Clause 62 - First year allowances for expenditure wholly for a fence trade
Finance Bill
4:30 pm
Mr Howard Flight (Arundel and South Downs, Conservative)
I beg to move amendment No. 111, in page 40, line 32, at end add—
'(4) The Treasury shall report no later than 31st December 2002 on the net monetary effect of this section and sections 90 to 92 of this Act.'.
The amendment would require the Treasury to report the net effect of the tax changes, including the enhanced allowances affecting the oil and gas extraction industry, largely because there appears to be, on the same basic evidence, substantial differences between the numbers reported by the industry on the expected impact and the Government's position. The amendment is in essence partly a probing one to require the Treasury to justify its assumptions and calculations. It is possibly more than a probing amendment in that, if the Government are not willing to see the light at this stage, we feel that the policy needs to be kept under close review and there may be a case for including a report on the impact of the measures.
On Second Reading, the then Chief Secretary to the Treasury argued that the negative effect of the additional 10 per cent. tax on investment would be neutralised by the new 100 per cent. first-year allowances, and the Financial Secretary has continued that argument today. As she will be aware, the assessment of the industry is that new investment of some £10 billion will be lost between now and 2010, including a loss of some 50,000 jobs. It is worth pointing out that, on a rough and ready calculation, the income tax and national insurance lost as a result of job losses is equal to approximately half of the lost additional £7.6 billion of tax revenues.
The other crucial point in terms of the principle and effectiveness, or otherwise, of the capital allowances is that the future of the North sea industry is increasingly in the hands of smaller companies. The North sea is and will become increasingly more immaterial to
major operators such as BP. However, many smaller companies do not have the existing production to benefit from the 100 per cent. capital allowances. In their early years, it is very rare that they are profitable, and as we are aware, financing costs on borrowing to finance new investment are not allowable against the extra 10 per cent. tax.
For example, two start-up companies are involved in redeveloping the Argyll field. Typically, a field has a life of seven years, and is not normally profitable for at least the first three years. That is the crucial territory. Increased capital allowances cannot be effective for new investment if there are no profits to set off against those capital allowances, unless, with a bit of luck, they become profitable well down the line. Bruce Dingle, the chief executive officer of Venture Production, a typical new entrant, has made the point that start-up costs are spectacular where every other late-stage basin such as the North sea receives real incentives to maintain and stimulate investment and production, and not disincentives, which the higher tax rate represents, or non-effective capital incentives, which the 100 per cent. allowance constituted companies have not got the profitability to make use of.
We have already touched on the nature of the Financial Secretary's reply and on the economic data. The point that I stress and that is crucial to the amendment is that the UK Offshore Operators Association has used the same economic information and basis for forecasting investment as the Government. However, the industry trade body and the Government have reached vastly different conclusions about the impact of the extra taxation and capital allowance packages.
Not only did the Chancellor stress on record the importance of not exploiting North sea recovery in its mature stage through a changed and excessive tax regime, but the Secretary of State for Trade and Industry in November 2000, before his movement elsewhere and subsequent resignation, welcomed the £1 billion new investment. He commented that the Government had created a stable tax regime to which the industry was responding well. The Government cannot be surprised that the industry feels that it has been badly betrayed. In November 2000, the Chancellor said:
''It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make . . . decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that will guide Budget decisions in future.''—[Official Report, 8 November 2000; Vol. 386, c. 317.]
The Government are apparently attracted by a £10 billion decline in investment and 50,000 job losses. The Chancellor's words meant, as with so many things, the very opposite of what they said.
We are on serious territory. One could understand a Government going for a tax grab if they thought that they could get away it and wanted to be purely opportunistic—that is what they did with pension funds. However, such behaviour will rebound on
them. The £5 billion pension tax grab has wrecked occupational final salary schemes, and, mark my words, this tax grab will severely damage North sea oil investment.