Mr.
Timms: I think that new sub-paragraphs 13(4) and 14(4)
serve a useful purpose, and I will attempt to persuade the hon.
Gentleman of that.
Those
sub-paragraphs modify the stamp duty land tax effective date provisions
for the purposes of rent to shared ownership schemes. Such schemes can
be structured in a number of ways. The structure referred to in those
sub-paragraphs involves a purchaser entering into a contract to
purchase a share of a property through a shared ownership lease or
trust but delaying completion for a pre-specified time, during which
the purchaser occupies the property as a tenant and pays a reduced
rent, which gives them the chance to save for the deposit that they
will need to purchase their share of the property. Under the normal
effective date provisions, occupation of the property in that way would
cause stamp duty to be payable before completion. The modification of
the effective date provisions in clause 81 ensures that the purchaser
does not have to pay stamp duty until they have purchased their share
of the property. Normally they would have to pay it when they signed
the contract, which would be earlier than we would
wish. Alison
Seabeck (Plymouth, Devonport) (Lab): I would welcome some
clarification on how the community land trust model would potentially
fit here. I might be completely wrong and this might be totally
irrelevant, but in that model a similar equity stake in a property is
bought over time. Has HMRC given any consideration to what might need
to be put in place to deal with that model when it comes
forward?
Mr.
Timms: I think that I will have to reflect on that
question and come back to my hon. Friend, but she is absolutely right
about the importance of the
arrangements. Among
the interesting aspects of my preparatory work for the debate on this
clause were the figures for the numbers of people who have taken
advantage of the Rent to HomeBuy option addressed here. I have been
given a note that states that by the end of March that figure was just
over 1,000, and by the end of May almost 5,000. The model that is
addressed here is therefore proving popular, and is one that people
want to take advantage of in the current difficult economic
circumstances. It is right that they should be able to do that. The
Conservative amendments would directly disadvantage the purchaser under
such a rent to shared ownership scheme, by making them liable to pay
stamp duty at the very time when they are trying to save for a deposit.
That is the purpose of allowing the dates to be deferred in such a
way. HMRC
will update its guidance, as the hon. Member for Hammersmith and Fulham
suggested. I think that subjecting purchasers to the normal effective
date provisions would make them liable for stamp duty land tax when
they are trying to save for a deposit and least able to afford it. On
the subject of well known paragraph 7,900, I shall point out that there
are not 7,900 paragraphs; it is simply a feature of the online
numbering, which perhaps gives an exaggerated impression of how many
paragraphs there are.
Mr.
Hands: I have listened to the Minister’s reasoning
on our two amendments and I am reasonably satisfied. I will look at the
matter again in more detail and come back to him in writing. I beg to
ask leave to withdraw the amendment.
Amendment,
by leave, withdrawn.
Clause 81
ordered to stand part of the Bill.
Clause
82Stamp
taxes in the event of
insolvency Question
proposed, That the clause stand part of the
Bill.
Mr.
Hands: Mr. Atkinson, will it be convenient to
consider schedule 37 with this?
The
Chairman: Yes, if it is more convenient for the Committee
to consider them as one, that would help matters.
With this it
will be convenient to take schedule
37.
Mr.
Hands: Thank you, Mr. Atkinson.
Clause 82 and
schedule 37 are slightly different, in that they relate to both stamp
duty land tax and stamp duty reserve tax. With the clause we return,
with interest, to repos, which have already featured in parts of the
Finance Bill. Where, due to the insolvency of one of the parties,
securities are not returned in the repo to the originator of a stock
lending or repurchase arrangement, a reverse repo arrangement and/or a
related transaction, the clause and schedule provide relief from stamp
duty land tax and stamp duty reserve tax. As discussed on Tuesday,
stock lending and repo arrangements involve the transfer of the full
title to the securities involved for a limited or temporary
period.
The clause
arises from the fact that the stamp duty and SDRT legislation exempt
the transfers from taxes because the ownership is temporary. However, a
default by the borrower or purchaser under repo or stock lending
arrangements such that the transfer becomes permanent reinstates the
charge to SDRT that would have arisen in the absence of relief. That
can happen when one of the parties to the transaction goes into
insolvency, which leads to, first, the creditors of the insolvent
entity having less money available due to the additional tax liability
and/or, secondly, a possible restriction on the ability of the solvent
entity to restore its original
position. The
clause prevents that by ensuring that no stamp duty or SDRT charge
arises when one party to the arrangement goes into insolvency. If the
solvent party does not have the shares or other securities returned, he
would probably have to purchase replacement shares from the market and
thus incur stamp taxes. The Finance Bill removes the SDRT charge from
purchases of replacement securities of the same kind and amount as
those transferred prior to the insolvency that afflicted the solvent
party at the end of the transaction.
The clause
and schedule were introduced in response to the Lehman Brothers
collapse in mid-September 2008, hence the start date of 1 September
2008. They have, as I see it, been
welcomed.
2.30
pm
Mr.
Timms: I am grateful to the hon. Gentleman for correctly
setting out the background to the clause. It arose because the collapse
of Lehman Brothers exposed the potential for unexpected stamp duty and
stamp duty reserve tax charges when stock lending and sale and
repurchase arrangements terminate because of insolvency. The overall
cost to the Exchequer of that relief, which is certainly a welcome help
for people facing unexpected costs, is nil. There is no net benefit or
cost to the Exchequer because any tax repaid as a result of a claim for
those reliefs is tax that the Government did not intend to be paid
anyway. It is a helpful measure and I am grateful for the hon.
Gentleman’s support for it.
Question
put and agreed
to. Clause
82 accordingly ordered to stand part of the
Bill. Schedule
37 agreed
to.
Clause
83Capital
allowances for oil decommissioning
expenditure Question
proposed, That the clause stand part of the
Bill.
Mr.
Hands: I mentioned earlier that the post of Exchequer
Secretary is currently a sort of revolving door at HM Treasury: since
the clauses on oil were included in the Bill just a few weeks ago, we
have gone through three Exchequer Secretaries, none of whom are present
today to explain them. Yet again, I congratulate the Financial
Secretary on being so multi-disciplined and able to answer on these
clauses. These are important clauses on North sea oil, and it seems
that that important area has been badly served by the Government,
particularly in recent weeks with the rapid change in Exchequer
Secretaries. Such a major part of our economy deserves better
treatment. Clause
83 is the first of eight clauses relating to North sea oil, each of
which gives 83 relates to schedule 38. It is a shame that my hon.
Friend the Member for Fareham and the hon. Member for Taunton are not
currently in their places, because this is my first opportunity to
introduce the word “smörgÃ¥sbord” into our
deliberations. One of them said that I might know something about the
word’s pronunciation, but I am not an expert on Nordic or
Scandinavian pronunciation. The only thing that I know about that is
that the last consonant should normally be softened, so
“smörgÃ¥sbord” should sound more like
“smorgasburgh.” I digress
slightly. Each
of the smörgåsbord clauses is extremely short, but many
of the schedules are almost interminable—in places, they are
very complex indeed. Clause 83 and schedule 38 deal with the extremely
important topic of decommissioning. In general, the UK faces some
important challenges in maintaining revenue from North sea oil while at
the same time getting the last drops out of existing fields and
extending our reach to the many smaller pockets of oil and gas that are
yet to be tapped.
Taxation
plays a crucial role both in companies’ decisions to invest and
in their decisions to decommission. It is important that the Government
get a fair return on a national asset, but neither in the case of
decommissioning,
nor in the case of exploration, is it in the national interest to have
oil in the ground, not least because unexploited oil produces no
tax. That
is not an anti-green statement. As important as bringing forward
alternatives and becoming more energy-efficient remains, we are likely
to be dependent on oil and gas for some decades to come. It is
financially stupid and less green to import more oil and gas than we
have to. It also raises serious problems about energy security,
as anyone who has observed Russia’s relationships with its
eastern European neighbours may have concluded. For as long as we are
stuck with fossil fuels, our own reserves are preferable in every
sense. I hope that all of that is stating the obvious and is widely
accepted. Therefore, we need to take great care in how we handle
decommissioning. Our aim must be to recognise properly the cost in
decommissioning a field effectively and safely. However, we must also
do what we can to ensure that the remaining pockets of oil in a field
can still be economically exploited. So the debate about schedule 38 is
set in that
context. Although
we have ceased to be self-sufficient, UK oil and gas still accounts for
about 70 per cent. of our primary energy demand. The industry talks in
terms of “barrels of oil equivalent” when it lumps oil
and gas together. Using that measure, it is estimated that the
equivalent of up to 25 billion barrels of oil is still recoverable
across the UK continental shelf, which is sometimes abbreviated to the
UKCS. The Department of Energy and Climate Change estimate is more
modest than that, but it still thinks that there are between
17 billion and 20 billion barrels of oil equivalent left
under the UKCS, which extends slightly beyond the North sea, as we will
discuss when we debate a later clause in relation to oilfields west of
the Shetland isles.
Those
figures—17 billion to 20 billion from DECC or 25 billion from
the industry—can be compared with the 39 billion barrels that
have been recovered so far over the lifetime of the North sea fields.
In other words, and to put decommissioning in context, we are just
under two thirds of the way through our own North sea oil. As the UK
currently produces about 1 billion barrels a year, the potential for
the future is still clear. Oil & Gas UK, which represents the oil
and gas industry, estimates that North sea gas could still meet 20 to
25 per cent. of our gas demand in 2020. Regarding oil, it
believes that as much as 60 to 65 per cent. of UK oil demand could
still be met from the North sea. That is where the decommissioning
regime, which is referred to in detail in schedule 38, has the
potential to come into its own.
A decline in
overall annual production is inevitable, but it need not be as steep as
is popularly imagined, if we can get the decommissioning regime right.
Furthermore, declining production does not necessarily equate in any
way to a declining industry in the manner that was previously familiar
with elements of UK manufacturing. Let me explain that point: we host
world-class expertise in offshore engineering, and we lead the way in
subsea technology. More than 34,000 people are directly employed by the
major companies and contractors on average earnings of £50,000
per annum.
I notice the
curious absence of the Scottish National party spokesman from our
deliberations this afternoon. I would have thought that the elements of
part 6—
Mr.
Syms: I understand that the hon. Member for Dundee, East
has a problem with a daughter who has a broken arm, so there is a
reason why he is not here.
Mr.
Hands: I thank my hon. Friend for that intervention. I
must say that I was genuinely unaware of that family problem.
Therefore, I want to put on the record the fact that I do not impugn
the integrity of the SNP’s spokesman or that of the SNP as a
whole in not being here to express an interest in North sea oil, on
this occasion at least.
Aberdeen is
renowned as a centre of excellence and is home to a number of vibrant
specialist companies that export their services across the world.
However, the future challenges are also considerable. On current plans,
of the 25 billion barrels of equivalent reserves, according to UK Oil
& Gas, or the 20 billion barrels, according to DECC, that remain in
the UKCS, only 10 billion barrels will be recovered—I think that
that is the Government’s own estimate. That means that half of
what is left, or 15 years’ worth of barrels at
current annual production levels, will remain in the sea
bed. It
is very important that we get the decommissioning regime right. We need
to incentivise companies to get out as much as they can from beneath
the North sea. That is where the high costs of decommissioning really
come into play. If any members of the Committee doubt its value, they
should reflect that in 2008-09, oil and gas accounted for 28 per cent.
of corporate taxation in the UK, with receipts of more than £13
billion. Put slightly differently, taxation from the North sea paid for
last year’s transport
budget. Clause
83 and schedule 38 are, we are told, anti-avoidance measures, which we
broadly support, as long as care is taken that the measures have no, or
minimal, side effects. New fields need first to be explored and then
developed, and the easy targets have long since been exploited. What is
left is smaller, more difficult to get to and, in the case of the west
of Shetland, located in fairly inhospitable regions. About 7 billion
barrels are in the form of so-called heavy oil. As someone in the
industry put it when they came to see me a couple of weeks ago, heavy
oil is called heavy because, if one pours it into a cup and then turns
the cup upside down, it does not come
out. The
existing fields present different problems, and getting the last of the
oil and gas out involves not only additional investment, but also
deferring decommissioning. We need to be extremely careful about how we
structure the tax relief available for decommissioning as laid out in
clause 83 and schedule 38. The costs of decommissioning are
huge—they are far greater than the annual and diminishing
returns from fields near the end of their lives—and they are met
by offsetting the costs against previous tax receipts. In other words,
HMRC provides a sizeable tax rebate for decommissioning. Naturally
enough, the rules under which fields qualify for the rebate become the
determining factor, as well as whether there is still oil or gas to be
had, in the decision to cease production. In other words, companies
make a logical, economic decision based on the oil and gas that might
still be in the field, the costs of decommissioning, the relief that
they will get and the time span over which they will get
it. Now,
nothing that I have said so far is meant to suggest that the Government
are not aware of the issues. Governments of both main parties have a
long
track record of discussions with the oil and gas industry, which
recently culminated in this Government’s paper,
“Supporting investment: a consultation on the North sea fiscal
regime”, last November. The paper summarised last year’s
round of discussions and prepared the ground for the proposals under
discussion, which include schedule
38. The
paper describes the general situation quite well. For example, it
states that the continental shelf
is “facing
increasing challenges due to its nature as a maturing basin. The easy
to recover hydrocarbons have been exploited and the remaining
opportunities are, increasingly, either smaller in size or require the
use of cutting edge technologies to enable extraction. One result of
this is that many potential projects have become commercially marginal
and unable to compete with other projects around the globe. These
challenges are exacerbated by the current uncertainty over future oil
prices and the high cost levels faced within the North
Sea.” That
was the conclusion in response to the
consultation. The
financial environment in which companies operate has changed
considerably since the proposals under discussion were first conceived.
Oil prices collapsed before recovering sharply but partially, and
difficulties in the capital markets have caused big problems,
particularly for the smaller companies that the Government have quite
rightly encouraged to operate in the North sea. At present, annual
investment may drop from £5 million to £3 million by the
end of the year, and warnings have been sounded about an irrevocable
loss of production from the fall in capital and exploration investment.
While the proposals might have been well received when oil was trading
at more than $100 a barrel and capital was relatively easy to come by,
the Budget has done little to allay the industry’s fears in the
current market. Even if the oil price returns to higher levels, the
relative attractiveness of the UK continental shelf vis-Ã -vis
other oil fields will remain a
problem. The
Treasury’s conundrum, as ever, is to find the balance that
maximises revenue, which provides the immediate backdrop to the
four-page schedule under discussion. The Treasury also needs to set
down a stable, predictable framework in which companies feel safe to
plan. One complaint in this policy area, which I am afraid we have
heard made all too often of this Government over many Finance Bills, is
the level of short-term chopping and changing that characterises their
approach. 2.45
pm Turning
to decommissioning, and the substance of clause 83 and schedule 38, the
Government appear to be moving to reinforce the rule that
decommissioning costs can only be written off when they are actually
run up. The consultation paper puts it thus:
“Virtually
all capital expenditure incurred in the North Sea, including putting
the plant and machinery in place, or in dismantling it at the end of
the life of an oil field, now qualifies for one hundred per cent First
Year Allowances (FYAs), allowing the cost to be written off for tax
purposes in the accounting period in which the expenditure is
incurred.” That
is the rule that they set out, but this rule is, in turn, under attack.
The explanatory notes accompanying the Bill include this rather coy
remark: “The
Government has become aware of arrangements that have been entered into
which seek to establish a claim for tax relief for decommissioning
costs several years in advance of any decommissioning work actually
being carried out. This undermines
a fundamental general principle that relief is given in the accounting
period, for costs incurred in respect of the work actually carried out
in that accounting
period”. As
I understand it, these “arrangements” are the much
gossiped about arrangements of one particular company, and in the
tradition of anti-avoidance stuff, these companies do not tend to be
mentioned in debates on the Finance Bill. I was not intending to do so
anyway. However, this company, has, I understand, sought to circumvent
the principle by creating some intra-group structures intended to
justify an early claim for the relief on decommissioning. The principle
as it stands is proper and appropriate, as it is only when actual costs
are being incurred that the true cost of decommissioning can be known
with certainty. We therefore support the intent of the
Government’s proposals, but I would like some reassurance from
the Minister that the way schedule 38 is drafted will not inadvertently
create problems around so-called mid-life
decommissioning. Decommissioning
is actually a legal requirement and the costs involved are huge,
greatly outstripping the annual revenue that a declining field will
generate—I return to the point about the equation of what is
left to exploit vis-Ã -vis decommissioning costs and the relief
given against them. Hence, the rules governing the relief of
decommissioning costs against the tax previously paid on the income
from a field assume far greater importance near the end of the life of
a field than getting all the remaining oil out. As I understand it, in
the Government’s proposals there is a danger of prompting the
total closure of a field to secure, beyond doubt, the capital allowance
for the full cost when, in fact, a limited number of platforms within
the field could have continued to operate. Again, it is about trying to
get as much out of the UKCS as we possibly can within a reasonable tax
framework. While
oil companies would lose some revenue by doing this, guaranteeing the
full capital allowance is, for them, the overriding priority. For the
Exchequer, this approach makes no sense at all. The more oil that can
be extracted for the Exchequer, the more tax HMRC will collect. I would
appreciate the Minister’s comments on whether schedule 38 runs
the risk of leaving too much oil
behind. To
summarise on clause 83 and schedule 38, companies producing oil and gas
in the UK and on the UKCS have a statutory requirement to decommission
oil and gas fields at the end of their life. They are able to obtain
relief for such decommissioning costs in the form of 100 per cent.
capital allowances against ring-fenced profits once they have been
incurred. The Government have stated that it has become aware that some
companies—I thought it was only one company—have entered
into intra-group arrangements designed to enable a claim for tax relief
to be made before the actual decommissioning work is carried out. It is
unclear whether the 100 per cent. ring-fenced abandonment relief, which
was introduced in 2001 for corporation tax, had the intended effect
that relief for decommissioning costs were only available when the
decommissioning actually took place, particularly following the
relaxations of the conditions for relief made in last year’s
Finance Act. Certain companies have therefore entered into contracts
for decommissioning services and claimed relief in respect of payments
made under these contracts even though the actual decommissioning may
be some years away.
The proposed
changes to the legislation here apply to decommissioning expenditure
incurred on or after 22 April 2009. It provides that
expenditure must be incurred and paid out in respect of an approved
abandonment programme and it will be allowable only in the accounting
period in which the decommissioning period is carried out or
undertaken. If the expenditure in respect of which a claim is made is
disproportionate to the decommissioning carried out, the claim can be
reduced by HMRC proportionately. We have a few concerns, which we have
outlined, but nevertheless we will support clause 83 and schedule
38.
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