Mr.
Timms: I start by reassuring the hon. Gentleman about the
seriousness with which we are dealing with this part of the Bill. I
certainly relish the opportunity to debate this area of policy, having
first had responsibility for it almost 10 years ago. I am probably not
the best qualified member of the Committee to debate this part of the
Bill. That is probably my hon. Friend the Member for Waveney, because
of his long experience as chair of the all-party group on offshore
activities. I can certainly reassure the hon. Gentleman that we have
consulted widely and put a great deal of work into the clauses in this
part of the Bill, which my hon. Friend the Economic Secretary and I
will be
addressing. The
package of changes as a whole could assist in unlocking up to an
additional 2 billion barrels of oil and gas from the North sea. That is
an increase of 20 per cent. on the production that is
currently planned. This is a vitally important resource from the point
of view both of our energy security and the economy. The extra
production that these changes will unlock can play an important role in
the UK economy. As my hon. Friend the Member for Waveney knows better
than anyone, we have extremely good links with the offshore industry.
We have had those for a long time. We have forums—the Pilot
forum in particular—in which we can discuss these matters and
make sure that we can take full advantage of the industry’s
expertise and advice in coming up with a regime that can do the best
possible job for the UK
economy. The
first clause deals with an avoidance problem, addressing arrangements
under which companies claim tax relief for the cost of decommissioning
oil and gas infrastructure in the North sea many years in advance of
the work actually being carried out. These arrangements are deliberate
avoidance. Schedule 38 amends the rules that provide tax relief for
decommissioning costs with effect from the Budget. The rules will make
sure that companies can claim tax relief for decommissioning costs only
during the accounting period in which the work is carried
out. I
can give the hon. Gentleman the reassurances that he was seeking. The
changes proposed by this measure will not prevent companies obtaining
tax relief for their decommissioning costs when the work is carried
out. It is important to note that oil companies have access to a very
generous regime for tax relief for decommissioning expenditure. That
tax relief is there for a good reason and this change does absolutely
nothing to reduce the access that companies have to that. Oil and gas
companies come to the North sea under the terms of licences, which
require them to decommission their installations and infrastructures at
the end of an oilfield’s productive life. Companies understand
that obligation. They make
arrangements to meet it knowing that tax relief will be available for
those costs when the work is carried out. Nothing here will diminish
that access. The arrangements that the clause and schedule address are
undermining those activities and seeking to obtain advantage over other
companies who are not prepared to enter into an avoidance scheme of
this kind. This avoidance scheme is not a consequence of last
year’s changes. It provides companies with the certainty that
they will receive relief for their decommissioning costs for the period
in which the work is actually carried out, which up until recently was
the position that everybody thought
obtained. Question
put and agreed to.
Clause
83 accordingly ordered to stand part of the
Bill. Schedule
38 agreed
to.
Clause
84Blended
oil Question
proposed, That the clause stand part of the
Bill.
Mr.
Hands: Clause 84 and schedule 39 refer to blended oil. For
the benefit of newcomers to the oil debate, I shall explain briefly the
three basic elements in the North sea fiscal regime. The first is
petroleum revenue tax; the second, corporation tax which, as we know,
is ring-fenced in the case of the North sea; and the third, the
supplementary charge. PRT, which is at the heart of schedule 39,
applies only to the older, larger fields at a rate of 50 per cent. of
net income. It applies to specific fields given development consent
before 1993. A number of allowances and reliefs apply. In practice,
most pre-1993 fields do not pay it. Where they do, however, it
generates considerable revenue.
While
schedule 39 is about PRT, it is important when considering it to
understand the effects of the other two parts of oil taxation operating
in the North sea. Corporation tax applies to companies’ upstream
oil and gas profits within the North sea ring fence at a rate of 30 per
cent. The ring fence prevents companies off-setting losses in other
downstream parts of their businesses against their upstream profits.
This is an area affected, as we saw, by the previous clause on capital
allowances, although decommissioning issues are also prevalent with
PRT.
The
supplementary charge applies, as its name suggests, as a supplement to
corporation tax. When it was introduced in 2002 it was levied as an
additional 10 per cent. charge on ring-fenced profits and was increased
to 20 per cent. in 2006. As Members will already have calculated, this
means there is a marginal rate of 50 per cent. on most fields, rising
to approximately 75 per cent. on fields subject to PRT. These rates are
high and, as the Government acknowledge, may be too high to attract
future investment in fields where oil is difficult to extract. We will
come in a later clause to consider the widening of the North sea oil
regime to provide an incentive for areas such as high-pressure and
high-temperature oil fields.
With that
brief exposition of the three main areas, I will turn to schedule 39
itself. Oil from different fields commonly shares a pipeline back to
the shore, despite the fields falling under different ownership, and it
is then sold after blending in the pipe. Brent crude is itself a blend.
There is an obvious need for tax purposes to establish the relative
strengths in the blend and from
which fields the oil came, as it is the companies that face the tax. In
the case of PRT, the field of origin determines whether PRT is
applicable, so it is vitally important to sort out that blend. As I
said, co-mingling occurs when hydrocarbon from one field is mixed with
hydrocarbon from another during transportation to the UK or its first
port of discharge; and the hydrocarbon is then sold on as a
blend. When we look
at our smörgåsbord of crude oil blends, including Brent,
Forties, Flotta, Wytch Farm, Beryl, Maureen and Triton—the last
three being co-mingled and lifted off-shore—the number of
contributing fields in each varies from two constituents in the case of
the simplest blends, such as Wytch Farm and Wareham, to more than 20 in
the case of Brent, which from August 1990 also incorporated the Ninian
system, and more than 30 in the Forties field. Similarly, a number of
co-mingled gas systems—separate from oil—exist, usually
named by reference to the pipeline or the terminal, such as SAGE, CATS,
FLAGS and LOGS. There is even one named after a part of the
country—Easington. I think there is only
one.
3
pm Section
63 of the Finance Act 1987 gave statutory effect to the arrangement
that has been used in the past for determining the taxation on those
blends or co-minglements. All participators in fields contributing to a
blend of oil were required to furnish details of the method of
allocation by 1 August 1987, or if later, within 30 days of making the
first allocation under that method. In other words, companies have to
report how the blend works. Failure to comply with that requirement
incurs a penalty of up to £500 per participator, with a
subsequent daily penalty after the failure has been declared by the
court or commissioners. Any change in the method of allocation requires
details of the revised method to be notified within the same 30-day
time scale. What is important is that much of that arrangement will be
abolished, and I am pointing out the convenience of its abolition. I
have printed out a copy of the Government’s guidance under the
Finance Act 1987 on exactly what must be done prior to the creation of
a blend or a reporting of the changes to a
blend. The
proposals in schedule 39 simplify the rules on allocation and drop the
requirement that routine changes be backed up by extensive
documentation sent to HMRC. The reform has been welcomed by the
industry, and will reduce the compliance work load that companies face.
The Government’s criteria for reform, as set out in the
consultation document “Supporting investment”, fall under
seven broad headings: promote investment and production, ensure a fair
return for the UK taxpayer, be non-distortionary, be equitable, improve
stability, be sustainable and, most importantly, reduce the
administrative burden. In that abbreviated form it is difficult to
disagree with the criteria. The fuller explanations are more
substantive, but we find no issue with those criteria.
Whether those
seven aims have been pursued as rigorously as they might have been in
the Finance Bill in general is open to debate. Schedule 39, besides
being equitable in the sense of not disproportionately affecting any
one section of companies, mainly lays claim to meeting the last
criterion—a reduction in the administrative burden. The
explanation of the criterion in annex B of the “Supporting
investment” document reads:
“Any
changes to the fiscal regime should not increase the administrative
burden on companies involved in the North Sea, either by increasing the
complexity of the current regime, or through adding to the reporting
requirements. Government should also actively look to reduce the
administrative burden where
possible.” It
seems that by simplifying the blended regime perhaps as far as
reasonably possible, the Government will at least have modestly
reduced, in this one area, the administrative burden facing the oil and
gas
sector.
The
Economic Secretary to the Treasury (Ian Pearson): It is a
pleasure to serve under your chairmanship this afternoon,
Mr. Atkinson. I am sure that members of the Committee will
have enjoyed the dilation on the structure of taxation in the oil and
gas industry given by the hon. Member for Hammersmith and Fulham, and
his comments on blended oil and the bureaucracy that has been involved
in the system to date. I note that he welcomes the measures in clause
84 and schedule 39. They have been subject to discussions with the
industry, and I think that there is consensus on the approach that we
have adopted. This is a useful simplification measure and I am glad
that it is widely
supported. Question
put and agreed
to. Clause
84 accordingly ordered to stand part of the
Bill. Schedule
39 agreed
to.
Clause
85Chargeable
gains Question
proposed, That the clause stand part of the
Bill.
Mr.
Hands: I start by welcoming the Economic Secretary to the
debate. I said at the start of the debate on clause 83 that four
Ministers have been responsible for the North sea oil and gas regime
since the Bill was published, but in the short space of time since then
we have gone up to five. Nevertheless, I am delighted to see him in his
place and look forward to hearing his views on the sector over the
coming minutes.
Mr.
Mark Field (Cities of London and Westminster) (Con): I am
sure that my hon. Friend will be delighted by the absence of the hon.
Member for Dundee, East, because it would have been pointed out that
there are, no doubt, several Members of the Scottish Parliament who are
also responsible for those matters. Dealing with the five Treasury
Ministers will be quite enough for the time
being.
Mr.
Hands: We have already reflected on the absence of the
hon. Member for Dundee, East, but I am told it is due to an
injury.
The
Lord Commissioner of Her Majesty's Treasury (Mr. Bob
Blizzard): His daughter has broken her arm, and he has
given me his
apologies.
Mr.
Hands: Yes, so I will not pursue that subject. Questions
of devolution, although probably interesting, are perhaps not pertinent
to clause 85 and schedule 40.
I am extremely
unhappy about the way that 31 Government amendments to
schedule 40 have been tabled. They might have reached the Clerks by the
time limit on Tuesday, but they did not arrive with me through the
internal post until 2 pm yesterday, despite the fact that I have
requested, as Members may now do, as you probably know, Mr.
Atkinson, to be bumped up to the maximum number of deliveries a day,
which I think is four. Previously I had my post delivered once a day,
but when I joined the Committee there was such an incoming load of
Government amendments and personnel changes that it seemed wise to
increase its
frequency. In
normal circumstances, with three or four amendments, tabling them so
late might be acceptable, but 31 Government amendments really is an
awful lot to digest, especially when dealing with so complex a
schedule. It is difficult for the Opposition to scrutinise the result
properly, when there is such a number of amendments. I should point out
that I submitted three or four amendments of my own, so I am not saying
that the Government alone are guilty, but submitting 31 Government
amendments at the last moment makes life extremely difficult, given the
resources with which Opposition parties
operate. The
debate will be slightly difficult because I believe that many of the
Government amendments are designed to overcome the problems highlighted
in our amendments. I will rely to some extent on the Economic Secretary
to explain the competing merits of some of the Government amendments,
relative to the merits of the Opposition amendments, because I cannot
say with absolute certainty what those are, having been unable to
devote the time needed to determine the merits of A or
B. Part
of enabling the maximum recovery of economic reserves from the UK
continental shelf in the future lies in ensuring that the licence
interests are in the hands of companies that are willing to invest. The
current chargeable gains system can deter companies from swapping or
trading assets to achieve that, and that is what schedule 40 is
intended to deal with by making it easier for companies to trade
assets.
The schedule
has two parts. Part 1 extends chargeable gains exemptions on licence
swaps from being limited to pre-development licences, as is currently
the case, to being an exemption on all licence swaps. As before, the
licences will be required to be of equal value, but developed fields
can now also be traded among companies. That means that companies will
have greater scope to realign their assets. It should, therefore,
become easier to create concentrations of fields that could make
further investment more economic. In other words, in the latter part of
the life of a few of those fields, being able to trade them and perhaps
combine such a field with two or three smaller fields nearby would make
exploitation easier and more economic. That sounds like something we
want to encourage.
Part 2 of the
schedule allows companies to avoid a chargeable gain on the sale of an
asset, provided that the proceeds from the sale are reinvested within
the North sea ring fence. Until now, a company making a disposal of a
UK licence interest is subject to corporation tax on the chargeable
gains that arise, although there is a possibility that the gain can be
held over by reinvesting the proceeds into certain classes of asset. If
the reinvestment is in a qualifying class of asset, the gain is held
over until 10 years have elapsed, or the new asset is disposed of,
whichever happens earlier. Part 2 takes most forms
of reinvestment out of chargeable gains altogether, as long as certain
conditions are met. The combined effect of both parts of the schedule
should stimulate asset trading in the UKCS, either by allowing assets
to be transferred to a company willing to invest in certain fields, or
by enabling a series of transactions to be undertaken to align
interests. The
Government have tabled 31 amendments. My understanding is that they
would increase the number of licences that can be swapped in a single
transaction and tighten the definitions used in part 2. Broadly, they
seem to increase the flexibility of the schedule.
Government
amendment 258 is especially welcome as it reflects a concern, raised
directly with me by the industry, that the schedule was drafted too
narrowly in excluding other companies within a group of companies from
the criteria for reinvestment. That is probably the most liberalising
amendment. The inclusion of other companies within a group, on the
condition that they are within the ring fence, is also sensible and
should increase the number of disposals, while at the same time
removing the temptation for companies to find ways to work around the
rules.
In her letter
to the Committee setting out the amendments, the rather short-lived
Exchequer Secretary—I think the hon. Member for Burnley lasted
nine days, all told, but she found time to write this letter—she
explained that the amendments were
“the result of
consultation with the industry following the publication of the Finance
Bill.” As
I have said, the industry also raised those points with me and we
welcome the Government’s willingness to listen and modify their
proposal.
We tabled our
amendment 266 in an attempt to deal with the situation of groups. It
was anomalous to require that proceeds had to be reinvested by the
company—the same company—that realised the chargeable
gain, rather than extending the reinvestment provision to place it on a
group basis. That would have, or should have, given rise to greater
flexibility. Our amendment sought to exploit the similar arrangements
that related to holdover relief and to apply them to exemption. If the
Minister gives an assurance that the Government amendment will, in
practice, provide the same result, I shall be happy to withdraw
amendment 266.
Although the
Government appear to have accommodated groups of companies in response
to the feedback they received, they have not gone quite as far as they
could in other respects. In particular, it appears that insufficient
provision has been made for companies reinvesting in so-called subsea
tiebacks, where existing platforms are connected to new wells by an
underwater pipe. The new well is, as I understand the situation, dug
and is linked back to the platform via an additional new pipe; it is
like a satellite well. I think that is how those things work.
The
explanatory notes state that where a company disposes of
business “assets
used in connection with a UKCS field and the proceeds are reinvested in
other ring fence assets...the gain shall be treated as not being a
chargeable
gain.” In
other words, if one reinvests the proceeds, everything should be fine.
That seems clear, but all field assets are intended to come within the
scope of schedule 40. If there is any doubt, the explanatory notes
repeat that point the other way round.
“where the assets
are sold and the proceeds are not reinvested in the UKCS, then the
disposals will be taxed in the normal
way.” 3.15
pm There
seems to be an assumption that everything should be within the scope of
schedule 40. However, it seems that reinvestment in UKCS does not
include the exploration appraisal and development of new
wells—the so-called subsea tiebacks. Because of the way that
part 2 of schedule 40 is drafted, drilling new wells does not qualify
as reinvestment and is not seen as creating an
asset.
I understand
that the industry’s lobbying effort to exempt gains in general
was explicitly raised as an issue with one of the Minister’s
multitude of predecessors. It is hard to know who dealt with that
lobbying effort, but the Economic Secretary is nodding, which shows
that he is aware of the situation faced by some of his colleagues, past
and present. Wells were explicitly raised as an issue, but the
Government appear to have ignored that plea, despite the fact that it
sits squarely within the schedule’s intent. Indeed, in reading
the explanatory notes, one would think that wells are actually
included, but I do not think that they are. The Minister needs to
clarify that
point. An
increasing percentage of recent UK continental shelf developments have
been in subsea tiebacks, which are likely to continue to increase in
the future. The new wells are linked to existing
infrastructure—the platform—so there is an advantage in
having the wells provide the export route for the hydrocarbons. In most
cases, the developments will not support the cost of infrastructure in
their own right. As I understand it, on average, approximately 40 per
cent. of the cost of a subsea tieback development is associated with
the wells, so a significant proportion of the funds invested in future
developments will not qualify for the reinvestment relief. Bizarrely,
it appears that constructing a new well does not qualify for relief,
but constructing a tieback to the well does. I would be grateful if the
explained what precisely qualifies for the relief and whether the
explanatory notes accurately state that everything should be
accounted
for. Amendments
262 to 265 are designed to rectify the problem. I am keen to hear the
Government’s arguments on new wells and am willing to concede
that there may be easier means to achieve the end than those that we
have outlined in our amendments. If the Government can find a better
way to do it, so be it, but if there is a point of principle at stake,
I would like to hear
it. The
raison d’être of schedule 40 is to encourage new
investment in the North sea. It seems reasonable to extend the criteria
to cover fully one of the primary forms of development that that
investment needs to take, and there do not appear to be any additional
costs associated with that step. Preventing reinvestment from incurring
a chargeable gain should surely mean just that. I look forward to
hearing the Minister’s explanation of the competing sets of
amendments and that all parts of the assets described will qualify
under schedule 40.
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