Clause 147

Finance (No. 2) Bill – in a Public Bill Committee at on 13 June 2006.

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New basis for determining the market value of oil

Question proposed, That the clause stand part ofthe Bill.

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

Good morning, Mr. Benton. I welcome you to the Chair on this now sunny morning as we come to part 5 of the Finance Bill. The clause provides for a new basis for determining the market value of oil for petroleum revenue tax purposes related to the non-arm’s length disposal of oil. The changes are being introduced because the opportunities that the current market value rules provide give considerable scope for tax arbitrage. The current rules that rely on a range of market values during a month are being replaced therefore under clauses 147 and 148 with prices based around what will be termed the notional delivery day for the majority of crude oils. They will be known as category 1 oils. For other blends of oil when prices are less readily available, Her Majesty’s Revenue and Customs will work with producers of those particular blends to arrive at an agreed and acceptable valuation method.

Under current rules, as the Committee may be aware, the market value of oil for non-arm’s length disposals—in other words, generally disposals within a wider group—is arrived at by taking an average of arm’s length prices during a month. That calculation method allows companies to track prices over a month and decide whether to dispose of oil at arm’s length or non-arm’s length depending on which was more tax-efficient and produced the lowest tax charge. The result was a significant tax loss to the public purse, and contractual and sales decisions based on tax considerations rather than commercial considerations.

The new rules stop such practices by valuing non-arm’s length sales of oil around the prices available two days before the delivery date, the delivery date itself and two days after, the so-called 2-1-2 method. That is commonly used in commercial contracts. New rules will be introduced to arrive at a delivery date for all circumstances when oil is disposed of at non-arm’s  length. Under those rules, the delivery date will be the date of completion of load or the date of the bill of lading, whichever is appropriate.

The pricing method will apply to the major blends of oil for which there are commonly quoted daily prices. They will be known as category 1 oils. Other oils where such prices are less available or not appropriate will be known as category 2 oils, and HMRC and the producers of such oil will reach agreement on the most appropriate method for valuing such oils. On that basis, I commend the clause to the Committee.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

Welcome to the oil section of the Finance Bill, Mr. Benton. I know that it will be an unbelievably exciting experience for you, as it will be for the rest of us. The heading “New basis for determining market value” is probably the most eye-catching of the headings of clauses 147 to 155 that cover the oil section, although that might not be saying very much. It must be said that some of the remaining clauses, especially clauses 153 and 155, are more significant.

I must confess that I have recently become used to Ministers moving clauses formally, so I was not necessarily expecting to hear the lucid explanation of the clause that the Financial Secretary has just given. However, since I have, I wish to ask him a couple of questions. The provisions are presented simply as an anti-avoidance clause. If it is such a clause, obviously we welcome its aim. It is important to eradicate attempts to take unfair advantage of the tax rules. I should like to hear an assurance from the hon. Gentleman that the clause is unconnected with the other tax changes that are proposed under the remaining clauses. Perhaps he would give us an idea of how much revenue it will raise.

Photo of Stewart Hosie Stewart Hosie Shadow Spokesperson (Women), Shadow Spokesperson (Home Affairs), Shadow Spokesperson (Treasury)

It is useful to consider what the Treasury Committee said about the pre-Budget report. It welcomed the Treasury’s promise of no further increases in North sea oil taxation in the length of this Parliament, not least because any further subsequent increases might increase uncertainty about future taxation of oil companies and might serve as a disincentive for future investment in the North sea.

In January, the Institute for Fiscal Studies’ green budget pointed to the problem of the type of tax regime introduced in 2002 and the supplementary charge being introduced. They said that

“the neutrality of this tax regime rests crucially on the constancy of the tax rate. If the tax rate that applies to future returns is expected to be higher than the tax rate at which upfront investment costs attract tax relief, then projects with a positive net present value in the absence of tax may become unattractive to investors”.

The key thing about both the Treasury Committee and the IFS is that one called for certainty and the other called for constancy. While there may be disagreements over tax rates and over new and unnecessarily complex regulation, I agree that clause 147 provides a solid and comprehensive framework for determining the market value of oil, and clause 148 provides for its introduction. I welcome the comprehensive nature of clause 147.

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

The hon. Member for Dundee, East (Stewart Hosie) ended rather sooner than I had expected. I thought that he was going on to add a  caveat to his welcome for the mechanism set out in clauses 147 and 148 for determining market value. He calls them solid and comprehensive as a framework and I welcome that. Particularly in relation to his amendments to clause 153, we will no doubt come on to debate the nature of stability and certainty in the tax regime and how that can best be delivered or, in some cases, undermined by some of the proposals.

Suffice it to say that I emphasise to him and to the hon. Member for Wycombe (Mr. Goodman) that the measures in clauses 147 and 148 and in the two sets of clauses that are coming up, before we get on to the question of supplementary charge rates, are revenue protection measures. On Second Reading, the hon. Member for Dundee, East said in a discussion with my right. hon. Friend the Paymaster General, which was subsequently confirmed and clarified to him in a letter on 4 May, that they are revenue protection measures and are not connected with the question of the level of taxation of North sea oil and gas.

I can inform the hon. Member for Wycombe that the measures in amendment No. 147 were announced at the pre-Budget report. They were published in a discussion document for the industry in July last year. The industry has been looking at them, helping us develop the detail and expecting them to be introduced. The hon. Gentleman asked what the revenue protected will be. Alongside the announcement in the pre-Budget report in December, we confirmed that the estimated revenue protected, using the new method of calculating market valuations, will be £40 million this year,£80 million next year, £80 million the following year and £80 million ongoing.

Therefore, it is a revenue protection measure. It is necessary. It is based on the experience that we have had, not of all companies but of some companies stealing a march on their competitors by the system of tax arbitrage to which the current laws leave us open. On that basis, I urge the Committee to support the Clause and Schedule 18.

Question put and agreed to.

Clause 147 ordered to stand part of the Bill.