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

Finance Bill – in a Public Bill Committee at 4:30 pm on 11th June 2002.

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Amendment proposed [this day]: No. 99, in page 40, line 21, after 'first-year', insert 'and writing-down'.—[Mr. Chope.]

Question again proposed, That the amendment be made.

Photo of Joe Benton Joe Benton Labour, Bootle

I remind the Committee that with this we are taking 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
Type of AQE Amount
AQE incurred on the provision of plant and machinery for use wholly for the purposes of a ring fence trade which is not excluded by section 46 (general exclusions) 50%
All other AQE 25%

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 4SF.''.'

No. 104, in 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 asset10%
UQE for use wholly for the purposes of a ring fence trade50%
All other AQE25%''

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)

I think we had more or less concluded the discussion. Just before the break, the Financial Secretary to the Treasury gave us some very interesting figures. I am sure that there will be further comments on the subject, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

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.

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 support the amendment. I am glad that we have the opportunity not only to rehearse arguments heard prior to the intermission, but to develop further ones. I learnt from my hon. Friend the Member for Gordon (Malcolm Bruce) during the intermission that he knows of several companies that are not going ahead with investment. He feels that the level of activity will fall.

This morning, the Government said that they had heard of no examples of people not going ahead with investment. It may be that they have not heard of any because of the fact that investment has not gone ahead. It would be difficult for the Treasury to, shall we say, prove a negative. However, in the United States many small business that would otherwise undertake exploration and consider drilling in marginal fields are not doing so. The word is that Britain no longer has a stable tax regime, or one that enables a profitable return, so investment decisions are not going ahead. Amendment No. 111 would therefore be appropriate. By the end of the year, we would be able see real figures rather than those dreamt up. We are not allowed to see the evidence for the figures.

That takes me back to the point about leasing, which I made in an earlier intervention on the Minister. It has come to my attention that a large section of the industry, which is exploited by small and medium-sized enterprises, depends on the leasing of assets. That does not appear to have been taken into account in the Government's modelling and tax proposals. Some companies use capital leasing, by which they depend on a non-oil company having bought an asset, which they lease from it. Of course, such a non-oil company will not be able to benefit from the allowance that the Government propose in the clause, and will have to pass the extra cost down the line. A small business that is leasing will get no benefit from the allowance because it is leasing an asset from a non-oil company. It will therefore be hit by the charge and there will be no compensation to it.

The Government say that they will promote that important, marginal, growth sector through their structure, but they will cause real damage. They are trying to persuade the Committee that the structure on which they have landed will produce a spurt of investment and increase returns, but the hon. Member for Arundel and South Downs (Mr. Flight) and I have quoted examples that suggest that the opposite will be the case. Although the amendment is in many ways a device to help provoke debate, if they were to accept it, they would call our bluff and that of the industry. We could make an analysis, which would be available to the House of Commons by the end of the year, to drill down to the measure's monetary effects. Some people suspect that the Government will not reach their revenue estimates because they will do too much damage to investment in the oil industry.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

I rise to make a few brief points. I was near to tears listening to the heart-rending pleas from Opposition Members because I had no idea that multinational oil corporations were in such difficulties. Like me, my hon. Friend the Financial Secretary to the Treasury—I hope that I have got her title correct because she has been promoted—is a former journalist who will have learnt the aphorism by which to identify a news story: when a dog bites a man that is not a story; when a man bites a dog that is a story. When businesses complain about taxes that is not a story; if businesses were to welcome new taxes that would be a story.

The argument presented today by Liberal and Conservative Members is based purely on the premise that multinational corporations will have to pay extra taxes. That is a shame. I wish that we lived in a world in which those companies did not have to pay their fair share, but much of the extra revenue that will come into the Treasury will be used to enhance public services.

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)

In using an analogy from the newspaper industry, the hon. Gentleman has shown that spinning has gone too far. He should be defending the jobs of Scottish citizens and his constituents.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart

I am more than happy to defend jobs in Scotland and elsewhere in the United Kingdom, which is something that Opposition Members have not done in this debate. The taxation regime for the oil industry in the United Kingdom is benevolent compared with that in other oil-producing countries. I do not believe some of the arguments used by Liberal and Conservative Members. It is right that the oil companies should pay their way. They are not being asked to pay more than is due, but simply a fair amount. I hope that the Government will recommend voting against the amendment.

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

I was not able to interrupt and, with the greatest respect, the hon. Gentleman has missed the point. With a mature field such as the North sea, there is a delicate argument about the right level of tax to generate the greatest revenues and sustain rising investment and jobs. The argument is not ''bleeding hearts for large oil companies''; it is the economic argument that he will hear from not just the industry but outside specialists, indeed the leading specialist in the territory. The Wood McKenzie report, published only last February, contains an analysis of the maturity of the North sea and the fiscal prospects. It concludes that there is no room for additional fiscal rent to be extracted from upstream companies on an expected-monetary-value basis.

Our argument is, ultimately, a pragmatic economic argument. We are saying that the Government's projections and numbers are wrong, both in terms of impact on investment and in terms of revenue potential.

Photo of Tom Harris Tom Harris Labour, Glasgow Cathcart 4:45 pm, 11th June 2002

Will the hon. Gentleman explain how his party would fill the gap that was created by a refusal to proceed with this tax change?

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

I fear that the hon. Gentleman did not hear what I said. If he does the sums in terms of revenues and lost revenues, he will find that the net tax benefits will be nothing like those forecast by the Government. Moreover, as was pointed out earlier, even the gross figure may not be anywhere near the Government's forecast.

Let me point out, with respect, that we are not the Government. It is the Government's job to decide where they will raise revenue. We are merely saying that, pragmatically, we believe that the proposal is against the national interest. It will not raise revenue. It will reduce North sea production. It will worsen the current account balance. It will lose jobs, and people will have to be supported by welfare payments. We think that the Government's judgment is wrong.

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

The hon. Member for Kingston and Surbiton (Mr. Davey) mentioned jobs. My constituency on the east coast of Scotland has lost jobs in the past because of investment decisions by big multinational companies in the North sea, which have concentrated their operations in Aberdeen.

We are currently seeing a change in the nature of operations in the North sea. The larger North sea oil companies are moving, as is inevitable. The hon. Gentleman may have read an article published recently about the huge investment BP is making in, for instance, the Caspian sea. I believe that, in many respects, the North sea will go the same way as the gulf of Mexico. A number of big American companies moved from there to other fields.

I think the Government are right to raise taxes, but I also think it right for the Opposition to raise questions. We are talking about an operation that still has a reasonable medium and long-term life. We must protect those jobs. We must also ensure that the revenue we obtain from companies pays for what they obtain from the country. Ultimately, we should establish the right price for a barrel of oil, which is higher than it has been for a long time, and what we should raise in revenue. That will produce the right balance.

Earlier, we talked about decisions that had already been made, involving 50,000 lost jobs. I believe that the decision to cut 500 jobs, at a time when there was a lot of tension in Scotland, was made before the text of the Budget was known. Decisions were made on the restructuring of business of big multinationals from the North sea to other areas. Most of the movement is long term. The chief executive of BP made that point at a meeting of the UK Offshore Operators Association. He did not believe that a 10 per cent. increase in corporation tax would have an immediate effect on investment in North sea oil. The hon. Member for Gordon apparently knows about that. Anyway, the chief executive believed that in the long

term, given the corporate decisions that must be made elsewhere, the big firms would move to more profitable fields. They would not linger. That is the nature of the business: it is a cut-throat business.

Experts in the Scottish press who investigate the Scottish oil industry know that the natural process--it happened in the gulf of Mexico--is that smaller companies move into the gap left by bigger players when they eventually sell their interest.

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

I agree entirely with the hon. Gentleman's diagnosis, but the logic is that new ventures and smaller businesses will be expected to keep the oil industry in the North sea going. I would be interested in his opinion of the package of measures for those companies, which is at the heart of our concern about the combination. The capital allowances will not be an effective incentive for investment because those companies are not profitable enough to use them.

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

The measures are a first step because production in the North sea is changing. An article in Scotland on Sunday stated:

''Colin Welsh, the European managing director of Simmons & Company, the American energy investment firm, predicted new exploration''— new investment and new production players would form a group to capitalise on the sale of holdings in the North sea. The package is there, but the trick is to question and probe such packages. The Treasury must ensure that they are effective and, because of the number of jobs left in North sea oil, they must be reviewed regularly.

I sympathise with some of the amendments, but the Government have taken a balanced decision on the revenue that they will extract from the corporation tax increase and the need to run the national budget. Given the number of people who work in the industry and need to use the health service and social services, a balance must be struck. There is still a lot of work in the North sea and I have attended several meetings as a new member of the UK Offshore Operators Association. In Dundee recently, I visited schools engineers clubs where the success of North sea oil was a big issue. Innovation has been essential to capitalise on difficult oil fields that would previously not have been capitalised on.

The Treasury and the Department of Trade and Industry must ensure that the UK Offshore Operators Association and operators in the North sea are kept closely informed so that they know what is going on. The Government's decision marks a definitive moment in the balance of production in the North sea. On balance, I believe that their decision is correct and that the measures will help newer businesses to enter production fields, but we must keep a close eye on that because it is still a vital strategic industry for economic production.

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

I support the comments of my hon. Friend the Member for Arundel and South Downs. I

take on board with interest the robust comments of the hon. Member for Glasgow, Cathcart (Mr. Harris) and the more compliant comments of the hon. Member for Dundee, East (Mr. Luke), who obviously has a lot more experience of the cut-throat nature of the oil industry than some Conservative Members. Those comments were entirely fair.

The substantive issues concerning the clause have been lost in our discussion of the previous group of amendments. Amendment No. 111 covers a narrow point. We want the Treasury to analyse and examine the net monetary effect. We do not know what the effect on the industry as a whole will be and it would be sensible, before taking a path along which it would be difficult to retreat, at least to examine the net monetary effect. The hon. Member for Glasgow, Cathcart may be right and the provision may lead to more money coming into the Treasury's coffers--that is the intention--to fund the national health service and other public services. However, there must be a real risk that it will have the opposite effect and that, in having negative effects not only on multinationals but on small start-up companies in the oil business, many of which will employ significant numbers of people in the UK, they will not result in any great monetary advantage to the Treasury. It seems that the proposal is a sensible compromise, given that there are two distinct schools of thought about the oil industry. Therefore, I hope that the Financial Secretary will give it further thought.

Photo of Michael Jack Michael Jack Conservative, Fylde

In the intervening period since the previous time we gathered in this Room, I managed to obtain some official Government figures on the size of the investment that underpins our discussions on this part of the Bill. It is a great sadness that the Treasury cannot be as open with public information as the Department of Trade and Industry is. The DTI carries out an annual survey of investment in offshore oil. The survey results for 2001 make very interesting reading, because they show the fragility of the forward investment position in the oil and gas industry. That is why Opposition Members have made the points that they have. For the record, I would like to share the information with the Financial Secretary in the spirit of transparency and openness and perhaps explore with her whether the Treasury's figures match up with those of the DTI. It would be very interesting to know whether, in the world of joined-up government, they have the same view.

For what I might call the firm area of oil and gas exploration—so-called sanctioned fields, which are defined as fields in production or under development— including sanctioned incremental investment, the sums are £2.3 billion for 2002, £1.3 billion for 2003, £800 million for 2004, £600 million for 2005 and £200 million for 2006. The point has been made that, although at present there may be a good level of activity relative to the maturity of our continental shelf fields, it is clear that forward decisions for the years from 2004 onwards are very much in the pending tray.

If we consider the next category, which is probable fields—fields that are likely to move forward during the next four to five years—we find a much thinner picture, in the same way. The figures are £1.8 billion for 2002, £2.5 billion for 2003—an increase, but it is steadily downhill after that—£1.8 billion, £700 million and £400 million. Given the dearth of agreed investment, it would be surprising if the measures that we have been discussing did not substantially affect forward investment prospects.

I would be very interested to hear why the Financial Secretary believes in the robustness of her view against the real-world background in which the actual levels of committed investment rapidly tail off from 2004 onwards and in which the Government's proposals will bite. That is why we in the Opposition are asking for some mitigation.

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

Is not it the case that the DTI-sponsored Palec cogency studies broadly found that 32 jobs are lost for each £1 million decrease in investment? Therefore, central to our argument is the issue not just of investment forecast but of the effect on jobs.

Photo of Michael Jack Michael Jack Conservative, Fylde 5:00 pm, 11th June 2002

My hon. Friend has been carrying out parallel research, and I am delighted that he has augmented the line that I have been putting forward. I shall not rehearse all the figures, but if one considers parallel aspects of North sea investment that might not necessarily be affected by the measure, one finds a similar lack of absolute forward commitment the further on they go. [Interruption.] The Minister's body language is always instructive—she is shaking her head as if to say, ''Well, you ought to know.'' That is true, but we are talking about the difference between absolute and committed investment and investment which, if the level of activity presently being enjoyed on the continental shelf is to be sustained, will have rapidly to increase above the amount that has already been committed.

That is the point—the rate of return will be the main problem, particularly for those fields that do not have a profitable cash flow at the end of the first year to absorb the full effect of the 100 per cent. write-off. That type of field is likely to be the first to perish in terms of the investment decision-making process. Sadly, the Minister will not discuss how she has reached her conclusions. How are we to know whether her arguments are robust? The figures are telling and they underpin some of the arguments made by my hon. Friends on the Front Bench in support of their amendments.

Photo of Mark Hoban Mark Hoban Opposition Whip (Commons)

I had not intended to speak in the debate on the amendments to the clause on oil taxation, as it is not an area with which I am particularly familiar. However, the cases that we have heard put on the impact of this change in taxation on the oil industry have been polar opposites. The hon. Member for Glasgow, Cathcart suggested in his customary style that the business community is crying wolf over this matter. He was ably supported in that case by the Minister. Conservative Members have

taken an alternative view—that the changes will have a negative impact on the oil industry and could lead to a considerable loss of jobs and investment.

It is important that we continue to monitor the impact on investment and jobs of the changes in oil tax. The amendment tabled by my hon. Friend the Member for Arundel and South Downs, which seek to provide for a report on the impact of this measure on revenues, is important and we should all support it. The oil fields of the North sea are an important asset that should be exploited fully in the country's interests, not purely in the economic interests of the country but in the interest of those who work in the North sea.

I declare an interest, in that my brother-in-law is a deep-sea diver working in the oil sector. I am acutely aware, based on his patterns of employment, of how fragile the investment in oil fields is, as my right hon. Friend the Member for Fylde (Mr. Jack) said. When the economics are good, my brother-in-law's services are in great demand both in the North sea and elsewhere; when the economics are bad, he has—to use a phrase of a former Member of this House—more time to spend with his family.

For my brother-in-law's sake and for the sake of all those who work in the sector, it is important that the Government continue to monitor closely the impact of this legislation. The Government would be failing in their duty to ensure that the oil fields of the North sea are fully exploited if they refuse to support the amendment.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The contributions on the clause have been full and well informed, and I found those of my hon. Friends particularly interesting. I enjoyed the remarks of the hon. Member for Arundel and South Downs and the way that they put the clause in the context of the Chancellor's Budget statements, which set out clearly his intention to raise a fair share of revenue for the nation from North sea oil while encouraging long-term investment and not basing any policy on short-term changes. That is exactly what we have tried to do with this package of measures.

The amendment, as I understand it, is designed to require the Treasury to issue a report on the clause's net monetary effect on companies. The clause will have a 100 per cent. positive impact on companies' cash flow, so perhaps the Opposition did not mean precisely what they put down in the amendment. Perhaps they were talking about the impact of the total package on the net monetary value, which we have already debated at length on the Floor of the House.

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

The amendment refers to

''sections 90 to 92 of this Act'' as well as to the clause, so it is clear.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank the hon. Gentleman for clarifying that point, but we debated the subject at length on the Floor of the House. The package of measures will have a positive net monetary effect for the nation as a whole. That is its intention.

The hon. Gentleman questioned whether the North sea had the capacity to deliver a fairer share of revenue to the Exchequer while maintaining activity and investment incentives. Again, I think that I went through the subject in detail on the Floor of the House. As I said then, following the tax changes made by the Conservative Government in 1993 and the abolition of petroleum revenue tax, the rate of return in the oil industry rose from 10.5 to 34 per cent. last year. By comparison, other non-financial industries made an average rate of return of 11 per cent. last year. Some might try to argue that that difference was due to the high oil price, but that is not the case.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I will if the right hon. Gentleman lets me make my point. The rate of return for the North sea was higher than that of other industries in each of the past nine years, even in 1998 when the oil price fell sharply.

Photo of Michael Jack Michael Jack Conservative, Fylde

For the sake of clarity, will the Financial Secretary tell me how the rate of return was calculated and who calculated it?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The right hon. Gentleman knows full well that I set out on the Floor of the House the precise assessment criteria and appraisal methods that we used to reach our conclusions on rates of return. I shall not repeat that today. I do not accept the accusation that 50,000 jobs are under threat and that activity will fall as a result of the Budget changes--an accusation that the oil industry is making and that the hon. Member for Arundel and South Downs has repeated today.

I am talking about the impact of the Budget changes on investment activity and jobs, not about whatever else in the external environment may affect the oil industry. I would be completely foolhardy if I were to make an individual forecast of what is likely to happen in relation to that.

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

The rates of return issue is central to the ability to pay tax. While we can debate the historic rate of return, the crucial issue is not the history but the future. The hon. Member for Dundee, East mentioned the change in the North sea from large companies to small ones. Given that change and the increasing marginality of fields to be developed, the relevant issue is what the future rate of return will be to sustain the additional taxation. The Financial Secretary says that it is not her job to calculate that, but in a way that is exactly what the Government must do when considering the pluses and minuses of such tax changes.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I agree, but it is not our job to try to predict how individual companies will calculate their post-tax rates of return. In aggregate for marginal fields with the new investment coming on-stream, the post-tax rate of return will increase as a result of the measures. The benefits of the first-year allowance

outweigh the effect of the increased tax take for marginal investment. We should therefore see new developments and projects as a result of the changes.

Of course, more profitable projects will pay more tax. The regime is designed precisely for that to happen. Even after the tax changes, the more profitable projects should still make respectable profits, and we shall have an oil industry regime that compares favourably with any in the rest of the world.

Photo of Michael Jack Michael Jack Conservative, Fylde

The Minister clearly stated that, in the Treasury's judgment, there is a relationship between the taxable potential of the North sea and the rate of return. Will she say whether the same principle will guide the Government in taxation of other areas of economic activity, so that those with a rate of return in excess of 30 per cent. can prepare for the inevitable—in other words, for more special taxes?

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The right hon. Gentleman will know that there are many reasons why particular rates of return are made in different industries, and whether they are sustainable over the longer term or temporary. I remember him questioning me on the Floor of the House on fairness. Over a long period, the post-tax rates of return have been significantly higher than for other non-financial industries. Those who argue that the North sea does not have the capacity to pay more tax, given its immense cash flow, are treading on difficult territory. I do not believe that there is no capacity to pay more.

The hon. Member for Arundel and South Downs made interesting points about new entrants to the industry, as did my hon. Friend the Member for Dundee, East. Of course we want to encourage new entrants into the industry to develop new fields. The hon. Gentleman said that tax allowances are not available to companies that do not make taxable profits, but by definition tax allowances are unavailable when there is no taxable capacity. As I said when responding to a previous amendment, allowances are not lost when companies fail to generate profits immediately, but may be carried over from year to year.

The treatment given to companies in the industry is no different from that for new entrants in other types of business. Indeed, there is a very active market in North sea field interests, and new entrants who want to benefit early from the investment allowance can choose to buy into a profitable field, which would give them a stream of income against which they could use the allowance in the first year. It is normal for North sea new entrants to do that, as it is a pragmatic response for those who want to gain those advantages. The problem that hon. Members have identified is more apparent than real, but we shall continue to monitor the situation and consider the impact.

The hon. Member for Kingston and Surbiton asked about not giving 100 per cent. allowances to small companies that lease and pay 40 per cent. tax. The upfront tax benefit will not be passed directly to the lessee, but might be passed indirectly in the form of lower rentals spread over the term of the lease. Extending the first-year allowances to assets for

leasing would lead to more investment, and we have designed our measures to encourage new investment, as the hon. Gentleman knows. We shall continue to monitor the operation of the scheme.

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 mechanism by which the Minister suggests that small companies might benefit from allowances would depend on contractual relationships, not Government policy. The companies are concerned because they are being hit by the extra corporation tax—which is Government policy—while getting nothing back from the Government. The mechanism that the Minister describes will give no succour to SMEs in the industry.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury 5:15 pm, 11th June 2002

As I said, we shall continue to monitor the scheme in operation. If the problem turns out to be real, companies will be welcome to talk to us about it. I do not believe that it is a problem, but we shall keep a careful eye on it.

North sea oil and gas are scarce national resources. That is why they have managed, over such a long time, to produce returns that often exceed a normal commercial rate. At times, producers make large profits because of movements in the world oil price. Over the past few years, they have not generated a fair share of revenue for the Exchequer. In this measure, we have combined an increase in the tax take with a very generous first-year allowance, which will continue to stimulate new investment and activity in the sector.

I emphasise again that I am not in the business of forecasting what will happen around the world. However, these particular Budget measures should act as a stimulus to investment and activity in the sector.

The right hon. Member for Fylde points to DTI figures and suggests that the DTI is somehow more open and transparent than the Treasury. Of course, I do not accept that. We work in close co-operation. Work at the DTI informs our assessment at the Treasury; that is why we use those figures as the basis for our analysis and for the estimates that are published in the Red Book. I set out on the Floor of the House the basis for our entire analysis. I do not believe the figures that the oil industry has quoted; the new allowance will provide a generous cash boost for the industry at a time when it is expected to contribute a fairer share of revenue. For those reasons, I suggest to the Committee that it should not accept the amendments.

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

I remind the Committee that the amendment simply calls for a study of the impact of the Government's proposed measures to be made by the end of the year. It does not change the measures. It is strange that the Government should want to resist that, because either they will be proven right or the industry and we shall be proven right. Perhaps 31 December 2002 is a little early, but if I were doing the Minister's job, I would want to know whether I had got policy right and I would accept such an amendment. It is a commonsense proposal.

The Minister rightly referred to oil and gas. The southern basin returns on gas are already negative and there are different calculations for oil as opposed to gas; gas is at a price equivalent to some £10 per barrel. These measures are to apply to both. How anyone at the Treasury can have thought that the measures would stimulate new investment in gas I cannot imagine—they will do the reverse. It is evident from the Red Book that the combined measures are designed to be substantially tax positive, raising £7.6 billion over eight years. The argument that the measures will encourage investment seems to be nonsense.

Our case is that, given the dramatically changing structure of the North sea, the wishful thinking aspect of combining accelerated first-year allowances and higher ongoing tax will not work. I was pleased to hear the Minister say that the Government would look further at the issue. She seemed to have taken the point that that might not be any incentive for new venture operations.

However, we think that any prudent Government—we have such a prudent Chancellor, after all—would double-check whether their theoretical calculations were correct, especially in relation to an industry that makes an important contribution to the current account balance and employs 260,000 people in Scotland. Therefore, I shall press the amendment to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 17.

Division number 5 Adults Abused in Childhood — Clause 62 - First year allowances for expenditure wholly for a fence trade

Aye: 6 MPs

No: 17 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Clause 62 ordered to stand part of the Bill.