Clause 64 - Chargeable gains: oil activities

Finance (No. 3) Bill – in a Public Bill Committee at 5:15 pm on 7th June 2011.

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

Photo of David Hanson David Hanson Shadow Minister (Treasury)

I have a few small questions on clause 64, which might overlap into schedule 15, although I hope the Minister can answer if possible under clause 64.

Clause 64 effectively brings in schedule 15, which amends the oil chargeable gains licence swaps legislation and extends the scope of the ring fence reinvestment legislation to exploration, appraisal and development  expenditure. That, again, is welcome and we will not oppose it; the Minister has our support on that matter. However, I wish to press her on the impact of one particular item, which may be better taken under schedule 15, rather than clause 64.

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East 5:30 pm, 7th June 2011

Order. If both Front Benchers agree, we can take clause 64 stand part and schedule 15 stand part at the same time.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Thank you, Mr Hood, for the matters overlap; this is a straightforward question. Schedule 15 is divided into two parts. Part 1 covers swaps, where companies swap their oilfield licences rather than buying a new licence outright. They can also apply if the licence is acquired partly for cash and partly for another licence. If it is a pure swap, the old licence is treated as disposed of for no gain or no loss, and the acquisition cost for the new licence is treated as the no gain, no loss value of the old licence. If it is a partial swap, the licence portion disposed of is still no gain, no loss. That legislation was introduced in 2009, and the schedule updates it, which I welcome.

The first change is to treat any enhancement expenditure on the asset that the buyer reimburses as incurred by the buyer. The second is to allow swaps to be treated as made on what the parties agree to be the effective date of the swap, even if the swap is not completed at that point. That is the point on which I wish to press the Minister. That effective date is when the economic benefit passes, even if formal title has not passed. It is common for oil and gas asset disposals to have an effective date and a later completion date. The change is in line with the original intention of the legislation and is reasonable. Any subsequent increase in the non-licence consideration will also be caught.

What might happen in the event of a subsequent decrease in the non-licence proportion? There is no such provision in the schedule as I read it. If that occurs, what will be the Minister’s response? At the moment, the increase in non-licence consideration will be caught, but a decrease may not be. I do not know whether there is any impact in that respect. As I read it, there is nothing in the schedule or the clause looking at that point. It may have no consequence, but I felt it worthwhile to point out that provision to the Minister, so that she can examine with officials whether it has a consequence.

I would also welcome clarification of the Minister’s understanding of the definition in the schedule of

“Exploration, appraisal and development expenditure”,

which is the phrase used on page 230 in part 2 of schedule 15,

“Reinvestment of ring fence assets”.

Paragraph 5 says:

“1981 Exploration, appraisal and development expenditure”,

and goes on to list a range of definitions of those three terms. It has been put to me that that is a flexible approach, which is fine, but it means that the definition is not under the direct control of Parliament and may not be based on generally accepted accounting practices. Will the Minister clarify those two issues? First, what happens when there is a decrease in a non-licence proportion? Secondly, will she give me a firm definition  of “exploration, appraisal and development expenditure”, and does she believe that that definition is based on generally accepted accounting principles?

Photo of Justine Greening Justine Greening The Economic Secretary to the Treasury

It is probably worth briefly running through clause 64 and schedule 15 to say why they are in the Bill and what we intend them to achieve. They introduce small but important changes to chargeable gains legislation that will apply to oil and gas companies. The changes relate to two areas of the fiscal regime and are intended to encourage further investment in oil and gas fields.

The existing oil licence swaps legislation provides that no chargeable gain arises on the swap of oil and gas licences in the UK and the UK continental shelf in some circumstances. That legislation was introduced to encourage and enable the transfer of licences so that they would be held by companies that were likely to invest in them. However, it does not adequately address the circumstances that arise in practice, and in many cases the legislation simply cannot apply. The existing ring fence reinvestment legislation provides that no chargeable gain arises in some circumstances when disposable proceeds are invested in new oil trade assets. One requirement of the legislation is that the disposal and acquisition qualify for roll-over relief. Again, that legislation encourages the disposal of licences and at the same time encourages investment of the proceeds in the UK continental shelf.

A lot of such investment comprises expenditure on exploration, appraisal and development, such as the cost of drilling wells, which does not qualify for roll-over relief. The right hon. Member for Delyn asked about the definition of expenditure on exploration, appraisal and development, and the measure uses generally accepted accounting principles. I hope that that provides the clarification he wants. However, as a result, the ring fence reinvestment legislation cannot apply, and that is the situation that we want to remedy. The changes made in the clause and in schedule 15 address those issues and ensure that oil licence swaps legislation applies by reference to the date on which the economic benefits under the licences concerned are treated as passing, rather than by reference to the date on which the swap arrangements are entered into.

The right hon. Gentleman also asked about valuation reductions. The point is that the parties want the swaps legislation to apply with reference to the position agreed on the effective date, and that any non-licence consideration should not affect the outcome, whatever way the non-licence consideration payments flow. He raises an interesting point, but in practice the way the legislation is now structured should ultimately have no impact. In fact, the changes in the clause and the schedule should ensure that the technical problems facing us in the existing legislation fall away.

The schedule will also ensure that for chargeable gains purposes the base cost reflecting any expenditure incurred arises to the appropriate company. On the ring fence reinvestment legislation, the incurring of expenditure on exploration, appraisal and development is treated as expenditure on assets that qualifies for roll-over relief, thus enabling the legislation to apply.

Clauses were published in draft in December, having been discussed with industry advisers. Comment was received on only one aspect—a definition—and a solution  to the issue identified was discussed and agreed with those who commented. The draft legislation was amended accordingly. The changes introduced by the clause and the schedule have been developed with the industry. They will enable the existing legislation to apply more widely, which will help to assist the transfer of UK continental shelf assets, ensuring that assets are held by those companies that are most likely to invest in them. The changes will help to ensure that the UK maximises the economic production of its oil and gas reserves.

Question put and agreed to.

Clause 64 accordingly ordered to stand part of the Bill.

Schedule 15 agreed to.