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Session 2007 - 08
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Finance Bill

Finance Bill

The Committee consisted of the following Members:

Chairmen: Frank Cook, Mr. Jim Hood, † Sir Nicholas Winterton
Atkins, Charlotte (Staffordshire, Moorlands) (Lab)
Blackman-Woods, Dr. Roberta (City of Durham) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Chapman, Ben (Wirral, South) (Lab)
Eagle, Angela (Exchequer Secretary to the Treasury)
Efford, Clive (Eltham) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Greening, Justine (Putney) (Con)
Hall, Patrick (Bedford) (Lab)
Hammond, Mr. Philip (Runnymede and Weybridge) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hesford, Stephen (Wirral, West) (Lab)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Joyce, Mr. Eric (Falkirk) (Lab)
Kennedy, Jane (Financial Secretary to the Treasury)
Morden, Jessica (Newport, East) (Lab)
Newmark, Mr. Brooks (Braintree) (Con)
Palmer, Dr. Nick (Broxtowe) (Lab)
Penrose, John (Weston-super-Mare) (Con)
Pound, Stephen (Ealing, North) (Lab)
Pugh, Dr. John (Southport) (LD)
Sharma, Mr. Virendra (Ealing, Southall) (Lab)
Simon, Mr. Siôn (Birmingham, Erdington) (Lab)
Thornberry, Emily (Islington, South and Finsbury) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Economic Secretary to the Treasury)
Viggers, Peter (Gosport) (Con)
Wright, David (Telford) (Lab)
Alan Sandall, James Davies, Committee Clerks
† attended the Committee

Public Bill Committee

Thursday 5 June 2008


[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 3, 5, 6, 15, 21, 49, 90 and 117 and new clauses amending section 74 of the Finance Act 2003)

1 pm
The Chairman: I welcome all Members to this sitting of the Finance Bill Committee. I feel duly refreshed, having had a plate of spaghetti Bolognese and my hair trimmed. That was not a large job, I confess, but I was told by the young lady who dealt with me that what is left is quality. I am sure that we will make good progress this afternoon.

Clause 96

Abolition of fixed stamp duty on certain instruments
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to consider Government new clause 6—Gifts inter vivos.
I call Kitty Ussher—what a pleasure.
The Economic Secretary to the Treasury (Kitty Ussher): The pleasure is all mine, Sir Nicholas. May I start by saying how nice you look with your new haircut?
Clause 96 contributes to the reduction of the administrative burden on business of complying with stamp duty legislation by exempting from duty a variety of instruments that transfer ownership of shares where there is not a sale and purchase for consideration. Those instruments will therefore no longer need to be stamped by Her Majesty’s Revenue and Customs and may be sent directly to the company registrar to change the share register. The detailed provisions are set out in schedule 32. This deregulatory measure has been widely welcomed and I am sure that all members of the Committee will agree that it is sensible.
New clause 6 ensures that clauses 95 and 96 will achieve their intended effect with respect to instruments executed to gift stock or marketable securities by removing the requirement for those instruments to be presented to HMRC for denoting as not chargeable with stamp duty. Approximately 900,000 instruments are executed each year to transfer ownership of shares and securities. Previously, a range of transactions not involving sales or purchases could be certified under Treasury regulations as exempt from stamp duty, meaning that some 550,000 instruments did not have to be presented to HMRC for stamping. Of the remaining 350,000 instruments that had to be presented, two thirds were stamped only with the minimum £5 stamp duty because either the consideration given was £1,000 or less, or the instrument was of a type that attracted a nominal fixed £5 charge. That places a significant cost in resources on business for a comparatively small amount of duty. KPMG assessed the costs to business of complying with the stamp duty legislation as £49 million, of which some £41 million was attributed to the need to present instruments to HMRC for stamping.
The Government are keen to drive down as far as possible the administration costs of complying with tax legislation, and have therefore decided to remove the need for instruments attracting only the nominal £5 fixed stamp duty to be stamped. In future, those instruments will be exempt from stamp duty and may be passed direct to the registrar to update the register of shareholders. Together with clause 95, the new clause will reduce the number of documents that need to be seen by the Stamp Office by around 230,000, reducing the administrative burden on business by £13.8 million annually, while simultaneously achieving efficiency savings for HMRC.
One category of instruments impacted by these changes is instruments gifting stock or marketable securities. Previously, where the gift was for no consideration, the instrument was potentially chargeable with a £5 stamp duty but could be certified as exempt under Treasury regulations. Where the gift was for inadequate consideration, an ad valorem stamp duty charge at the rate of 0.5 per cent. of the consideration provided was chargeable. Clauses 95 and 96 of the published Bill will remove both the £5 stamp duty charge and the requirement to certify the instrument of transfer and also disapply the ad valorem charge for instruments where the consideration was less than £1,000.
Since the Bill was published, however, it has been pointed out that those changes have activated another provision that would prevent such instruments being regarded as duly stamped unless they were formally adjudicated by HMRC as non-chargeable for stamp duty. That would mean having to present them for stamping even though no duty is payable. That would reverse the intended effect of reducing the number of instruments that needed to be presented to the tax authority.
New clause 6 will ensure that the original aim is met by removing the provision that would strictly require instruments gifting stock or marketable securities to be adjudicated. The new clause will therefore enable the full amount of the projected reduction of business costs to be realised.
Question put and agreed to.
Clause 96 ordered to stand part of the Bill.
Schedule 32 agreed to.
Clause 97 ordered to stand part of the Bill.

Clause 98

Meaning of “participator”
Question proposed, That the clause stand part of the Bill.
The Chairman: With this it will be convenient to consider clause 98 stand part, clause 100 stand part, and Government new clause 7—Abandonment expenditure: deductions from ring fence income.
The oil industry makes a significant contribution to our economy. It has done so since North sea oil first came on stream in the late 1960s. We have already extracted 35 billion barrels of oil, and latest estimates suggest that a further 30 billion barrels of oil remain on the UK continental shelf. We have seen in excess of £200 billion being spent on exploration and capital investment. The industry has of course generated significant employment opportunities, not least in Scotland; I understand that more than 100,000 people are employed there as a result of the oil industry.
We should not forget the Committee’s interest in the tax side of the industry. Tax revenues generated from North sea oil amount to well over £200 billion. That is an impressive contribution, and we should bear it in mind throughout our deliberations on this part of the Bill. Despite all those accomplishments, however, there is no doubt that these are challenging times for the industry. Rising oil prices bring opportunity, but it turns out that they also bring costs. There may be more opportunity because revenues are greater—ceteris paribus, that means that if oil can be got out of the ground then it is obviously worth far more—but costs have also become a greater factor for the industry for two main reasons.
First, because many of our larger North sea oil fields have been extensively pumped, much of the remaining oil that we seek to continue extracting is from much smaller fields. As a result, that oil is often more technically difficult to reach than the oil reserves that we have been pumping so far. It is an increasing challenge for the country and the industry to reach the remaining reserves, although the news is welcome that those reserves could be a fifth higher than expected.
The second thing that has pushed up the cost of producing the oil results from the fact that the price of oil has increased. Many producers are now looking at pumping oil out of fields that were previously uneconomic. As I said, some of those fields are technically challenging, which has resulted in an increased demand not just for a skilled work force, needed to operate in this area, but for the rigs and various pieces of kit that have to be used to get to the extra oil safely.
According to estimates by Oil and Gas UK, since 2003 the cost of extracting oil from the North sea has doubled to $10 a barrel, which has put pressure on the industry’s capital efficiency. As a result, in recent years North sea oil production has declined steadily: since its peak in 1999—two years earlier than expected—it has fallen by one third; and, worryingly, production has consistently been below forecasts, so it has declined at a faster rate than expected. That has gone hand in hand with a dramatic, real-terms reduction in investment in exploration and production, which in turn has had a bearing on the reduction in oil production.
The changes in clauses 98 to 100 to petroleum revenue tax are largely welcome. As I understand them, they will amend the petroleum revenue tax legislation, so that if an existing licence holder defaults on its decommissioning obligations, and the former licence holder is therefore required to meet it, the former licence holder will still have access to PRT relief, as it would have done had it remained a party to the licence. That is a welcome change to previous legislation under which the industry had to operate. The industry had expressed concerns about who pays for the decommissioning of mature, offshore oil installations. Moreover, there have been concerns that the uncertainty has put off new entrants from coming into the market. Clearly, we all want the North sea oil reserves that we have to be fully extracted as far as they possibly can.
1.15 pm
The Royal Bank of Scotland estimates that around 450 offshore installations will need to be decommissioned over time and that the cost of that could be between £15 billion to £20 billion up to 2030. Under current legislation, those licences in North sea fields that have multiple owners could still be liable for decommissioning, even if they receive no financial benefit from owning the licence. That and recent market changes—the shift down in the number of asset sales by large companies to new small and medium-sized players entering our UK market, who had been wanting to do that because they were encouraged by increased oil prices—have created a need to add some clarity to the whole area of decommissioning costs. It was incumbent on the Treasury to do what it has done and bring forward proposals on who should ultimately end up paying for the decommissioning of old oil installations, as well as introducing proposals on how that should work in the context of PRT relief.
Oil and Gas UK has welcomed that. In relation to the situation that we had before these proposals, it has said:
“It’s the uncertainty that’s the killer”.
Clearly, the matter needed to be addressed. Indeed, larger oil companies, such as Shell, have said that the present situation with uncertainty over decommissioning costs was slowing down asset sales. There is clearly an issue and it should be welcomed that the proposals will address it.
Clause 98 sets out what is meant by the term “participant”. I realise that clauses 99 and 100 outline the changes to the PRT framework regarding abandonment expenditure and the mechanism by which the share of the expenditure is to be attributed to the defaulter. The clause also refers to other aspects of the process by which the relief will be gained, including conditions regarding payment and liability in relation to the abandonment expenditure. I understand what the Government are trying to achieve in the changes contained in the clauses. I shall not go through the intricacies of PRT in detail, but I want to quickly pick up on a few points of clarification that I want to raise with the Minister. I will also ask a broader question about the future of PRT as a whole, given that there has been discussion between the Treasury and the industry on that matter.
First, under clause 99(1) of the Bill, proposed new paragraph 2B(4) of schedule 5 to the Oil Taxation Act 1975 refers to the condition that participators must have taken all reasonable steps by way of legal remedy. Will the Minister give some examples of what the Treasury considers would constitute a demonstration of having taken all legal steps? I am not especially concerned with the phrase
“all reasonable steps by way of legal remedy”,
but it might be worth clarifying what kind of legal steps we are talking about, so that the industry is left in no doubt about what that would constitute.
Secondly, the amendments to the existing PRT regime that are made in these clauses come into effect in relation to expenditure incurred after 30 June 2008. Will the Minister explain the significance of that date? I am sure it is perfectly straightforward, but some clarity about the rationale for choosing 30 June would be welcome.
On energy security, we have talked about the fact that we have gone past peak oil and I think over the past two or three years we have become a net importer, our oil production not meeting our oil needs. I would briefly like to ask about the framework of encouraging new entries into the tax framework. I understand that both the PRT section of the Petroleum Act 1998 and the ring-fenced supplementary corporation tax legislation of the same Act outline the use of what is called a linear model regarding the lifetime of North sea oil and gas assets. Does the Minister have any view on whether it might at some point be necessary to depart from that linear model outlook to improve our chances of maintaining our country’s future energy supply? Any insight she can provide in that area would certainly be helpful.
It would also be helpful to hear a little more about the Government’s assessment of how large a problem the Treasury feels that we have with decommissioning, in relation to the changes in clauses 98 to 100. How many participants does the Minister expect to take advantage of those extended provisions? What is the Treasury’s estimate of the relief that the extension will provide to the industry and businesses in coming years? Do the Government feel that there is already a problem with companies defaulting on decommissioning costs, or are they trying to head it off before it becomes an issue? Are they worried that some of the smaller companies that buy assets from larger oil companies might not be in a position to decommission properly?
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Prepared 6 June 2008