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Clause 66 - Oil and gas: reinvestment after pre-trading disposal

Finance (No. 2) Bill – in a Public Bill Committee at 3:45 pm on 13th May 2014.

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

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

With your permission, Mr Caton, I would like to consider clauses 66 and 67 together as they have been introduced as part of a package of measures with the same policy objectives and intended outcomes.

Photo of Martin Caton Martin Caton Labour, Gower

Does the Committee agree?

Hon. Members:

Yes.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

Thank you, Mr Caton. Although Budget 2014 announced that the Government, working with the new oil and gas agency, will review the tax treatment of North sea oil

“to ensure that it continues to incentivise economic recovery as the basin matures”,

the measures introduced by clauses 66 and 67 were both announced in the autumn statement 2013. Both are intended to support companies that are engaged in oil and gas exploration and appraisal activity, but are yet to start trading within the ring fence. As the Committee will know, the Finance Act 2009 introduced reinvestment relief to companies with ring-fence oil and gas trades, meaning that they are not subject to corporation tax on chargeable gains that arise on the disposal of assets in the circumstances in which disposal proceeds are reinvested in new oil trade assets, and the disposal and acquisition qualify for roll-over relief.

According to the tax information and impact notes, both measures are expected to have nil Exchequer impact over the period 2014-15 to 2018-19. Both clauses have been introduced to support investment in companies involved in oil and gas exploration and appraisal activity, which is, of course, welcome. However, both of the tax information and impact notes for the measures state that they are

“not expected to have any significant economic impacts…Only a small number of UK businesses will be affected by the measure. The proposals are designed to support exploration companies. This measure is expected to have a negligible impact on these businesses.”

Given the somewhat pessimistic assessment of what clauses 66 and 67 are likely to achieve, will the Minister outline the thinking behind the measures, which are, in HMRC’s own words,

“not expected to have any significant economic impacts”?

Both will have nil Exchequer impact and will benefit

“only a small number of UK businesses”.

Of those that will benefit, the impact will be only “negligible”. Exactly how many firms does she expect to benefit, and how many jobs does she expect to be supported as a result? What increase in exploration and appraisal investment and activity does she expect to see as a result of clauses 66 and 67?

Could the Minister also say a little about the long-term review of the tax treatment of the North sea that was announced at Budget 2014 and that was referred to in our discussions on the previous measures? When are decisions on that important issue likely to be made? We agree that certainty is key to investment decisions, and therefore it would be useful to have a little more information about exactly what the timetable for the long-term review is likely to be.

We are well aware of the nationally important role played by the UK oil and gas industry, which makes a very substantial contribution to our economy, energy security and employment. Indeed, in 2012, the oil and gas sector provided employment for about 440,000 people across the whole country, including for more than 10,000 people in my region of north-east England.

Of course, the lion’s share of those jobs—45% of them—are based in Scotland. I am sure that the Minister, like me and every member of the Committee, believes  that the UK is better together. Will she therefore comment on the important fiscal role that the UK Government play in supporting the national oil and gas industry and how the sector will be best served by our remaining together?

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury 4:00 pm, 13th May 2014

I thank the hon. Lady for her remarks. Clause 66 makes changes to align the tax treatment of pre-trading oil and gas exploration and appraisal companies to that of companies that have commenced a ring-fence trade. It will extend reinvestment relief to prevent a chargeable gain being subject to a corporation tax charge when a company sells an asset in the course of oil and gas exploration and appraisal activities, and reinvests the proceeds in the UK or the UK continental shelf. The change is expected to encourage oil and gas exploration activity.

I will give a little background. Currently, reinvestment relief allows companies that are carrying on a ring-fence trade to sell their assets without generating a corporation tax charge on any gain if they reinvest the proceeds of the sale back into the UKCS. A typical example of such a transaction is a company disposing of an interest in an oil licence together with assets such as a platform and pipeline, and acquiring an interest in a new licence and assets. In that way, companies can vary their portfolio of assets without incurring a tax charge as long as further investment takes place. That helps to ensure that oil licences and associated assets end up in the hands of the companies that are best suited to exploit them.

However, a company that is not yet carrying on a ring-fence trade is unable to take advantage of this exemption. Such companies are typically smaller exploration companies, which are seen as the lifeblood of the oil and gas industry. Without those exploration companies, there would be no new discoveries to replenish the declining reserves of North sea oil and gas. The Government have listened to the industry’s concerns and clause 66 will address the difference in tax treatment between trading and pre-trading companies, to help to encourage greater exploration.

The changes made by the clause will extend the scope of the legislation to ensure that any company that carries on exploration and appraisal activity within the UK or UKCS will benefit from reinvestment relief in exactly the same way as a company carrying on a ring-fence trade. That will benefit the smaller and typically UK-based exploration companies that have been hardest hit by the economic downturn. It will also support investment in UK-based industries, and protect and create UK jobs, not only in Aberdeen and Scotland, but throughout the rest of the UK—the hon. Lady mentioned the 10,000 jobs in her own region in the industry. The clause will also help to ensure that we are able to maximise the benefit of our remaining resources.

Clause 67 makes further changes to align the tax treatment of companies involved in oil and gas exploration and appraisal activity in the UK or UKCS, and which have not commenced trading, to that of companies that have commenced a trade. The clause will extend the scope of the substantial shareholding exemption to companies owning assets used for the purposes of oil and gas exploration and appraisal. Previously, that aspect of the substantial shareholding exemption applied only when assets were used for the purposes of a trade.

The substantial shareholding exemption prevents a corporation tax charge for gains arising from disposals by companies of shares, when certain conditions are met. It allows groups of companies to restructure without decisions being driven by tax implications. In most cases, the exemption applies only when a company has held a substantial shareholding in a subsidiary for the 12 months before the disposal. However, under the current legislation, the 12-month requirement is waived where the company being disposed of holds an asset used for the purposes of a trade. In the context of the oil and gas industry, a trade involves the exploitation of oil rights and the development of oil and gas. A typical example of assets used for the purposes of ring-fence trade would be an interest in an oil licence, together with assets such as a platform and pipeline. The substantial shareholding exemption allows companies to sell their existing interests in North sea assets without incurring a tax charge, enabling them to invest a greater amount in new North sea interests. This helps to ensure that the oil licences and associated assets end up in the hands of companies that are best suited to exploit them.

However, a disposal of shares in a company that is not yet carrying on a ring-fence trade does not qualify for the exemption. Such companies are typically smaller exploration companies, which are seen, as I have said, as the lifeblood of the oil and gas industry. Without such exploration companies, there would be no new discoveries to replenish the declining reserves in our North sea oil and gas. The Government have listened to industry’s concerns, and the clause will address the difference in tax treatment between trading companies and non-trading exploration companies.

Clause 67 will extend the scope of the legislation to ensure that companies investing in or carrying out exploration and appraisal activity in the UK or UK continental shelf will benefit from the substantial shareholding exemption in exactly the same way as a company carrying on a ring-fence trade. That will support investment in exploration activity, leading to increased production and helping us to get the most from our vital national interests. As I have said, the investment will help to create and sustain jobs across the whole UK both directly and indirectly through the supply chain.

Let me turn briefly to the hon. Lady’s questions. She effectively asked me to take out and polish my crystal ball when she asked me how many companies would be affected. The small numbers of oil and gas exploration companies that I have already mentioned will be affected, but it is difficult to say exactly how many, because the licence interests in the North sea are continually changing. She asked about representations. We have received many representations on the matter, and we have spoken to many interested stakeholders, including representative bodies.

The hon. Lady asked for the two clauses to be taken together, the point being that the measure is part of a whole package. She will appreciate that various bodies will identify issues here and there that they believe will affect them or their companies. Therefore, the Government are signalling that the oil and gas sector is, as she said, very important to the whole of the United Kingdom, particularly in Scotland. I entirely endorse her comments about us being better off together, and we must recognise the importance of oil and gas to the Scottish economy.

Photo of Catherine McKinnell Catherine McKinnell Shadow Minister (Treasury)

I appreciate that the Minister is not Mystic Morgan, but members of the Committee and members of the public would like to feel that the Government have put some thought into the measures in the Bill and given some consideration to the companies that will benefit. My questions are designed simply to elicit more information than is currently available, particularly given the total lack of information in the tax information and impact note, which gives the impression that the measure will have absolutely no impact on anybody anywhere.

Photo of Nicky Morgan Nicky Morgan Minister for Women, The Financial Secretary to the Treasury

I understand the reasons behind the hon. Lady’s question. If I were in her shoes, I might be asking the same question, because I probably would not have much else to ask. It is nice to be called Mystic Morgan, although I suspect that Mr Morgan may choose to disagree with that description.

The point about the changes is that they mostly concern small exploration companies, which are often start-ups. As the hon. Lady will appreciate, and as Government Members certainly appreciate, Government creates the environment for businesses to flourish. It is not for the Government to set out that x companies will benefit in year 1 and y companies will benefit in year 2. Instead, these and other changes create the conditions that allow companies to start up and incentivise them to invest.

I will not get involved in that dialogue; I will move on to talk about the evidence that the legislation will have any real benefit to exploration companies. As I have mentioned, the legislation has been subject to close and productive dialogue with industry stakeholders. It will remove a fiscal barrier to companies deciding to sell assets, making those transfers simpler and aligning the tax treatment with that of companies carrying on a trade, whether in the oil and gas industry or not.

The hon. Lady asked about the fiscal review. That was announced initially at the autumn statement, setting out a road map for ongoing work. It is dependent on changes and conclusions, and exploration will be included. I mentioned in the debate on a previous clause that the industry welcomes discussions about the review, its shape—which will depend on its chairman—and the areas it should explore. I cannot predict when the review will report, because we want to get it right and to encourage this important industry, particularly up in Scotland.

The hon. Lady also asked about the Exchequer costs in the tax information and impact note being nil. That is because exploration companies can already be exempt from tax under the current legislation. The clauses still enable exploration companies to achieve exemption, but in a simpler and more flexible way.

For the reasons that I have set out, these clauses will help further to level the playing field for all companies wanting to invest in the North sea and will be welcomed by the oil and gas industry. They are a further example of the Government’s support of the important UK oil and gas industry. I therefore hope that the clauses will stand part of the Bill.

Question put and agreed to.

Clause 66 accordingly ordered to stand part of the Bill.

Clause 67 ordered to stand part of the Bill.