Examination of Witnesses (Questions 220
TUESDAY 23 APRIL 2002
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
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.
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
225. Can we move on to another line, the oils
(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
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
Chairman: Can we have a note on that, please.
My own experience suggests it is concerned with Northern Ireland.
231. He has been talking about the mainland
(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
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
(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
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
(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