Clause 183 - Relief in respect of decommissioning expenditure

Finance Bill – in a Public Bill Committee at 5:00 pm on 19th June 2012.

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

Photo of Peter Bone Peter Bone Conservative, Wellingborough

With this it will be convenient to discuss the following:

That schedule 21 be the Twenty-first schedule to the Bill.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I need some additional minutes to speak to some of the broader issues arising from the clause, because I heard the Minister on an earlier clause refer to the plan for the future of the oil and gas industry. It is fair to say that at the time of the 2011 Budget, there was some consternation among the industry  at the outset regarding some of the measures announced. I have several pages of quotes—I will not read out every one—but suffice it to say that at that stage, a whole range of industry spokespeople felt not only that the Government had not consulted them in advance, but that some of the tax measures, which were described as a tax grab, a tax hike, and so on, would be particularly problematic for the industry. I may say a little more about that when I ask the Minister some particular questions.

Clause 183 and schedule 21 restrict to 20% the relief available for decommissioning expenditure for supplementary charge purposes by increasing the profits liable to the supplementary charge when decommissioning expenditure is taken into account in computing those profits. Where such expenditure reduces the amount of petroleum revenue tax chargeable, the schedule also reduces the profits liable to the supplementary charge, where the profits resulting from the reduction in PRT would be subject to the supplementary charge at a rate of more than 20%. The schedule further provides that losses arising from mineral extraction allowances given in respect of decommissioning expenditure are brought within the scope of the provision, which extends the period in which loss relief may be given.

The Minister has already referred to the timing of the implementation and introduction of the charges. In this case, the charge is effective from 24 March 2011, and the supplementary charge, therefore, increases from 20% to 32%.

At Budget 2011, it was announced that legislation would be introduced in the Finance Bill 2012 with effect from Budget 2012 to restrict the rate of tax relief from decommissioning expenditure for the purposes of the 20% supplementary charge. The schedule simply seeks to ensure that the principles that govern the restriction of decommissioning relief are applied consistently to PRT and non-PRT fields. The schedule also ensures consistency of treatment on decommissioning expenditure with regard to the restriction of relief and access to the extended period for which losses may be carried back.

An explanation of why restricting relief on decommissioning expenditure to 20% is fair when a rate of 32% is applied to profits might be helpful, because there has been some discussion on that point. The heat from the original debate has subsided, but the point I hear most often from people in these industries is that they need certainty to plan for long-term investment. The industry, therefore, is focused on the legislation required to ensure the contractual entitlements to such relief. In other words, each company wants to be certain of the relief’s future so that it can plan accordingly. I understand that the Minister will further consult the industry on that. Will she say a little more on the timing and scope of that consultation? How will the position be monitored?

Will the Minister also indicate how she intends to use legislation and policy to incentivise new activity by ensuring that smaller companies are able to operate at the margins of those areas where the larger companies work? How will she ensure that companies have the certainty they are looking for?

A response to those questions from the Minister would be helpful. We all want to see the future of our oil and gas industry in the UK, and we also want  security of supply. Concerns have been raised that if we do not get the investment infrastructure right—again, there are concerns both offshore and onshore, particularly for the petroleum refining industry—the cost of building, creating and modernising the infrastructure are not necessarily incentivised by the taxation regime.

I appreciate that not all of that can be addressed by this one schedule, or indeed by this Bill, but it would be a helpful signal to the Committee and the industry if the Minister explained how she intends to take matters forward.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury

I will, with pleasure, tackle the questions about clause 183 and will also briefly refer to some of what clause 184 does. Clause 183 and schedule 21 make changes to ensure that the rate of tax relief on expenditure related to the decommissioning of oil and gas fields is capped at 20% for supplementary charge purposes. To set out some background, let me take us back to Budget 2011 when, as part of a sizeable package to support motorists, the Government introduced a fair fuel stabiliser. The Committee will well remember that at that Budget we were able to reduce fuel duty by 1p in order to support the motorist. This means that the rate of supplementary charge on the profits from oil and gas production is higher when, as now, oil prices are high and activity is more profitable.

At Budget 2011, the rate of supplementary charge was therefore increased from 20% to 32%, where it has remained. If oil prices fall below a trigger price of £45 per barrel on a sustained basis, the fair fuel stabiliser will reduce the rate of supplementary charge back to 20%, on a staged and affordable basis. However, as the clause makes clear, the rate of tax relief given for decommissioning will not change with that supplementary charge rate. As hon. Members may already know, licensees in offshore oil and gas fields are required by law to decommission their installations at the end of a field’s life. The oil and gas fiscal regime provides tax relief on the costs of that decommissioning.

The restriction in clause 183 and schedule 21 means that the rate of relief will remain at 20% for SC purposes. The total rate of relief that companies receive on their decommissioning costs will therefore remain at 50%, or 75% for fields that pay petroleum revenue tax. This measure is designed to ensure that companies are not encouraged to bring forward the decision to decommission mature fields when oil prices are high in order to obtain a higher rate of relief. The Government are committed to ensuring the maximum economic recovery of oil and gas in the UK continental shelf. Clause 183 and schedule 21 seek to ensure that we do not give companies an incentive which undermines this objective by allowing them to choose to decommission fields for tax reasons, even though they may still have potentially recoverable reserves.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I welcome what the Minister is saying about the importance of not encouraging or wrongly incentivising companies to decommission at an early stage to take advantage of some kind of tax break. How does she balance that with ensuring that the taxation regime encourages further investment? I am thinking particularly of the balance between some of the larger companies and the smaller companies.

Photo of Chloe Smith Chloe Smith The Economic Secretary to the Treasury 5:15 pm, 19th June 2012

The hon. Lady is only a micro step ahead of me. I will do just that in a moment and on clause 184 too. I suspect we have common interests in the principles, which are to ensure that the UK continental shelf performs to the best of its economic ability.

The clause restricts the relief available for decommissioning expenditure for SC purposes to 20%. In doing so, it seeks to ensure that the principles governing the restriction of decommissioning relief are applied consistently to fields that pay petroleum revenue tax and those that do not. It also provides that losses arising from mineral extraction allowances in relation to decommissioning expenditure are eligible for the same loss carry-back periods as apply to losses arising from plant and machinery capital allowances in respect of decommissioning expenditure.

The point I want to take forward in answer to the hon. Lady’s question is how to encourage maximum production from appropriate fields, and how to incentivise smaller companies. The point is absolutely clear. The clause goes hand in hand with a much broader piece of work that the Government have done to provide the sort of certainty on decommissioning relief that I suspect she wants to hear about. That work began last year, and has continued into this year.

We announced in the 2012 Budget that the Government will legislate in 2013 on a contractual approach to provide further long-term certainty on decommissioning tax relief. Perhaps those of us who are lucky enough to be here again on the 2013 Finance Bill will enjoy every moment of that—if we are not put on the libraries committee in the meantime. The announcement in the 2012 Budget followed close engagement with the industry, which has warmly welcomed our proposed approach to provide greater certainty for the investment that we all want to see on the UK continental shelf. We believe that it should result in billions of pounds of additional investment and production over the life of the basin at no net cost to the Exchequer.

We will discuss further points on clause 184 that relate to how we can incentivise smaller companies to take part. They have been very much part of the discussions that I and my Department have had, and of the work that I outlined. Indeed, they can be discussed with field allowances.

I want to make it clear that we value consistency between the definition of decommissioning expenditure used in the clause and schedule, and in any contract in respect of the wider certainty work. However, I think it will be one of the issues covered in the consultation on decommissioning certainty that the hon. Lady asked about and which will be published later this year. Because of that ongoing consultation process, the clause includes a power to amend the definition of decommissioning expenditure through secondary legislation.

In conclusion, the clause and the schedule will ensure that companies remain eligible for tax relief worth half, or in some cases three quarters of their decommissioning costs. Losses arising from those costs will continue to qualify for generous carry-back provisions, and the clause seeks to ensure consistency of treatment for different types of decommissioning expenditure. We believe that restricting the rate of relief in that way is the most sensible way to address the risk that companies  might otherwise be incentivised to accelerate the decision to decommission mature fields on tax grounds. The clause and schedule also complement the Government’s wider ongoing work to ensure that companies have long-term certainty on decommissioning relief, which will be the subject of consultation in due course.

Question put and agreed to.

Clause 183 accordingly ordered to stand part of the Bill.

Schedule 21 agreed to.