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Dawn Primarolo: If the right hon. Gentleman casts his mind back to when he was Financial Secretary to the Treasury, he will recall that some of our double taxation treaties tried to address that point. Unfortunately, they were systematically misused, resulting in the loss of huge amounts of revenue to the Treasury and no gain to the developing nation concerned. The point made by both the right hon. Gentleman and my hon. Friend the Member for Dumbarton (Mr. McFall) is to be carefully considered, but I am sure that the right hon. Gentleman will remember that, unfortunately, once something is in the tax system it can be used in ways that were never intended. That has certainly been our experience.

Mr. Jack: I am grateful to the hon. Lady for the kind way in which she has responded to my point and for her

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agreement that it should at least be considered. I accept that we must be concerned about the abuse of the tax system, which I shall talk about in the context of tax relief for films. However, the time has come to see what encouragement we can give to genuine investment efforts. The Government have talked about addressing the issue of the devil making work for idle hands; in areas that are potential hotbeds of world terrorism, this objective is worth re-examining.

I am delighted to learn that companies such as Grosvenor Estates are in discussion with the Treasury and the Inland Revenue about section 13 of the Taxation of Chargeable Gains Act 1992 and the way in which private companies can trade legitimately in terms of their capital gains without being unfairly affected, as they would judge it, by the current mechanism. Companies such as Grosvenor Estates, which are entirely legitimate and do not use mechanisms afforded to private companies for illegitimate activities, deserve a fair hearing, and I am delighted to learn that those discussions are continuing.

I come now to the items in the Bill, and wish to focus on films, oil, capital gains tax, the oil strategy and associated matters. It is noteworthy that the Government's desire to restrict the tax relief on expenditure on the production of British qualifying films is buried in an Inland Revenue press release. I find it difficult to find an individual press release on the subject.

In the Chancellor's Budget speech in 1997, he talked about wanting to help the talents of British film-makers. He said that they should be employed, wherever possible, to the benefit of the British economy. He was mournful of the fact that the British film industry had not, in his judgment, received the encouragement that it deserved.

The Chancellor said that, after consideration, he would provide a three-year measure costing £30 million to encourage the British film industry. It has been interesting to see how, perhaps with typically cinematic imagination, the film industry has freeloaded on the Chancellor's tax generosity. As someone who gamely fought against giving relief to the film industry, because I could see no justification for helping that particular group of luvvies, I ask the Paymaster General to explain how assistance of £30 million to the film industry has led to the Treasury's estimate that next year, 2003–04, it will raise and recover £225 million, and £295 million in the following year. Perhaps the hon. Lady can enlighten us, either tonight or in the Standing Committee, as to what went wrong with the drafting of that relief; how the film industry freeloaded on the Government; how the Government were conned into the proposal in the first place; and why they have only now woken up to the fact that they have been taken—in common parlance—for "a right tater" by the film industry.

On the question of the oil industry, here again the Government are seeking to raise revenue through the measure. Some heroic work is going on in the Treasury with the addition of the 10 per cent. supplementary charge on the corporation tax of continental fields. In the current financial year, we start off at £100 million; then we go to £450 million; and then, in a massive leap, to £600 million. That is why I asked the Chief Secretary if he would be kind enough to put the business case. I, for one, want to know what lies behind those heroic revenue increases. What analysis has been carried out with the oil industry to examine its investment opportunities?

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The United Kingdom Offshore Operators Association reminded me that in this financial year, 2001–02, the Government have already raised £5.2 billion in tax from the oil industry—an increase of 25 per cent. over the previous year. In information furnished to me and, I am sure, to other Members, the UKOOA states that the measure, which came very much out of the blue, has shaken industry confidence. The association points out:


More tellingly, the UKOOA calculates that, in the period until 2010, the charge will remove £5 billion of capital resources from the industry. That is why we deserve to see some business modelling. What will be the effect on offshore development in the UK of taking £5 billion out of the industry?

The experts at Wood Mackenzie have already been quoted. They point out that if the oil price falls to below $20 a barrel, the mathematics of the formula currently proposed by the Treasury mean that 10 per cent. is the wrong figure if the Government want to raise the £100 million cited in the Red Book for 2002–03. For example, Wood Mackenzie calculates that an oil price of $19.50 would raise £127 million. That gives rise to the question of how sensitive that levy is to changes in the oil price.

Furthermore, the fact that the financing costs for debt cannot be set against the supplementary charge is a drawback to development. The UKOOA advises us:


We shall have to go into some important questions in Committee if the Government are to justify that punitive measure.

Mr. Flight: Has my right hon. Friend focused his mind on whether that 10 per cent. supplementary tax will or will not qualify in relation to double taxation treaties where a number of the North sea explorers are subsidiaries of overseas multinationals?

Mr. Jack: I am grateful to my hon. Friend for putting that question, although it leads me into an area which now is not the time to go into—the whole question of the international competitiveness of investing in offshore activity in the United Kingdom.

My third point relates to capital gains tax. When the Government came in, they changed the capital gains tax regime with their complex taper measures, making the express argument that the longer one held an asset the better it was and the more virtuous it was. Now, they are touting it around that two years is the chosen period during which one can achieve a very low rate of capital gains tax. That is quite remarkable. If the Government are the sinner that repenteth, where is the analysis that suddenly states that to get a 10 per cent. effective rate in two years is a good thing, whereas when they first introduced the tapered tax the period was significantly longer? Why not go the whole hog and get rid of that complex, unnecessary part of capital gains tax? If people could move their capital quickly on to more profitable activity, I cannot but believe that that would be an engine for growth.

That is another example of where, instead of undertaking cost compliance modelling of their tax proposals, the Government should produce a well argued

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business case. Too many of the Government's proposals on tax are based on ideas that have no justification in fact. It is clear that the long-term, up-to-10-year taper had no economic justification, just as the two-year period is not justified—so why not zero?

The Red Book contains some further heroic work on oil fraud strategy. I welcome the proper working of the tax system and the proper collection of revenue, but how on earth are the figures in the Red Book to be achieved? The oil fraud strategy starts off at £100 million in 2002–03. In 2003–04, we suddenly find ourselves nearly three times better off and then there is a gargantuan leap to £550 million—half a billion. In 2004–05, we shall be five and a half times better at getting that money in than we were in 2002–03.

How is that trick to be pulled? What is the extent of the oil fraud that is going on? The House needs more convincing details, especially from a Government who are confronting a National Audit Office report that states, in paragraph 5.8 of its summary, that we face a VAT fraud bill of between £6.4 billion and £7.3 billion. Where is the analysis of what the Government have been doing to try to ensure that that missing money was collected? That sum is the equivalent of at least one year's increase in the national insurance charge. That is a major leakage. I want to be convinced that the Government are not merely publishing heroic figures and that the Red Book contains justification for the claim that such a huge sum of money can apparently be raised through the oil fraud exercise, even though there is no mechanism for doing that.

I am sure that we shall have many interesting and detailed discussions in the Finance Bill Committee. I hope that it might be possible for me to make a modest contribution to them. I also hope that when we debate the individual measures, the Government will, for once, give us much greater insight into what is going on and into the justification for the measures that they propose. I hope that the Government will not merely use their Committee majority to bludgeon through tax measures without giving us a thorough and proper explanation of what those measures are, what they do and how they will work. The Government must convince us that—unlike the film industry tax measures—they will actually work.


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