Clause 306 - Ending of shipbuilders' relief

Finance Bill – in a Public Bill Committee at 9:45 am on 24th June 2004.

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Question proposed, That the clause stand part of the Bill.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

This is a small clause with a long history. It removes tax relief on energy input used to construct ships, and it is part of a raft of major measures to subsidise shipbuilding in this country that have been in place for decades. To its detriment, the industrialised world engaged for a generation of shipbuilding in an auction of subsidies, and some auctioning continues to this day.

We support the clause. We left such clauses on the statute book as well of course, but I hope that the Committee does not find it too party political of me to point out that it took an EU directive requiring the removal of those state aids to force the ending of relief. Since the Government came to power, the reliefs under the clause have totalled £70 million. We are talking about not threepence ha'penny, but quite a sizeable sum of money. I do not mind if the Economic Secretary has to write to me to answer these three important questions. Are there any other forms of state aid to shipbuilding left? Who were the beneficiaries? Are the Government committed not to find other ways of getting money to the shipbuilding industry?

The other general issue concerns whether we will be—as usual—reasonably obedient European citizens, getting rid of the relief, while other shipbuilders in

Europe may not be so quick to get rid of it. Many have argued that the auction of reliefs must be reduced, leaving a level playing field at each stage of reduction. I am not convinced by that argument in terms of economics or in practice. However, it is an argument. Therefore, what is the situation for the removal of similar reliefs in the main subsidising shipbuilding countries of the EU, Germany, Spain and one or two of the new entrants, such as Poland?

I will understand if the Economic Secretary does not have the answers to all those points, but why have the Government decided to delay implementation for a year? Is it because they already had commitments to ships under construction, which would have meant changing the terms for beneficiaries of the relief, or is there another purpose to the delay? Beyond that, I would be happy if the Economic Secretary wrote to me on any points that he is not able to answer today. As I said, I support the measure.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I believe that I will not need to write to the hon. Gentleman, as I can answer his questions directly. The European state aid rules, plus the regulation that was passed in 1998 and came into effect at the end of 2000, apply across the EU. The UK is not singled out by the regulation for removal of old-style subsidies. The spirit and purpose of the regulation is to remove such reliefs across the European Union.

The hon. Gentleman asked about remaining state aid. A form of special support for shipbuilding in Europe was introduced in June 2002 as a temporary defence mechanism, principally in response to particular competitive pressures from the Korean shipbuilding industry. It applies in a very restricted way to container ships and chemical carriers. In fact, it does not apply to any of the ships built in UK yards. It was intended to last until March 2004 and has been extended by one year. That is the only remaining type of formal state aid. I shall discuss the beneficiaries of the traditional shipbuilders' reliefs in a moment.

To support the shipbuilding industry, the UK Government have shifted the focus of support from old-style operating subsidies, as the hon. Gentleman rightly noted—I welcome his support for the measure—to supporting and directing investment to help the shipbuilding industry to build up its skills base and to increase investment in technology, research and development. Such productive investments will help to secure the industry's long-term future. We have moved away from the direct operating subsidies represented by shipbuilders' relief.

The clause repeals the national legislation on shipbuilders' relief. I announced the abolition of the old-style operating subsidy in my written statement to Parliament on 12 January. Abolition reflects the Government's policy to replace operating subsidies with more effective support for the shipbuilding industry: promoting international competition; promoting and putting in place support for enterprise, research and development; science and innovation; and tackling skills needs.

Contrary to the hon. Gentleman's impression that there is a one-year delay, the statement of 12 January confirmed the full and immediate abolition of shipbuilders' relief. The clause repeals with retrospective effect the national legislation on shipbuilders' relief.

As the hon. Gentleman said, this is a short clause with a long history. Shipbuilders' relief was introduced in 1966 to provide relief to shipbuilders from hydrocarbon oil duty incurred on the costs of constructing, fitting out and equipping certain vessels. The relief was payable by Customs and Excise at a rate of 2 per cent. of the value of an eligible vessel. The relief was, in effect, an old-style direct operating subsidy that has no place in a modern and competitive business environment.

In view of our policy for modernising the support that we give to industry, in 1998, we gave strong support to the European Commission's preparation of the regulation that established new rules on aid to shipbuilding. The regulation explicitly refers to commercial vessels and fishing vessels for export from the Community. Since Community regulations have direct effect in member states, the classes of vessel specified in the regulation automatically lost their right to shipbuilders' relief from 31 December 2000, the date the regulation came into force.

Shipbuilders' relief was also payable in respect of other fishing vessels and warships. The purpose of the regulation was to bring to an end state operating aid in the Community. To comply with the spirit of the regulation and with more general state aid law, I also announced on 12 January the abolition, with immediate effect, of shipbuilders relief for those categories of vessels. However, I confirm that Customs will honour claims for contracts signed on or before the date of my announcement in Parliament in respect of those categories of vessels.

The Government are therefore committed to continue support for our manufacturing industry, and shipbuilding in particular, but it will be done differently in order to ensure that the industry has the skills that it needs and the right level of productive investment for the future. I commend the clause to the Committee.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General 10:00 am, 24th June 2004

I thank the Minister for that reply, which was erudite, thorough and well informed. I did not make myself clear; I thought that implementation had been delayed EU-wide for a year. If I am mistaken—

John Healey indicated assent.

Photo of Andrew Tyrie Andrew Tyrie Shadow Paymaster General

The Minister is nodding. I think I read about that somewhere or other while briefing myself for today's debate. I shall take another look and drop him a line.

The Minister referred to the large number of other measures intended to help the shipbuilding industry, through more modern assistance, improvements in the skills base, R and D and other methods. Has he put a cost to those measures, and will he share it with the Committee, either now or later?

Photo of John Healey John Healey The Economic Secretary to the Treasury

Why wait? In June 2001, we launched a four-year project with the shipbuilding industry. The total funding committed to the project was £6 million, £3 million of which has been paid. It is called the Link shipbuilding research project and it is paid through the Shipbuilders and Shiprepairers Association. It is designed to help the work force and the yards by combining academic studies with masterclasses tailored to the needs of the yards involved.

In my statement of 12 January, I made it clear that we are setting up sector skills councils, a new way of bringing the commitment of industrial sectors and the trade unions together to build a skills base for those industries. The new sector skills council that covers shipbuilding, but that goes more widely, is preparing a sector skills agreement. If it is approved, it will draw £500,000 of direct support from the Government. In my statement, I also committed an additional £500,000 to help build the skills base in the shipbuilding industry. Those are the sums that we have committed over recent years.

As I explained in my more general comments, that is the focus of the support that we now regard as being appropriate for the industry of the future.

Question put and agreed to.

Clause 306 ordered to stand part of the Bill.