Clause 62 - First-year allowances for expenditure wholly for a ring fence trade

Finance Bill – in a Public Bill Committee at 12:00 pm on 11th June 2002.

Alert me about debates like this

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 12:00 pm, 11th June 2002

I beg to move amendment No. 99, in page 40, line 21, after 'first-year', insert 'and writing-down'.

Photo of Joe Benton Joe Benton Labour, Bootle

With this it will be convenient to take the following amendments: No. 100, in page 40, line 27, after 'first-year', insert 'and writing-down'.

No. 101, in page 40, line 31, after 'amendments', insert

'relating to first-year allowances'.

No. 102, in page 40, line 32, at end add—

'(4) The amendments relating to writing-down allowances made by that Schedule have effect for chargeable periods beginning on or after 1st January 2003.'.

No. 103, in schedule 21, page 252, line 4, at end insert—

'6A In section 56 subsection 7 shall be replaced with—

''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period is a percentage of the amount by which AQE exceeds TDR, as shown in the Table—

AMOUNT OF WRITING-DOWN ALLOWANCES

6B In section 56 after subsection (7) add—

''(8) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

(9) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

No. 104, in schedule 21, page 255, line 30, at end insert—

'14 In section 418, subsection (1) shall be replaced with—

''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period in respect of qualifying expenditure is a percentage of the amount by which UQE exceeds TDR, as shown in the Table—

AMOUNT OF WRITING-DOWN ALLOWANCES


Type of UQEAmount
UQE on the acquisition of a mineral asset 10%
UQE for use wholly for the purposes of a ring fence trade50%
All other UQE 25%''

AMOUNT OF WRITING-DOWN ALLOWANCES

15 In section 418 after subsection (6), add—

''(7) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

(8) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

This group of amendments is important. Committee members may have noticed the press statement that was issued on Thursday, 23 May on the politics section of BBC Ceefax. It stated:

''The United Kingdom oil industry is warning that up to 50,000 jobs could be lost owing to tax changes in the last budget. The changes including a 10 per cent. rise in corporation tax were a shock to the industry. The United Kingdom Offshore Operators Association said the extra costs will cost £8 billion in the next eight years.''

It warned that companies looking to develop new oil fields will bypass the North sea.

Given what the Chancellor said at the time of the Budget, the provisions are designed as a sop to the oil and gas extraction industry to soften the blow of clause 90, which we discussed on the Floor of the House. The clause gives a 100 per cent. first-year allowance for expenditure on plant and machinery, which is not a long-life asset used in a ring-fenced trade. It will help cash flows, but the amendments would give a larger benefit to the industry. They would give increased allowances to expenditure incurred before the introduction of the supplementary 10 per cent. corporation tax charge.

The UK oil industry points out that companies have already incurred much of the capital expenditure that generates income subject to the supplementary charge and that tax relief has already been given on capital allowances claimed to date against income taxed at the old rate of 30 per cent. The amendments would increase the rate of writing-down allowance available on existing capital expenditure to compensate for the higher rate of corporation tax.

Recent investments have been adversely affected by changes announced in the Budget. In recent years, the oil industry has been encouraged to invest. Indeed, not long ago—in the November 2000 pre-Budget report—the Chancellor of the Exchequer said that it had been put to him that North sea oil companies that earn higher profits from higher oil prices should be subject to special taxes, but that he was determined not to make short-term decisions based on short-term factors. He said that the key issue was the level of long-term investment in the North sea and that that would be the approach that would guide Budget decisions in future.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

As the hon. Gentleman says, that was very good, at the time. Unfortunately, however, it is entirely inconsistent with what is in the Bill, as a result of which some companies have already announced job cuts. BP has announced that it will be cutting 800 jobs from its North sea operations, following closely on the 500 job cuts made a few months ago. It is also in talks to dispose of its Thistle field and is considering whether to decommission its North West Hutton field early in order to save costs. The Government's approach is inconsistent with their energy review in discouraging new gas field investment.

The amendments are designed to mitigate the extremely adverse impact of the regime that the Government are introducing under clause 90 in increasing corporation tax by 10 per cent. I hope that

they will realise that they have made a mistake. One way of pulling back from that position would be to accept the amendments, which, without going into more detail at this stage, I hope the Committee will do.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

I welcome you to the Chair, Mr. Benton.

I support the amendments. I congratulate the Financial Secretary on her promotion. Many hon. Members have been aware of her career in the House and wish her well in it. We are especially glad that she now holds that position and is responding on behalf of the Treasury Benches. She is an experienced and distinguished economist who has studied and considered economics and its effect on business in particular. I am sure that she will be prepared to admit to the Committee that the Budget proposals for the North sea oil industry will only reduce investment. That is the crux of the argument that Conservative Members and my hon. Friends the Members for Gordon (Malcolm Bruce) and for West Aberdeenshire and Kincardine (Sir R. Smith) advanced in the debate of the Committee of the whole House. Both sides of the House have tried to advance that key argument and, worryingly, the Government have tried to dismiss it.

The Government have tried to pretend that there will be no huge tax increase, but according to the studies that Professor Kemp has undertaken for the industry, the increase will be equivalent to £8 billion over eight years. Surely there is no way that the Government can pretend that such a tax rise can do anything other than hit investment. I hope that the Financial Secretary will at least be more frank with the Committee than her predecessor on that point. That is why these amendments are important; they would go a small way to relieving the huge tax increase faced by that sector, which is important for north-east Scotland and the rest of the United Kingdom.

The Financial Secretary will want to show that she remains loyal to the Government and to ensure that she continues the arguments that they have used, but she could show some flexibility. She could consider this and subsequent groups of amendments and say that they may represent a way for the Government to make some amends for the huge tax impost. That might be one way of showing that the Government have been listening and appreciate the negative impact of the measure, demonstrated by the job losses that have been announced and the loss of confidence in the industry.

Many of the press comments and some of the statements from the industry show that one of the most damaging impacts of the tax changes is the effect on confidence and on the good faith that the Government had previously built up with the industry. We must remember that the industry has to operate in the face of great instability, especially in relation to the oil price, which has fluctuated massively during the past 20 years. If the Government add extra instability to what is an inherently unstable economic system, they will tie British industry's hands in going about its

business. They would compound the huge mistake that they have made if they fail to adopt some of the amendments in this group.

Amendment No. 99 would make small amends by enabling the writing-down allowances to be doubled in the next year or so. That would not involve huge amounts of money, but it would follow the logic of the clause by attempting to provide extra relief via capital allowances. It would also show that the Government recognise that their tax measures are in some way retrospective. Many of the investments that will be effectively taxed under clauses 90 to 92, which were debated on the Floor of the House, now face much reduced returns.

Although the investment decisions were taken under a different tax regime, those involved now face an extra impost. Introducing the proposed extra writing-down allowance would go some way towards recognising the extra burden imposed on those investments. I hope that the Government will agree to the amendment, which is supported by Labour and Opposition Members.

Photo of Michael Jack Michael Jack Conservative, Fylde 12:15 pm, 11th June 2002

In following my hon. Friend the Member for Christchurch and the hon. Member for Kingston and Surbiton, I wish to underscore their arguments about the economic impact on North sea oil exploration. In dealing with the fields that are already in production, they have rightly drawn the Committee's attention to the fact that, in response to the request that I made when the issue was debated on the Floor of the House for the Government to justify why they wish to increase tax in this way, other members of the Committee and I received an economic case made out for a brand new oilfield that was immediately profitable at the end of its first year.

That case involved one of those wonderful bits of Treasury and Inland Revenue mathematics that are given to Ministers so that they have an illustration showing that a positive result can be achieved. By the magic of adjusting the cash flow for the field in relation to the tax allowances, bingo, they managed to create a result that suggested that the proposal would be beneficial to the oil industry. It just goes to show that, with the right sleight of hand, people can prove anything they want by means of statistics. If the impact of the measure is concentrated on an existing field, however, those arguments do not hold up. I congratulate the Financial Secretary on her promotion, which is justified, but I now expect her to deploy her expertise in demonstrating that the proposal will have no negative impact on existing fields.

In taxation matters, there is always the question of retrospection. Because the measure will have an impact on existing investment made under a different regime, I think that—as was said earlier—some further relief is justified. In all areas of investment in the oil business there is great sensitivity to changes in the oil price. While the industry has a certain expertise in taking the long-term view, in a mature field or a declining field—indeed, in certain parts of the North sea fields—short-term price changes can significantly affect decisions about whether any further investment

is to be made in a currently active field, or whether it is worth using any of the new technologies to enhance oil extraction from fields that are approaching the end of their life. All that could well happen unless the amendments are accepted.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am delighted to return to the Committee after the short recess, Mr. Benton, particularly now that it is under your able chairmanship. I welcome my hon. Friend the Member for Wentworth to his new position, and look forward to working with him. I am sure that he will make a great contribution to the debate, and to the making and communication of Treasury policies.

It is a pleasure to return to the debate on the North sea oil regime, which featured such enthusiastic and well thought-out contributions from Members on both sides of the Committee of the whole House. The quality of those speeches showed that Members take their commitments to their constituents seriously, and are acting as honourable representatives. At that time, however, the Opposition chose to decouple two parts of an extremely important package that I expect to create a stable, long-term fiscal regime for a significant part of the economy.

Photo of Michael Jack Michael Jack Conservative, Fylde

Will the Financial Secretary clarify what she means by ''long-term''?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The right hon. Gentleman knows very well that, in the pre-Budget report and in past Budgets, the Government set out their intention of creating a long-term stable regime for the North sea which raises a fair share of revenue for the country. The Budget set out the operation of that regime in detail, and companies should now have the confidence to invest while knowing that they are not operating in a system that is clearly unsustainable and unfair to most taxpayers and citizens.

The clause and schedule introduce a new, generous system of 100 per cent. first-year allowances for capital expenditure incurred in the extraction of oil and gas in the United Kingdom and the United Kingdom continental shelf.The hon. Member for Christchurch described the new allowance as a ''sop'', but I completely reject the charge that it is a sop to the industry. The measure is very important because it will add to the industry's cash flow and provide additional incentives for the industry to invest. I do not agree with his analysis, or that expressed by the hon. Member for Kingston and Surbiton, although I welcome the kind remarks in his contribution.

I do not accept to any degree the charge that the investment allowance, which is part of the total package, will impact negatively on investment and jobs, because the package has been designed carefully. The investment allowance means that, even with the supplementary charge, companies investing in new projects will have higher post-tax rates of returns than under the previous rules. As I set out in the House when the clause was last debated, in terms of net present value the benefit of the allowance will

outweigh the additional tax for marginal projects. The effect on marginal projects will turn the effect on investment, and marginal projects will be encouraged by the change. The increased tax is designed to reduce the net present value of the more profitable fields, but such work is likely to go ahead in any event. The overall impact on investment is likely to be positive rather than negative.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

Is the Financial Secretary really telling the Committee that she believes that taking £8 billion out of an industry over eight years will not have a negative impact on investment? Is she really asking us to believe that?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

If the hon. Gentleman studies the speeches that were made in the House, he might convince himself that the measures have been designed so carefully that although they will clearly extract value from existing, more profitable fields, they will also increase the post-tax rate of return for investment in new marginal projects. Although that will have a cash-flow effect on companies, it will lead to greater investment and development. However, I do not want to rehearse arguments in Committee that we have already had in great detail in the House.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East

Does my hon. Friend the Financial Secretary agree with me, and indeed with the Royal Bank of Scotland, that although the big corporate players may take corporate decisions that shift activity away, recent job losses show that activity is already being shifted away? The job losses were not a direct effect of the Government's proposals, but a function of previous corporate decisions about the market being taken up if there were a move by smaller, leaner companies that could invest profitably.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank my hon. Friend for his intervention. It is right to point out in Committee that the industry had already forecast before the Budget that there would be an impact on jobs and activity over the coming years. We have to isolate that effect from the Budget measures, which will have a positive impact on both marginal investment decisions and jobs and activity in the future. Those two forces will clearly play out in due course.

I am of course aware of some of the comment on those issues, but I should like to point to Tony Wood, senior economist at the Royal Bank of Scotland, who said:

''We are concerned that negative publicity will impact on investment sentiment and do not see short term any negative impact from the budget.''

There is a risk of the industry exaggerating its concerns through self-interest. We must all be aware that pointing in an exaggerated fashion to potential effects that do not exist will have a self-reinforcing impact on the industry. I warn hon. Members not to get involved in that sort of scaremongering.

Photo of Ann McKechin Ann McKechin Labour, Glasgow Maryhill

May I congratulate the Financial Secretary on her promotion? Does she agree that, had there been such a catastrophic effect on the industry as a result of the decision, we would have seen a marked drop in the

share prices of the companies concerned? In fact, there was no sizeable or noticeable impact whatever in connection with the dividend prices of the major oil companies that operate in the North sea.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 12:30 pm, 11th June 2002

I thank my hon. Friend for her kind remarks and her informed contribution, which builds on remarks that she made earlier. It is the case that there has not been a significant impact on the share prices of oil companies. We should interpret that in a positive fashion.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

Prior to the intervention by the hon. Member for Glasgow, Maryhill (Ann McKechin), the Financial Secretary warned the Committee and the industry that they should not make panicky statements and suggested that people should avoid scaremongering. Does she not realise that the greatest damage has been done by the Government? Having been in consultation with the industry through the pilot project, and having built up a degree of trust, the Government have suddenly changed the tax regime and created a fear that there will be future instability because the industry can no longer trust the Government's word. Surely that is the greatest long-term damage that has been done to the British North sea oil industry.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I do not accept the hon. Gentleman's charge in any way whatever. We are committed to working with the oil industry, and to encouraging new investment, new exploration and development in the North sea. The proposals will make new investment more economic for oil companies, while extracting a fairer share of revenue for the taxpayer. The hon. Gentleman accuses us of inconsistency in the matter. I refer him to the statement in the pre-Budget report of 2000 when the Chancellor said:

''While it has been put to me that North sea oil companies, earning higher profits from higher oil prices should be subject to special taxes . . . The key issue is the level of long term investment in the North Sea. And this will be the approach that will guide budget decisions in future.''

In the Budget statement in 2001, he said:

''As we consider the next steps for taxation in the North sea, our approach will be guided not by short-term factors but by the need for a regime that raises a fair share of revenue and promotes long-term investment in the North sea.''—[Official Report, 7 March 2001; Vol. 364, c. 299.]

Those are the guiding principles that the Government have set out, which we have communicated to the oil industry. The industry knew that it was not contributing a fair share of revenue to the taxpayer. It knew that change was inevitable and that the taxpayer deserved a greater contribution from the industry. We have designed the measures to make investment more profitable in future, and to encourage investment and job-creating activity.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister)

The Financial Secretary says that the industry knew that there were going to be changes. Is she telling the Committee that the Government actually consulted the industry on such a tax change?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am saying that the Chancellor set out very clearly in his Budget statement the approach that we were going to take to the North sea fiscal regime. What we have done is completely consistent with what was said at the time. Of course, no industry likes paying more tax, and I am not for a minute going to suggest that North sea oil companies are jumping up and down saying ''Thank goodness! The Chancellor has finally decided to force us to contribute more revenue to the Exchequer.'' However, I am saying that what we have done in the Budget is totally consistent with the approach set out in previous years. Any objective assessment of the situation that the oil companies might have chosen to consult would have suggested to them that more tax was going to be raised from the industry. We have designed the tax measures in such a way as to have a positive impact on the economy and the outcome is an important, significant and positive one for jobs and activity.

Photo of Michael Jack Michael Jack Conservative, Fylde

The Financial Secretary has outlined the care with which the measure was considered. Will she therefore share with the Committee the Treasury's estimate prior to the Budget for North sea investment over the next eight years? Can she also tell us the figure that she is working on post-Budget?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

As the right hon. Gentleman well knows, we do not give, in aggregate or individual terms, forecasts of that detail. Particularly for North sea oil companies, it is straightforward to draw individual conclusions from aggregate data. For reasons of commercial confidentiality, we cannot share that with the Committee. As he knows, I set out in the House the criteria that were used to consider the matter.

I should turn to the specifics of the amendment, rather than rehearse recent arguments on the Floor of the House. The group of amendments with the chargeable periods commencing on or after 1 January 2003 provides an increased rate of writing-down allowance at 50 per cent., instead of the current 25 per cent. for expenditure already incurred by companies. I urge the Committee to reject the amendments.

I note that the hon. Member for Kingston and Surbiton said that it would not cost the Government much to accept the amendment, but the Revenue estimates that it would cost us up to £1 billion over the next two years, and that it would do nothing to increase investment in the North sea. The money incurred would be a pure deadweight cost and would mean a transfer of a substantial sum of money from the taxpayer to an industry that has already made good returns from the North sea recently and will continue to do so when the Bill's changes are introduced.

To accept the amendment would be neither sensible nor necessary. Our Budget changes have been carefully analysed and we have assessed their effects on all project categories, including future ones. We know of not one single project that would be made uneconomic by the Budget changes.

Photo of Michael Jack Michael Jack Conservative, Fylde

In giving us a figure for the cost of the amendment, can the Financial Secretary share with us the basis of that calculation? How much investment would the amendment give relief to?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I made it clear that the amendment is backward-looking and will do nothing to stimulate new investment, which is why we resist it. We have produced a system with a sensible marginal rate of tax on profits from a natural resource, and which has maximum incentives for investment. It is a principled and sustainable regime that is far more likely than the outgoing one to be durable of cycles.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I congratulate the Financial Secretary on her appointment.

I apologise for not being here for much of today's debate. Furthermore, I have not given the provisions detailed study. However, I should like to raise a common-sense point that may have been covered on the Floor of the House or in Committee. Is the new 100 per cent. allowance flexible? We all know that the up-front costs of investment are high, and that profits are slow in coming, so can the Financial Secretary confirm that any unused allowance can be carried forward until the allowance is completely exhausted?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am extremely pleased that I gave way to the hon. Gentleman because he made an interesting and considered point. I am happy to be able to say that the answer is a definitive yes. If the allowance is unused when, for example, a new entry comes into play and it makes losses in the first year, the allowance can be carried forward and the full allowance can be taken up in due course. Taken as a whole, the regime that we have created will encourage investment, activity and job creation. This package is good for the economy. Our regime will be better for the industry and the country, and I therefore encourage the Committee to reject the amendments.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

May I raise the specific issue of mothballing? My understanding is that mothballing extends the life of a field and is something that everyone wants to see in the national interest, as opposed to shutting down, which means, ''That's it''. I do not understand why the new capital incentives will apply to shutting down but not to mothballing, which, if anything, is entirely the wrong way round. It is rather crackpot not to give mothballing the capital allowance. Why is it there for shutting down?

I apologise for being away. I intended to ask a question rather than make a separate contribution. My specific point needs explanation.

Photo of Michael Jack Michael Jack Conservative, Fylde

I listened with interest to the Minister's reply to this debate. I would like to pick her up on her retreat into ''commercial and in confidence'' when we questioned the economic arguments underpinning the Treasury's position. Magically, when matters are flowing in the direction of the Treasury and the world outside is saying, ''Thank you very much for this good idea'', estimates of great increases in investment and economic activity are scattered around like confetti.

However, when the going gets tough and people start saying, ''How did you make this calculation and what is the economic impact?'', we find that the shutters come down.

I draw the Minister's attention to a letter sent to her on 15 May by the UK Offshore Operators Association. Interestingly, commenting on a debate on the Floor of the House in which the same argument was used, the Director General, Mr. James May, writes:

''Having consulted my members (who provided this data)''— the economic information that we discussed a moment ago—

''they are firmly of the view that the data, provided in aggregate, is not of a commercially sensitive nature and they would encourage you to release it at the earliest opportunity. UKOOA Members regularly share and publish this aggregated data, as in our annual Economic Report.''

I did not ask for figures oil company by oil company. I asked for the numbers, which the Treasury must have. If the Minister were truly confident of the impact of the measure, she would have no hesitation in sharing in public the Treasury's analysis. The Treasury must have had a figure for investment to have calculated the cost of the measure. The Minister knows exactly what the numbers are, because otherwise she could not have put to the Committee a moment ago an estimate for the cost of the amendments tabled by my hon. Friend the Member for Christchurch.

If the Minister knows the cost, she knows the amount of investment affected, and, if she is as confident of her position as she says, it is remarkable that she is not prepared to share the numbers with the Committee. In the age of freedom of information that we are rapidly moving towards, it will be interesting to see how she could defend, in terms of the public position, not sharing with the House of Commons the basis of an argument that would enable us to understand more clearly the economic assumptions that have been made. Indeed, the industry invited the Minister to share such information with us. I am interested to know why the Minister is so reluctant.

The Minister will also be aware of a letter that I am sure was circulated to her. Having had an opportunity to assess the current situation, UKOOA members wrote to the Chancellor on 6 June. The Minister said in her opening remarks that the Government want to create a period of long-term fiscal stability. I asked her what she meant by ''long-term''. She replied that the Chancellor said that the Government want the North sea regime to be long-term and stable, but I wanted to know how many years should be read into ''long-term''.

On the subject of the measure to which the amendment relates, UKOOA's letter to the Chancellor says:

''This is a marked feature of the proposals, and a change from historical practice.''

The Government have signalled a significant change by introducing an element of retrospection into the measure, a factor that the Minister did not mention. If I have got that wrong, I shall be the first to apologise. As I have not had the benefit of the briefing that she has received, I may have misunderstood what UKOOA goes on to say.

UKOOA says that without the ''transitional relief'' proposed under the amendments advocated by my hon. Friend the Member for Christchurch, the current proposals

''will have a significant detrimental effect on investments''.

The hon. Member for Glasgow, Maryhill said that the share price of the oil companies did not go down when the measure was announced. She lives in an odd world that does not recognise the international mobility of investment money.

One of the arguments for amendments Nos. 99 to 104 is that they will help to sustain investment in the United Kingdom offshore fields, and not allow it to move to potentially more profitable areas. I am not surprised that the share price did not go down, as people in the markets would have said, ''Fine; some of the investment money that we might have made in the UK offshore fields will go elsewhere.'' In particular, it will go to Scotland and those constituencies on the west coast that are benefiting from some of the oil and gas development there. It will be to the UK offshore fields' detriment that that investment goes elsewhere.

I do not wish to rehearse the arguments that we had on the Floor of the House, but it is evident that there are more profitable areas than the UK continental shelf for investment in oil. [Interruption.] I can hear that the Royal Bank of Scotland is ringing up to agree with my arguments. I am delighted that it pays so much close attention to our debates. The Minister may well be able to sustain her position, but unless she can justify it more specifically, there will be deep suspicion that she is resisting the amendment because the proposal in the Bill represents a smash-and-grab raid by the Chancellor on a source of money that he has decided he wants.

Photo of Edward Davey Edward Davey Shadow Spokesperson (Office of the Deputy Prime Minister), Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Office of the Deputy Prime Minister) 12:45 pm, 11th June 2002

I rise again because I was not happy with the Minister's reply. I have also been informed of a point that has not yet been raised, which is that smaller fields and companies tend to lease, not purchase, their equipment. They have therefore profited from 100 per cent. relief on such leasing, but the clause does nothing to help them offset the new tax. Such smaller companies, which are often the most innovative—and are trying to develop the marginal fields that we have heard so much about in the Government's defence of themselves—will not benefit. They will be hit by the 10 per cent. tax and will have no offsetting allowances.

If the Minister is trying to tell the Committee that the new structure will be beneficial to investors in the long term because the marginal fields will benefit, she shows that she and the Government do not understand how the industry works through leasing for small companies and fields. I hope that the Government will take that on board, and that if the Minister speaks again she will give more assurances to the Committee and the industry that the Government will think again about the measure and will consider the amendments under discussion.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I very much enjoyed hon. Members' contributions on the point raised by the hon. Member for Arundel and South Downs. We shall return to that

point under a later amendment, but I will say that the 100 per cent. allowance for decommissioning covers the mothballing of infrastructure at the end of a field's life. We may want to return to that point when we discuss amendment No. 109.

The right hon. Member for Fylde has made several accusations that I do not accept. He talked about the shutters coming down, and the Government's unwillingness to share our economic analysis with hon. Members. I set out in considerable detail our methods of economic analysis, and the economic appraisal assessment that we used in developing these policy ideas, on the Floor of the House—which gave an opportunity for hon. Members on both sides of the House to cross-question and carefully scrutinise them. Indeed, that opportunity was taken up, and I do not intend to rehearse again today the arguments that we went through at that time.

The right hon. Gentleman mentioned the letter from the industry association, which says, ''We have lots of figures, and we do not mind if they are put in the public domain, and the Treasury should do the same.'' The figures that we are talking about are not industry figures; industry figures are incomplete. We are talking about the release of Inland Revenue and DTI information, which is commercially confidential. The industry association does not represent all the companies in the North sea.

However, Committee members are, of course, able to find out the estimated cost of the Budget measures and the forecast tax receipts, which are published in the Budget. Therefore, no one could accuse the Government of having the shutters down, and of not being prepared to share our analysis with hon. Members.

The right hon. Gentleman also talked about what we consider the long term to be. I have set out the criteria on which our assessment of the fiscal regime was made. The right hon. Gentleman accused the Government of imposing an element of retrospection. I do not accept that that is the case. The measures will come into force as they are introduced. Of course, the industry has made plans on the basis of different tax policies, just as ordinary individuals in life make plans on the basis of a particular tax regime. When tax rates and reliefs, and so on, are changed in the Budget and those individuals have to adjust, we do not say that that is retrospective, and nor should we say that the regime that we are introducing in the North sea is retrospective.

Not a single person or company has come to us and said that a single project will be made uneconomic by the changes that we shall introduce. In fact, serious analysis has been published that shows that the impact on investment from these changes will be positive.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

A distinction should be drawn between individual taxpayers and the oil industry on two grounds; first, the substantial effect that this will have on the oil industry, and secondly, and perhaps more importantly, the fact that the oil industry was—so we are told—kept as an integral part of this entire process, because it was part and parcel of the industry

consultation that allegedly took place prior to this happening. However, as we all know, the oil industry has been surprised by the recommendations.

Therefore, there is a fundamental difference between the adjustment that an individual taxpayer makes and that which is being imposed on the oil industry as a result of these measures.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

As I explained to the Committee, I do not expect an industry to rejoice when additional tax is imposed on it; it would be extraordinary if it did. However, for reasons that I have explained, I do not think that this sort of change to the fiscal regime cannot have been anticipated.

Mr. Flight rose—

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I give way, although I wish to make progress.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Is it not the case that, when my right hon. Friend the Member for Fylde was a Minister and changes were made to oil taxation, they did not apply to revenue flows from investments that had already been made? These measures are understandably seen as newly retroactive because, due to the huge amount of capital investment in the industry, the precedent with regard to the oil industry has been not to apply them to projects that are already in hand. As the Minister knows after being encouraged by Pilot, the industry feels that it has been cheated by the Government and sucked in to make investments and commit capital. A 33 per cent. increase in taxation has been applied on those committed investments. On past precedent, that is in bad faith.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am grateful that the hon. Gentleman made clear—for the sake of both myself and the Committee—the difference that he understands between retrospection and retroactivity in this case. However, as I have spelled out, and perhaps laboured, the purpose of the tax changes is to encourage new investment and the development of marginal fields. Of course, previously profitable fields, many of which incurred investment at a time when the rates and the amount that was expected to be paid to the Revenue were much higher than today, will have to pay more. That is part of the package's purpose. We are interested in encouraging investment while securing a fair share of revenue for the Treasury.

Mr. Chope rose—

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

Perhaps the hon. Gentleman will let me make progress to deal with the point on leasing raised by the hon. Member for Kingston and Surbiton.

Lessors will not pay the supplementary charges on their profits even if they are leasing assets in the ring-fenced area. Therefore, extending the scheme to lessors who are outside the charge would give relief in circumstances in which there is no reason for that.

Photo of Mr John Burnett Mr John Burnett Liberal Democrat, Torridge and West Devon

I am sorry to have sparked an esoteric sub-debate. Can the Minister make it clear whether a lessor leasing for the purposes provided for in the Bill will receive the 100 per cent. allowance so that that tax benefit can be passed in due course to the lessee in whole or in part?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I should like to make it clear to the Committee that the normal 25 per cent. allowances available to lessors that already assist lessee companies that are not paying tax will continue under the new regime. Investment in the North sea currently totals more than £3 billion a year. Only a tiny part of that investment is leased assets. We believe that that reflects the specific nature of the oil industry, which is generally quite profitable and may rely on equity finance to fund its investment. Of course, we will monitor closely the operation of the regime to ensure that there is no distortion in the system.

I heard what hon. Members said about this, but we believe that the current operation of the regime and the 25 per cent. allowance is sufficient.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

The Minister said that the amendment would cost £1 billion a year. Will she tell the Committee the cost to the Exchequer of the present proposals in the clause?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The cost of the proposals and forecasts of tax receipts are clearly shown in the Red Book. I have set out the way in which we undertook the assessment in great detail. The pure dead-weight cost of the hon. Gentleman's proposals would be £1 billion, which is why I urge hon. Members to reject the amendment.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

We have had a very disappointing response from the Minister. Let us deal with costs. She said that the amendment would cost £1 billion and that we know the cost of the clause to the Exchequer, but we do not. We know only what is in the Red Book: the net increase in yield to the Exchequer of the measures that relate to the North sea oil regime.

I am asking a perfectly reasonable question: what will the cost be to the Exchequer of the first-year allowances that are set out in the clause? The Minister is stonewalling and refusing to respond. Much as we congratulate her on her well-deserved elevation and promotion, I must say that, in light of what she has said during this debate, many people in the oil industry will regret the fact that her portfolio will not be transferred to the Economic Secretary, who has just arrived on the Front Bench.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

For the record, perhaps I may set out the cost of the measure. In 2002-03, it will cost £400 million; in 2003-04, £650 million; and in 2004-05, £500 million. Perhaps that will satisfy the hon. Gentleman that I am taking this issue seriously.

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.