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Session 2001- 02
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Standing Committee Debates
Finance Bill

Finance Bill

Column Number: 289

Standing Committee F

Tuesday 11 June 2002


[Mr. Joe Benton in the Chair]

Finance Bill

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38)

Clause 62

First year allowances for expenditure wholly for a fence trade

Amendment proposed [this day]: No. 99, in page 40, line 21, after 'first-year', insert 'and writing-down'.—[Mr. Chope.]

4.30 pm

Question again proposed, That the amendment be made.

The Chairman: I remind the Committee that with this we are taking the following amendments: No. 100, in page 40, line 27, after 'first-year', insert 'and writing-down'.

No. 101, in page 40, line 31, after 'amendments', insert 'relating to first-year allowances'.

No. 102, in page 40, line 32, at end add

    '(4) The amendments relating to writing-down allowances made by that Schedule have effect for chargeable periods beginning on or after 1st January 2003.'

No. 103, in schedule 21, page 252, line 4, at end insert—

    '6A In section 56 subsection 7 shall be replaced with—

    ''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period is a percentage of the amount by which AQE exceeds TDR, as shown in the Table—

Type of AQE Amount
AQE incurred on the provision of plant and machinery for use wholly for the purposes of a ring fence trade which is not excluded by section 46 (general exclusions) 50%
All other AQE 25%

    6B In section 56 after subsection (7) add—

    ''(8) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

    (9) In this section ''ring fence trade'' has the same meaning as in section 4SF.''.'

No. 104, in page 255, line 30, at end insert—

    '14 In section 418, subsection (1) shall be replaced with—

    ''(1) The amount of the writing-down allowance to which a person is entitled for a chargeable period in respect of qualifying expenditure is a percentage of the amount by which UQE exceeds TDR, as shown in the Table—

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Type of UQEAmount
UQE on the acquisition of a mineral asset10%
UQE for use wholly for the purposes of a ring fence trade50%
All other AQE25%''

    15 In section 418 after subsection (6), add—

    ''(7) The increased writing-down allowance for ring fence trades will only be available for chargeable periods beginning on or after 1st January 2003.

    (8) In this section ''ring fence trade'' has the same meaning as in section 45F.''.'.

Mr. Christopher Chope (Christchurch): I think we had more or less concluded the discussion. Just before the break, the Financial Secretary to the Treasury gave us some very interesting figures. I am sure that there will be further comments on the subject, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 111, in page 40, line 32, at end add—

    '(4) The Treasury shall report no later than 31st December 2002 on the net monetary effect of this section and sections 90 to 92 of this Act.'.

The amendment would require the Treasury to report the net effect of the tax changes, including the enhanced allowances affecting the oil and gas extraction industry, largely because there appears to be, on the same basic evidence, substantial differences between the numbers reported by the industry on the expected impact and the Government's position. The amendment is in essence partly a probing one to require the Treasury to justify its assumptions and calculations. It is possibly more than a probing amendment in that, if the Government are not willing to see the light at this stage, we feel that the policy needs to be kept under close review and there may be a case for including a report on the impact of the measures.

On Second Reading, the then Chief Secretary to the Treasury argued that the negative effect of the additional 10 per cent. tax on investment would be neutralised by the new 100 per cent. first-year allowances, and the Financial Secretary has continued that argument today. As she will be aware, the assessment of the industry is that new investment of some £10 billion will be lost between now and 2010, including a loss of some 50,000 jobs. It is worth pointing out that, on a rough and ready calculation, the income tax and national insurance lost as a result of job losses is equal to approximately half of the lost additional £7.6 billion of tax revenues.

The other crucial point in terms of the principle and effectiveness, or otherwise, of the capital allowances is that the future of the North sea industry is increasingly in the hands of smaller companies. The North sea is and will become increasingly more immaterial to

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major operators such as BP. However, many smaller companies do not have the existing production to benefit from the 100 per cent. capital allowances. In their early years, it is very rare that they are profitable, and as we are aware, financing costs on borrowing to finance new investment are not allowable against the extra 10 per cent. tax.

For example, two start-up companies are involved in redeveloping the Argyll field. Typically, a field has a life of seven years, and is not normally profitable for at least the first three years. That is the crucial territory. Increased capital allowances cannot be effective for new investment if there are no profits to set off against those capital allowances, unless, with a bit of luck, they become profitable well down the line. Bruce Dingle, the chief executive officer of Venture Production, a typical new entrant, has made the point that start-up costs are spectacular where every other late-stage basin such as the North sea receives real incentives to maintain and stimulate investment and production, and not disincentives, which the higher tax rate represents, or non-effective capital incentives, which the 100 per cent. allowance constituted companies have not got the profitability to make use of.

We have already touched on the nature of the Financial Secretary's reply and on the economic data. The point that I stress and that is crucial to the amendment is that the UK Offshore Operators Association has used the same economic information and basis for forecasting investment as the Government. However, the industry trade body and the Government have reached vastly different conclusions about the impact of the extra taxation and capital allowance packages.

Not only did the Chancellor stress on record the importance of not exploiting North sea recovery in its mature stage through a changed and excessive tax regime, but the Secretary of State for Trade and Industry in November 2000, before his movement elsewhere and subsequent resignation, welcomed the £1 billion new investment. He commented that the Government had created a stable tax regime to which the industry was responding well. The Government cannot be surprised that the industry feels that it has been badly betrayed. In November 2000, the Chancellor said:

    ''It has been put to me that North sea oil companies earning higher profits from higher oil prices should be subject to special taxes, but I can tell the House that I am determined not to make . . . decisions based on short-term factors. The key issue is the level of long-term investment in the North sea. This will be the approach that will guide Budget decisions in future.''—[Official Report, 8 November 2000; Vol. 386, c. 317.]

The Government are apparently attracted by a £10 billion decline in investment and 50,000 job losses. The Chancellor's words meant, as with so many things, the very opposite of what they said.

We are on serious territory. One could understand a Government going for a tax grab if they thought that they could get away it and wanted to be purely opportunistic—that is what they did with pension funds. However, such behaviour will rebound on

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them. The £5 billion pension tax grab has wrecked occupational final salary schemes, and, mark my words, this tax grab will severely damage North sea oil investment.

Mr. Edward Davey (Kingston and Surbiton): I support the amendment. I am glad that we have the opportunity not only to rehearse arguments heard prior to the intermission, but to develop further ones. I learnt from my hon. Friend the Member for Gordon (Malcolm Bruce) during the intermission that he knows of several companies that are not going ahead with investment. He feels that the level of activity will fall.

This morning, the Government said that they had heard of no examples of people not going ahead with investment. It may be that they have not heard of any because of the fact that investment has not gone ahead. It would be difficult for the Treasury to, shall we say, prove a negative. However, in the United States many small business that would otherwise undertake exploration and consider drilling in marginal fields are not doing so. The word is that Britain no longer has a stable tax regime, or one that enables a profitable return, so investment decisions are not going ahead. Amendment No. 111 would therefore be appropriate. By the end of the year, we would be able see real figures rather than those dreamt up. We are not allowed to see the evidence for the figures.

That takes me back to the point about leasing, which I made in an earlier intervention on the Minister. It has come to my attention that a large section of the industry, which is exploited by small and medium-sized enterprises, depends on the leasing of assets. That does not appear to have been taken into account in the Government's modelling and tax proposals. Some companies use capital leasing, by which they depend on a non-oil company having bought an asset, which they lease from it. Of course, such a non-oil company will not be able to benefit from the allowance that the Government propose in the clause, and will have to pass the extra cost down the line. A small business that is leasing will get no benefit from the allowance because it is leasing an asset from a non-oil company. It will therefore be hit by the charge and there will be no compensation to it.

The Government say that they will promote that important, marginal, growth sector through their structure, but they will cause real damage. They are trying to persuade the Committee that the structure on which they have landed will produce a spurt of investment and increase returns, but the hon. Member for Arundel and South Downs (Mr. Flight) and I have quoted examples that suggest that the opposite will be the case. Although the amendment is in many ways a device to help provoke debate, if they were to accept it, they would call our bluff and that of the industry. We could make an analysis, which would be available to the House of Commons by the end of the year, to drill down to the measure's monetary effects. Some people suspect that the Government will not reach their revenue estimates because they will do too much damage to investment in the oil industry.

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Prepared 11 June 2002