Schedule 21 - First-year allowances for expenditure wholly for a ring fence trade

Finance Bill – in a Public Bill Committee at 5:15 pm on 11th June 2002.

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Amendments made: No. 94, in page 251, line 4, leave out 'within the relevant period'.

No. 95, in page 251, line 6, leave out 'not' and insert

'at no time in the relevant period'.

No. 96, in page 251, line 8, after 'is' insert

'at any time in the relevant period'.

No. 97, in page 251, line 11, leave out from 'periods' to second 'the' in line 14 and insert

', beginning with the incurring of the expenditure, first ends, namely—

(a) the period ending with the fifth anniversary of the incurring of the expenditure, or

(b) the period ending with the day preceding'.—[Ruth Kelly.]

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

I beg to move amendment No. 110, in page 251, line 41, leave out '24%' and insert '100%'.

In essence, the amendment would make the 100 per cent. first-year allowance apply to all assets, not only those with an alleged useful life of less than 25 years. Given that the rate of writing-down allowance on long-life assets is 6 per cent., the first-year allowance of 24 per cent. does not seem to be especially generous. Indeed, I should be interested to know how the Government came up with that figure, especially as oil and gas extraction is a long-term project, requiring assets with a useful economic life, which may be 25 years. The logic behind extending the 100 per cent. allowance to all investments is, first, that the proportion of assets in the long-life category is relatively modest, about 10 per cent., so the measure would not have a huge impact on tax revenues.

Secondly, many long-life assets turn out not to be long life, particularly as many of the fields currently being developed may not have a long life. In practice, what falls into such a category may not be used for 25 years. I understand that there was no logic to the Government's having selected 24 per cent. Under the new 40 per cent. tax regime, particularly when long-life assets represent a relatively higher proportion of the total investment, the lower 24 per cent. figure could lead marginally to negative decisions about investment prospects.

It is not a huge issue, but I wonder whether it is worth the candle to make such a theoretical separation. I wonder whether the Government are pinning their hopes on capital allowances keeping investment going and, therefore, whether it would be rather more practical and sensible to give the full 100 per cent. capital allowances to all investments.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I thank the hon. Gentleman for the constructive manner in which he spoke. The amendment would indeed give long-life assets with a span of at least 25 years the full 100 per cent. new first-year allowance. Although I understand the hon. Gentleman's argument, he has not made a real case for such a change. We have increased fourfold the allowance for the vast bulk of capital expenditure in the North sea in the first year—from 25 per cent. to 100 per cent. The increase for long-term assets, too, is increased fourfold—from 6 per cent. to 24 per cent. Long-life asset provisions exist to align the rate of depreciation for tax more closely with commercial depreciation. A rate of 24 per cent. is far in excess of normal commercial depreciation, and is therefore extremely generous for assets that have a long life.

The hon. Gentleman pointed out that not many assets in the North sea have a long life, and said that it might not be that expensive to extend the 100 per cent. rate to long-life assets. I agree that not many long-life assets are to be found in the North sea, but such assets

are indeed expensive and extending the rate would have a significant revenue cost to the Exchequer. In other areas, such as for small and medium-sized enterprises, although generous first-year allowances are made, they are not applied to long-life assets, which continue to attract 6 per cent. We see no case for increasing the allowance further. I therefore urge the hon. Gentleman to withdraw the amendment.

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

First, I am interested to note that the logic of choosing 24 per cent. was the simple arithmetic of applying a multiplier of four and not a professional study of its impact on capital allowances. The Minister referred generally to a considerable cost, and I should be interested if she would quantify that figure. My understanding is that with about 10 per cent. of assets generally being long-life assets, the cost would not be hugely material. I have already set out our arguments. Ultimately, it is back to the principal argument—that it is part of a package designed to keep investment as high as possible. For all the reasons that we put forward, we would broadly argue that anything that is doable that is likely to be on the plus side if its revenue cost is not that great would be sensibly done.

The Government still have not made their intentions clear about royalties, despite having loosely promised to do certain things, and I understand that, contrary to my previous understanding, that royalty is relevant to about 20 per cent. of new investment and is particularly relevant to maximising the recovery of an existing field and to the inner drilling of wells. I do not know whether the Minister has anything further to say about when the Government will complete the package.

Overall, we are not debating a huge issue of principle. I hope that the Government will consider it further. Notwithstanding the vote that we just had, if the Government were privately wise enough to do their own investigation of the effects of the package on the industry during the coming nine to 12 months, they could be a little more generous in this territory without a massive tax impact. 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 5:30 pm, 11th June 2002

I beg to move amendment No. 109, in page 252, line 4, at end insert—

'First-year allowances on mothballing costs

6A.—(1) Omit section 161C(2) and insert—

''(2) The decommissioning expenditure is to be treated as first-year qualifying expenditure under section 45F above.''.

(2) Omit section 163(2)(b) and insert—

''(b) on decommissioning plant and machinery which has been brought into use for the purposes of a ring fence trade.''.

(3) In section 163(3), leave out ''The'' and insert ''Where the plant and machinery forms part of an offshore installation or a submarine pipeline, the''

(4) In section 163(5), after ''1998'' insert ''except that an offshore installation partly in relevant waters and partly not shall not be excluded from the definition of offshore installation for these purposes only.''.'.

The amendment touches on a subject raised briefly this morning, when the Financial Secretary gave a response on which I would be grateful for further elucidation. The comments on capital allowances apply equally to the amendment and the cost of mothballing platforms. The decommissioning of infrastructure related to oilfields and the decommissioning of trans-median field installations part of which lie outside UK territorial waters, are currently excluded from the change to grant 100 per cent. first-year allowances. The Financial Secretary commented that her understanding was that mothballing did fall within the allowances. There is also an issue of onshore versus offshore. Surely it is anomalous that such types of expenditure should be excluded from the general change of the capital allowance system. Mothballing extends the life of a field when shutting down would terminate it; logic would suggest that all mothballing should qualify for the capital allowances.

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, and I should be interested to hear whether the Financial Secretary will place on the record the view that the hon. Gentleman said she expressed earlier today—that the capital allowances as currently construed do cover all mothballing expenditure. That is not my understanding. It is important that they should, because when the industry is trying to decide whether it can plan for the future and ensure that certain marginal investments might become profitable later on, if it can mothball various plant and machinery installations it can leave those options open and get better value from that investment, and the resources overall. It is important that the tax regime enables companies to retain their existing facilities if they could have a future use. I hope that the new regime that the Financial Secretary proposes will enable mothballing activity to retain the maximum allowances.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

I am happy to return to the issue of mothballing, and to set clearly on the record when the allowance applies and when it does not. The amendment would provide a 100 per cent. allowance to certain decommissioning expenditure that does not at present qualify for that allowance. The substantial costs of decommissioning offshore oil or gas fields that are incurred under approved abandonment programmes, are already relieved at 100 per cent. I do not believe that there is a case for extending the very generous investment relief that we are introducing in the clause to decommissioning expenditure that is not incurred under a specific approved abandonment programme, or is incurred other than in connection with the closing down of an oil or gas field.

After all, the 100 per cent. allowance that we are talking about is carefully designed to stimulate future investment activity, not its demise. Therefore the rationale for the allowances not applying to mothballing during the development of a field is clear. The oil tax regime already recognises the special case of decommissioning offshore installations through a

100 per cent. allowance. I cannot see a case for further extending that allowance, and on that basis I ask the Committee to reject the amendment.

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

I should like to ask the Financial Secretary for her estimate of the cost difference if the amendment were accepted. Are we talking about material sums because the complexity surrounding the qualification of some forms of mothballing seems to be unsatisfactory? Overall, the point is the same as that raised by the previous amendment. It certainly seems strange that closure qualifies while some forms of mothballing do not.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The hon. Gentleman queries the cost of the measure. I can tell the Committee that it would cost tens of millions of pounds each year, which would not encourage new investment, to recognise the issues faced by companies engaged in normal commercial transactions and rationalisations. It would be a significant measure for the Exchequer to consider and would not tie in with our overall policy objectives. For those two reasons, I urge members of the Committee to reject the amendment.

Photo of Michael Jack Michael Jack Conservative, Fylde

It is on the record that my hon. Friend the Member for Arundel and South Downs asked a perfectly reasonable question. He asked how much it would cost if his proposal were accepted. The Treasury says that it would cost tens of millions of pounds and would not be in line with its policy. We should receive a better and clearer explanation. If the Financial Secretary does not have the figure, will she commit herself to calculating and supplying it in due course? The question was perfectly respectable and we should have an answer.

Photo of Ruth Kelly Ruth Kelly Financial Secretary, HM Treasury

The right hon. Gentleman expects me to make a forecast today on normal commercial transactions undertaken by oil companies. I have given the Committee a reasonable projection that the cost of the measure will run into tens of millions of pounds, and it is impossible to give a more precise figure. I have set out why the proposal does not tie into our policy and, for the last time, I ask the Committee to reject the amendment.

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

I thank my right hon. Friend the Member for Fylde for his intervention. The Financial Secretary is being cavalier, and I shall repeat the commonsense point to which she has not responded. Shutting down a field means that there is no chance of recovery. Mothballing is done deliberately in order to leave scope for further recovery when oil prices rise. There is an obvious inconsistency in shutting-down expenditure qualifying while mothballing expenditure does not. The policy is irrational.

My right hon. Friend did not ask for the exact figure today, which would be unreasonable. There is, however, a difference between £10 million and £90 million. My understanding is that, relative to the total picture, the materiality would not be that great. Rather than suggesting that closing down should not get the allowance and all mothballing should get it, it is easier simply to say that all mothballing should get it.

This is not a huge point, but the Government would be wise to keep their mind open and look at the measure's effect. If the result of not extending the allowance were to be that many marginal fields were closed down rather than mothballed, yet again the Government would have shot themselves through the foot. There is little point in pressing the amendment to a vote, but the Government should take a more in-depth approach to the matter. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 21, as amended, agreed to.

Clause 63 ordered to stand part of the Bill.

Schedule 22 agreed to.