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 arms length and non-arms
length prices for the disposal of the oil that they producedin
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 arms 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 Majestys 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 usthe 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-arms 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-arms 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
arms 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-arms 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 HMRCthat of the use of forward
contracts to find the lowest price for tax purposeswas 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
therethe Financial Secretary, the hon. Member for Falmouth and
Camborne and myselfin 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. Ladys 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
oclock.