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Clause 85

Finance Bill – in a Public Bill Committee at 3:00 pm on 18th June 2009.

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Chargeable gains

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

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I start by welcoming the Economic Secretary to the debate. I said at the start of the debate on clause 83 that four Ministers have been responsible for the North sea oil and gas regime since the Bill was published, but in the short space of time since then we have gone up to five. Nevertheless, I am delighted to see him in his place and look forward to hearing his views on the sector over the coming minutes.

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

I am sure that my hon. Friend will be delighted by the absence of the hon. Member for Dundee, East, because it would have been pointed out that there are, no doubt, several Members of the Scottish Parliament who are also responsible for those matters. Dealing with the five Treasury Ministers will be quite enough for the time being.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

We have already reflected on the absence of the hon. Member for Dundee, East, but I am told it is due to an injury.

Photo of Bob Blizzard Bob Blizzard Government Whip

His daughter has broken her arm, and he has given me his apologies.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

Yes, so I will not pursue that subject. Questions of devolution, although probably interesting, are perhaps not pertinent to clause 85 and schedule 40.

I am extremely unhappy about the way that 31 Government amendments to schedule 40 have been tabled. They might have reached the Clerks by the time limit on Tuesday, but they did not arrive with me through the internal post until 2 pm yesterday, despite the fact that I have requested, as Members may now do, as you probably know, Mr. Atkinson, to be bumped up to the maximum number of deliveries a day, which I think is four. Previously I had my post delivered once a day, but when I joined the Committee there was such an incoming load of Government amendments and personnel changes that it seemed wise to increase its frequency.

In normal circumstances, with three or four amendments, tabling them so late might be acceptable, but 31 Government amendments really is an awful lot to digest, especially when dealing with so complex a schedule. It is difficult for the Opposition to scrutinise the result properly, when there is such a number of amendments. I should point out that I submitted three or four amendments of my own, so I am not saying that the Government alone are guilty, but submitting 31 Government amendments at the last moment makes life extremely difficult, given the resources with which Opposition parties operate.

The debate will be slightly difficult because I believe that many of the Government amendments are designed to overcome the problems highlighted in our amendments. I will rely to some extent on the Economic Secretary to explain the competing merits of some of the Government amendments, relative to the merits of the Opposition amendments, because I cannot say with absolute certainty what those are, having been unable to devote the time needed to determine the merits of A or B.

Part of enabling the maximum recovery of economic reserves from the UK continental shelf in the future lies in ensuring that the licence interests are in the hands of companies that are willing to invest. The current chargeable gains system can deter companies from swapping or trading assets to achieve that, and that is what schedule 40 is intended to deal with by making it easier for companies to trade assets.

The schedule has two parts. Part 1 extends chargeable gains exemptions on licence swaps from being limited to pre-development licences, as is currently the case, to being an exemption on all licence swaps. As before, the licences will be required to be of equal value, but developed fields can now also be traded among companies. That means that companies will have greater scope to realign their assets. It should, therefore, become easier to create concentrations of fields that could make further investment more economic. In other words, in the latter part of the life of a few of those fields, being able to trade them and perhaps combine such a field with two or three smaller fields nearby would make exploitation easier and more economic. That sounds like something we want to encourage.

Part 2 of the schedule allows companies to avoid a chargeable gain on the sale of an asset, provided that the proceeds from the sale are reinvested within the North sea ring fence. Until now, a company making a disposal of a UK licence interest is subject to corporation tax on the chargeable gains that arise, although there is a possibility that the gain can be held over by reinvesting the proceeds into certain classes of asset. If the reinvestment is in a qualifying class of asset, the gain is held over until 10 years have elapsed, or the new asset is disposed of, whichever happens earlier. Part 2 takes most forms  of reinvestment out of chargeable gains altogether, as long as certain conditions are met. The combined effect of both parts of the schedule should stimulate asset trading in the UKCS, either by allowing assets to be transferred to a company willing to invest in certain fields, or by enabling a series of transactions to be undertaken to align interests.

The Government have tabled 31 amendments. My understanding is that they would increase the number of licences that can be swapped in a single transaction and tighten the definitions used in part 2. Broadly, they seem to increase the flexibility of the schedule.

Government amendment 258 is especially welcome as it reflects a concern, raised directly with me by the industry, that the schedule was drafted too narrowly in excluding other companies within a group of companies from the criteria for reinvestment. That is probably the most liberalising amendment. The inclusion of other companies within a group, on the condition that they are within the ring fence, is also sensible and should increase the number of disposals, while at the same time removing the temptation for companies to find ways to work around the rules.

In her letter to the Committee setting out the amendments, the rather short-lived Exchequer Secretary—I think the hon. Member for Burnley lasted nine days, all told, but she found time to write this letter—she explained that the amendments were

“the result of consultation with the industry following the publication of the Finance Bill.”

As I have said, the industry also raised those points with me and we welcome the Government’s willingness to listen and modify their proposal.

We tabled our amendment 266 in an attempt to deal with the situation of groups. It was anomalous to require that proceeds had to be reinvested by the company—the same company—that realised the chargeable gain, rather than extending the reinvestment provision to place it on a group basis. That would have, or should have, given rise to greater flexibility. Our amendment sought to exploit the similar arrangements that related to holdover relief and to apply them to exemption. If the Minister gives an assurance that the Government amendment will, in practice, provide the same result, I shall be happy to withdraw amendment 266.

Although the Government appear to have accommodated groups of companies in response to the feedback they received, they have not gone quite as far as they could in other respects. In particular, it appears that insufficient provision has been made for companies reinvesting in so-called subsea tiebacks, where existing platforms are connected to new wells by an underwater pipe. The new well is, as I understand the situation, dug and is linked back to the platform via an additional new pipe; it is like a satellite well. I think that is how those things work.

The explanatory notes state that where a company disposes of business

“assets used in connection with a UKCS field and the proceeds are reinvested in other ring fence assets...the gain shall be treated as not being a chargeable gain.”

In other words, if one reinvests the proceeds, everything should be fine. That seems clear, but all field assets are intended to come within the scope of schedule 40. If there is any doubt, the explanatory notes repeat that point the other way round.

“where the assets are sold and the proceeds are not reinvested in the UKCS, then the disposals will be taxed in the normal way.”

There seems to be an assumption that everything should be within the scope of schedule 40. However, it seems that reinvestment in UKCS does not include the exploration appraisal and development of new wells—the so-called subsea tiebacks. Because of the way that part 2 of schedule 40 is drafted, drilling new wells does not qualify as reinvestment and is not seen as creating an asset.

I understand that the industry’s lobbying effort to exempt gains in general was explicitly raised as an issue with one of the Minister’s multitude of predecessors. It is hard to know who dealt with that lobbying effort, but the Economic Secretary is nodding, which shows that he is aware of the situation faced by some of his colleagues, past and present. Wells were explicitly raised as an issue, but the Government appear to have ignored that plea, despite the fact that it sits squarely within the schedule’s intent. Indeed, in reading the explanatory notes, one would think that wells are actually included, but I do not think that they are. The Minister needs to clarify that point.

An increasing percentage of recent UK continental shelf developments have been in subsea tiebacks, which are likely to continue to increase in the future. The new wells are linked to existing infrastructure—the platform—so there is an advantage in having the wells provide the export route for the hydrocarbons. In most cases, the developments will not support the cost of infrastructure in their own right. As I understand it, on average, approximately 40 per cent. of the cost of a subsea tieback development is associated with the wells, so a significant proportion of the funds invested in future developments will not qualify for the reinvestment relief. Bizarrely, it appears that constructing a new well does not qualify for relief, but constructing a tieback to the well does. I would be grateful if the explained what precisely qualifies for the relief and whether the explanatory notes accurately state that everything should be accounted for.

Amendments 262 to 265 are designed to rectify the problem. I am keen to hear the Government’s arguments on new wells and am willing to concede that there may be easier means to achieve the end than those that we have outlined in our amendments. If the Government can find a better way to do it, so be it, but if there is a point of principle at stake, I would like to hear it.

The raison d’ĂŞtre of schedule 40 is to encourage new investment in the North sea. It seems reasonable to extend the criteria to cover fully one of the primary forms of development that that investment needs to take, and there do not appear to be any additional costs associated with that step. Preventing reinvestment from incurring a chargeable gain should surely mean just that. I look forward to hearing the Minister’s explanation of the competing sets of amendments and that all parts of the assets described will qualify under schedule 40.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury 3:15 pm, 18th June 2009

Clause 85 builds upon existing reliefs and reforms the treatment of chargeable gains arising within the ring fence regime to ensure that oil and gas assets are in the hands of those most likely to develop them. The first change enacted by the clause is that,  where companies swap licence interests for developed areas within the UK continental shelf, the disposal of the licence interest will not give rise to a chargeable gain or to an allowable loss where the consideration received is also a developed licence interest. That will enable gas and oil companies to swap licence interests that they do not intend to fully develop with other companies to build hubs, around which further development will take place. That will increase production and extend the life of North sea infrastructure, which is a policy objective of ours.

The second reform is that, where a company disposes of oil and gas assets used in a ring fence trade and reinvests the proceeds in further ring fence assets, the company may make a claim that any gain arising is not chargeable, provided that the reinvestment has taken place no more than 12 months before or three years after the disposal. That provides an additional incentive for companies that make disposals of such assets to reinvest the proceeds in further acquiring and developing UK oil fields and infrastructure in order to enable the development of the North sea to reach its full economic potential. Where a company disposes of assets and removes the proceeds from the North sea altogether, they will still face a chargeable gain.

There is a number of amendments to schedule 40. I apologise to the hon. Member for Hammersmith and Fulham that he did not have the text of the amendments further in advance. We have probably relied too much on the internal post system. We ought to investigate if there are better ways of communicating with Opposition Front Benchers, to ensure that they have any Government amendments in as timely a manner as possible. I will ask my officials to see whether that can be done.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

Order. In fairness to everybody, I want to make it clear to the Committee that the text of the amendments was on the Order Paper on Tuesday, as I recall. I think that it is the letter that was delayed. However, the text of the amendments was here on Tuesday afternoon; I saw it. So the text of the amendments was available. In fact, I am told that it was available on Tuesday morning.

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I welcome that clarification. However, I am keen to ensure that our information flows are as good as possible, so that the hon. Gentleman has the information that he feels that he needs in this area.

First, I want to stress that the Government amendments are technical amendments, which build on the reforms introduced in the existing schedule. As the hon. Gentleman mentioned, they have been introduced as a result of further constructive meetings with oil and gas stakeholders following publication of the Finance Bill. That was confirmed in the letter from my hon. Friend the Member for Burnley.

The Government amendments extend the proposed legislation to ensure that it applies in the full range of asset trading circumstances that may occur in relation to the North sea. Although there are a large number of Government amendments to the schedule—31 in all—I assure the Committee that they cover only four areas. The first two relate to part 1 of the schedule and deal  with licence swaps. They will allow companies to swap licence interests in developed areas for licence interests in undeveloped areas, and to swap multiple licences in a single transaction.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I may be getting confused about something that I was not previously confused about. Is it also possible to swap assets in developed fields for other assets in developed fields, or is it possible only to swap developed assets for undeveloped assets?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I will come on to that point in a moment, hopefully. However, what I said was that the change would allow companies to swap licence interests in developed areas for licence interests in undeveloped areas and to swap multiple licences in a single transaction.

The third and fourth changes relate to part 2 of the schedule, which deals with reinvestment of ring fence assets. The third change will act to ensure that, where an asset trade has involved both a licence swap and a cash consideration, companies will be required to reinvest only the cash consideration, rather than the entire proceeds of the asset trade, to receive full roll-over relief.

The fourth change will ensure that the grouping rules, which apply more widely to reinvestment reliefs outside the North sea ring fence, apply equally to the new North sea reinvestment relief. I believe that that change covers the issue raised by amendment 266, which is one of the Conservative amendments. I confirm to the hon. Member for Hammersmith and Fulham that the Government changes have the same effect as that amendment was intended to have.

As we are all evidently agreed on the importance of the grouping rules applying to the legislation, I trust that the hon. Gentleman will feel able to withdraw his amendment and that he will support the Government amendments, which we believe are technically superior.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

Will the Minister explain something in relation to amendment 266? He seems to be saying that a collection of Government amendments would have the same effect—an identical effect—as that single amendment would have. Would it not be easier to take the single, stand-alone Opposition amendment, rather than a panoply of Government amendments that try to achieve the same purpose?

Photo of Ian Pearson Ian Pearson Economic Secretary, HM Treasury

I am advised that it would not be easier, which is why the Government amendments have been drafted as they have.

In response to the hon. Gentleman’s previous question about swapping developed assets for other developed assets, I can confirm that the legislation already allows the swapping of developed assets for other developed assets and the swapping of undeveloped assets for other undeveloped assets to take place. The change we are proposing now completes the picture.

I hope that it has become clear from what I have said that the Government are willing to listen to what stakeholders have to say on this subject and to take action. However I am unable to recommend amendments 262 to 265 to the Committee. As I understand them, they are designed to add costs incurred in drilling a well to the definitions of relevant assets that can be reinvested in for the purposes of the reinvestment relief in schedule 40.  However, they do not provide any further definition of exactly what costs are to be included within the term “well costs” and what are to be excluded. The general reference to “well costs” does not state what the chargeable gains asset is that would be being reinvested in. Indeed, from a chargeable gains asset perspective, it is not at all clear why the amendments are required, because where a chargeable gains asset is being invested in for the purposes of drilling wells, it would be covered by the Government’s proposed legislation.

If the amendments refer to general well-drilling expenditure, because that is not expenditure on either a licence or plant and machinery and hence would not itself be liable to chargeable gains, it would not come within the chargeable gains regime. Consequently it would be incorrect if it were eligible for the reinvestment relief. I remind the Committee that such general well-drilling expenditure already receives generous tax reliefs, for example through mineral extraction allowances.

The hon. Gentleman is correct in his assessment that tieback infrastructure would be eligible, although the costs of drilling wells are not. We are aware of industry’s view that exploration and appraisal expenditure should qualify for the relief, and we are willing to discuss the matter further with the industry.

As I said, I hope that the hon. Gentleman will feel able to withdraw amendment 266, as it is already covered by Government amendments, as well as the other Opposition amendments in the group. We are more than happy to engage further with the industry on these important matters.

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

Order. In fact, the Opposition amendments are not moved at this stage.

Question put and agreed to.

Clause 85 accordingly ordered to stand part of the Bill.