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 forumsthe Pilot forum in particularin which we can discuss these matters and make sure that we can take full advantage of the industrys 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 oilfields productive life. Companies understand that obligation. They make
Question put and agreed to.
Clause 83 accordingly ordered to stand part of the Bill.
Schedule 38 agreed to.
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
When we look at our smörgåsbord of crude oil blends, including Brent, Forties, Flotta, Wytch Farm, Beryl, Maureen and Tritonthe last three being co-mingled and lifted off-shorethe 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 systemsseparate from oilexist, 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 countryEasington. I think there is only one.
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 Governments 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 Governments 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 criteriona 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.
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
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 SecretaryI think the hon. Member for Burnley lasted nine days, all told, but she found time to write this lettershe 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 Governments 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 companythe same companythat 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.
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 wellsthe 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 industrys lobbying effort to exempt gains in general was explicitly raised as an issue with one of the Ministers 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 schedules 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 infrastructurethe platformso 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 Governments 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 dêtre 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 Ministers explanation of the competing sets of amendments and that all parts of the assets described will qualify under schedule 40.
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