Select Committee on Treasury Minutes of Evidence


Examination of Witnesses (Questions 220 - 239)

TUESDAY 23 APRIL 2002

MR GUS O'DONNELL, MR NICHOLAS MACPHERSON, MR NICHOLAS HOLGATE, MR ALEX GIBBS AND MR JOHN KINGMAN

  220. Turning to North Sea tax revenues, there is obviously a considerable increase in anticipated revenue. I would just like to know why the North Sea oil industry was the target of such a very significant increase in tax revenue and what impact and what account you have taken of the need for full environmental clearance of North Sea oil installations for which there does not seem to be any tax provision?
  (Mr Gibbs) If I could perhaps try and unpick the question a bit. Your first point on why the North Sea, I think the answer to that is really quite straight forward. The Government started a consultation process in 1998 on the form of North Sea taxation, which was subsequently abandoned because of the collapse in the oil price. Since then we have had four further years of clear evidence of very high levels of profit in the North Sea relative to the rest of the economy. In 2001 the net rate of return in the North Sea was over 34 per cent compared with 11 per cent in the non-financial sector of the economy as a whole and over the past five years it has consistently been about twice that level. So the Government has had a declared intention for some time of seeking to get an extra yield for the taxpayer from the North Sea and we now have further evidence on profitability of the North Sea under the current tax regime to back it up.

  221. So the Government regards the profit on the North Sea oil and gas fields as being excessive?
  (Mr Gibbs) The Government regards the profits as falling into the category of what I think economists call super normal profits, namely profits which arrive as a form of rent on a national resource.

  222. The environmental clearance liabilities of the future, and the future is not so very far away when we talk about the North Sea oil and gas fields, do they not amount to super normal liabilities?
  (Mr Gibbs) I think it is the case, and I would need to check my facts here, that the issues surrounding decommissioning and the costs of decommissioning get factored into the North Sea tax regime in that there already are allowances within the North Sea regime for that. One of the aspects of the package that the Chancellor has announced is the intention to abolish royalty. The reason why we are consulting with the industry on the timing of abolishing royalty is although it sounds like a good thing for the industry to abolish a tax in practice, because of decommissioning costs, the timing of when you abolish royalty impacts on different companies in different ways, so it is important that we talk to the industry about that.

  223. So there is the prospect of some future tax allowance for the costs of environmental reclamation in the North Sea oil and gas fields?
  (Mr Gibbs) My understanding, and I will have to correct myself subsequently if I am wrong, is that the current tax regime already includes tax allowances[1].

  224. I think that is a point that is the subject of hot dispute.
  (Mr Gibbs) It is certainly an issue as far as royalty is concerned.

  225. Can we move on to another line, the oils fraud strategy.
  (Mr Gibbs) Yes.

  226. Which is due to produce very significant increases in revenue. Can you explain that?
  (Mr Gibbs) Sure. This is, if you like, building on the other strategies for tackling fraud that Customs have launched and we had some at PBR time as well. Oils fraud is essentially a newly emerging fraud which currently accounts for about four per cent of the mainland oils market. What we are essentially talking about here is the misuse of what are called rebated fuels, namely fuels subject to very low rates of duty, of which the main examples are red diesel and kerosene, mixing them with each other, getting them on to the main market in a way which essentially represents fairly substantial criminal avoidance activity. What the strategy does, as with our other strategies, is define the problem—

  227. Do forgive me for interrupting you because that is a helpful explanation but the tax revenue take under this strategy over the next three years is almost a billion pounds. From what sectors of the economy do you expect that to be drawn?
  (Mr Gibbs) People who are criminally avoiding—

  228. From which sectors of the economy do you anticipate these notional people who are committing criminal fraud are likely to be found?
  (Mr Gibbs) I think it is hard to give a sectoral breakdown of what is essentially a criminal activity.

  229. How on earth have you arrived at these figures unless you have done such a breakdown? It is a billion pounds over three years.
  (Mr Gibbs) The fraud is estimated by Customs at currently costing them four per cent.

  230. Which sectors of the economy will be the target for these anti-fraud measures? Is it agriculture?
  (Mr Gibbs) I do not have a sectoral breakdown, I am afraid.

  Chairman: Can we have a note on that, please. My own experience suggests it is concerned with Northern Ireland.

Mr Cousins

  231. He has been talking about the mainland oils fraud.
  (Mr Gibbs) Yes, I have. In Northern Ireland it is not possible because of the amount of traffic across the border to separate out what is perfectly legitimate cross-border shopping and what is fraudulent smuggling. The estimate that Customs have for the total cost of those two things added together, and accepting that some of this is perfectly legitimate, is £380 million a year, the cost of both fraud and legitimate cross-border traffic in fuels.

  232. This is one of the most significant increases in tax take that is on Table A1. This one thing, the oils fraud strategy, is £1 billion over three years cumulatively, so in the last of the three years it is producing £550 million which is presumably intended to be ongoing after that at 550 million.
  (Mr Gibbs) Yes, it is.

  233. You must have some idea from which sectors of the economy you are expecting this increase in revenue to come.
  (Mr Gibbs) Part of the problem of tackling fraud like this, and one of the reasons why we and Customs feel there needs to be a specific strategy to deal with it, is that a lot of the time we are struggling to know what is going on. When you look at comparable products like alcohol or tobacco where there have been substantial issues and strategies to tackle them, it has nevertheless been the case that when these products are moved around the country before duty gets paid on them there are systems of warehouses, controls, all that kind of stuff. What we are essentially dealing with here is a much less certain problem where the rebated fuels which are supplied to various distributors are being intercepted and laundered and passed on to the market.

  234. Which industries are the rebated fuels regime designed to assist?
  (Mr Gibbs) I think they are mainly designed to assist hauliers and farmers.

  235. Thank you. The changes in taxation of overseas branches of foreign banks, what reaction have you had to those changes?
  (Mr Gibbs) I do not think we have had a specific reaction to us in the Treasury.

  236. You have not had a specific reaction?
  (Mr Gibbs) Not yet, but we are, as ever, ready to discuss—

  237. Did you consult on these changes?
  (Mr Gibbs) There has been a long process in the OECD over the past few years of essentially an international consultation on the principle. It is quite clear from the work that the OECD have done that the UK is hugely out of line with what every other country does in this area. We have taken a clear decision of principle that we need to move in line with the international consensus. We will, of course, consult the industry on the detail of how we do it to make sure it has the desired effect but the principle has been established very clearly through an OECD process.

  238. You are projecting again very substantial increases in revenue arising from that tax change. Do you anticipate any behavioural change?
  (Mr Gibbs) I think the scope for behavioural change is limited by two factors. First, as I was saying before, what we are doing here is moving ourselves in line with the treatment of bank capital that applies in what you might see as competitor locations, if you like. Secondly, it will be the case for quite a few of the banks asked to pay extra tax that there will be scope for double taxation relief through the treaty network. The US Tax Treaty, for example, provides for double taxation.

  239. Presumably the increase in tax take we have got in front of us has got any benefits from double taxation netted off?
  (Mr Gibbs) No, not double taxation relief claimed by an overseas bank from their home authority.


1   Mr Gibbs subsequently confirmed that expenditure on decomissioning North Sea oil and gas installations is already relievable in full as it is incurred for both Corporation Tax and Petroleum Revenue Tax and similarly against the new supplementary charge on ring fence trades. Back


 
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