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Session 2007 - 08 Publications on the internet General Committee Debates Finance Bill |
Finance Bill |
The Committee consisted of the following Members:Alan
Sandall, James Davies, Committee
Clerks † attended the
Committee Public Bill CommitteeThursday 5 June 2008(Afternoon)[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 96Abolition
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 98Meaning
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. Justine
Greening (Putney) (Con): This important part of the Bill
deals with oil, and specifically with North sea oil taxation. The
background to this debate is obviously
one of high oil prices. In 1999—ironically, the year in which
production of North sea oil peaked—oil was $18 a barrel. At that
time we were producing 2.8 million barrels of oil a day. Although oil
is now well over $100 a barrel—it is in the region of
$130—we are producing only 1.5 million barrels a day. That shows
how important the oil tax regime has been to this country, and it
continues to be so today.
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.
Oil and Gas
UK’s 2007 activity survey found that, in the past year,
investment fell by about £1 billion in real terms, to about
£4.5 billion—approximately a one-sixth
reduction. Certainty about the tax regime is vital for all industries,
and especially for oil companies whose investments are almost always
long term. More than that, it is critical that the tax regime for North
sea oil is simple, predictable and competitive. There is no doubt that
the surprise rise in supplementary corporation tax will not drive
business confidence in the tax regime, as has been highlighted by
industry producers themselves. Only last week we saw further proposed
tax changes, and one of the industry representatives who met the Prime
Minister was reported to have said that the Prime Minister’s
desire to increase oil production overnight slightly smacked of
desperation—increasing production is a very long-term
matter.
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?
Finally, I
take the opportunity to raise the broader issues of petroleum revenue
tax. Can the Minister shed any light on what the Government’s
next steps are expected to be following the publication of the
discussion paper, “Securing a sustainable future: a consultation
on the North Sea fiscal regime” in December 2007? The paper
contained quite a lot of debate on the future of
PRT and its possible abolition. I return to my earlier comments about
the importance of certainty in the industry. The changes in clauses 98
to 100 are welcome, as are other changes to PRT and to the capital
allowances regime, which we will discuss shortly. However, the industry
has flagged up much more fundamental concerns with me about the
uncertainty of the future of PRT. After the surprise change to the
supplementary charge in 2005, there is a concern that the Government
will suddenly make more unexpected and similarly dramatic announcements
on PRT. Will the Minister take this opportunity to provide the
Treasury’s latest view on the long or medium-term future of PRT
and North sea oil taxation? That would be very
welcome.
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