleum revenue tax. The new rules embodied in the primary legislation, plus the regulations, provide for the valuation of non-arm’s length sales of oil to be based around published agency prices where such prices are available. The method used is to average the published prices for the date of delivery and for the two days before and the two days after that published date. That reflects the way in which arm’s length contracts are commonly priced. The regulations provide a new, clear and well targeted set of rules to enable companies to calculate the market value of oil in non-arm’s length sales or disposals. To help the industry and its advisers further, HMRC will publish guidance before the end of this year on the operation of the rules.
The second set of problems identified by HMRC—that of the use of forward contracts to find the lowest price for tax purposes—was dealt with in a separate set of regulations laid before the House on 21 November. They were passed under the negative resolution procedure.
The third flaw is dealt with in the second set of regulations, the draft Petroleum Revenue Tax (Attribution of Blended Crude Oil) Regulations 2006, which provide certainty in deciding to which fields and in what proportions blended oil is attributable for the purpose of petroleum revenue tax. We established that companies had been exploiting the flexibility in the allocation rules to minimise their PRT liabilities by allocating oil to non-PRT fields when the price was high and to PRT-liable fields when the price was lower.
The regulations provide a formula for allocating what the industry calls the liftings of blended oil. In essence, lifting refers to pumping oil from the terminal into boats. The formula allocates liftings to the fields that contribute to the blend, and it is based on the production entitlement of each field.
In conclusion, both sets of regulations have come about as a result of extensive dialogue between the industry and HMRC. I pay tribute to the industry and to the companies that helped us devise the detail of the new rules. Together, the regulations provide a proper framework for calculating the market value of oil, and for allocating liftings of blended oil to the various constituent fields. They will give companies greater certainty as to how to calculate the values for tax purposes, and they will ensure that the amounts shown on tax returns to HMRC reflect the true value of the oil that is being disposed of. I commend the regulations to the Committee.
4.37 pm
Mr. Paul Goodman (Wycombe) (Con): It is a pleasure to see you in the Chair, Mr. Martlew. As the Financial Secretary just reminded us, the regulations return those of us who were there—the Financial Secretary, the hon. Member for Falmouth and Camborne and myself—in spirit to the happy experience of debating clauses 147 to 153 of the Finance Bill earlier this year.
The long and short of it is that although the industry was originally unhappy about details in the regulations, I am informed that it now takes the view that meetings with HMRC have improved them. The Financial Secretary made that point during the Finance Bill. What became evident during the Bill Committee was that the regulations, of which he gave notice, are aimed at stopping tax avoidance. He correctly quoted me as saying:
“It is important to eradicate attempts to take unfair advantage of the tax rules.” —[Official Report, Standing Committee A,13 June 2006; c. 544.]
I see from my note of the debate that I had highlighted that remark.
Therefore, since my party did not oppose the clauses in the Bill, we certainly do not oppose the regulations. I would like to ask the Financial Secretary exactly how much revenue he expects will be drawn into the Treasury, given the change that the regulations will make to taxation arrangements.
4.38 pm
Julia Goldsworthy (Falmouth and Camborne) (LD): As the hon. Member for Wycombe said, this debate brings back memories of another debate. At that time, there was a greater need to remove jackets.
The proposals were not opposed during the debate on the Finance Bill earlier in the year, so I have no intention of opposing them now, but I would like to ask the Financial Secretary a couple of questions. The first is to do with the kind of evidence there was to indicate that figures were being manipulated for tax purposes. He mentioned the figure of £160 million, but could he say a little about the evidence? Could he also comment on why there was a need for supplementary drafts to the regulations that superseded the initial draft regulations laid down on 21 November? If he were to comment on that, I would be happy to let the regulations pass without opposition.
4.39 pm
John Healey: I am grateful to both parties for their support for the regulations. The answer to the hon. Lady’s question is in the acknowledgement made by the hon. Member for Wycombe that the regulations have improved as a result of discussions with the industry. I am glad that the industry acknowledged that to him. It has also done so in public; it said that through that process we have dealt with its specific concerns. The draft regulations were published at an early stage and went through subsequent iterations before we considered them this afternoon.
On the scale of the problem, I said in my opening remarks that we had three concerns about the operation of the existing rules and flaws that companies were exploiting, and that they imposed losses totalling about £160 million a year. Those concerns were combined with our operational knowledge about companies that were taking tax advantage in that way, and led us to conclude that we had to take action to tighten the rules. It is good that the rules now give greater certainty to the companies that have to follow them; they should certainly stop the loss of the revenue that should have come to the public purse. On that basis, I hope that hon. Members will endorse the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Oil Taxation (Market Value of Oil) Regulations 2006.

Draft Petroleum Revenue Tax (Attribution of Blended Crude Oil) Regulations 2006

Resolved,
That the Committee has considered the draft Petroleum Revenue Tax (Attribution of Blended Crude Oil) Regulations 2006. - [John Healey]
Committee rose at eighteen minutes to Five o’clock.
 
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Prepared 6 December 2006