Finance Bill

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Ruth Kelly: I agree, but it is not our job to try to predict how individual companies will calculate their post-tax rates of return. In aggregate for marginal fields with the new investment coming on-stream, the post-tax rate of return will increase as a result of the measures. The benefits of the first-year allowance

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outweigh the effect of the increased tax take for marginal investment. We should therefore see new developments and projects as a result of the changes.

Of course, more profitable projects will pay more tax. The regime is designed precisely for that to happen. Even after the tax changes, the more profitable projects should still make respectable profits, and we shall have an oil industry regime that compares favourably with any in the rest of the world.

Mr. Jack: The Minister clearly stated that, in the Treasury's judgment, there is a relationship between the taxable potential of the North sea and the rate of return. Will she say whether the same principle will guide the Government in taxation of other areas of economic activity, so that those with a rate of return in excess of 30 per cent. can prepare for the inevitable—in other words, for more special taxes?

Ruth Kelly: The right hon. Gentleman will know that there are many reasons why particular rates of return are made in different industries, and whether they are sustainable over the longer term or temporary. I remember him questioning me on the Floor of the House on fairness. Over a long period, the post-tax rates of return have been significantly higher than for other non-financial industries. Those who argue that the North sea does not have the capacity to pay more tax, given its immense cash flow, are treading on difficult territory. I do not believe that there is no capacity to pay more.

The hon. Member for Arundel and South Downs made interesting points about new entrants to the industry, as did my hon. Friend the Member for Dundee, East. Of course we want to encourage new entrants into the industry to develop new fields. The hon. Gentleman said that tax allowances are not available to companies that do not make taxable profits, but by definition tax allowances are unavailable when there is no taxable capacity. As I said when responding to a previous amendment, allowances are not lost when companies fail to generate profits immediately, but may be carried over from year to year.

The treatment given to companies in the industry is no different from that for new entrants in other types of business. Indeed, there is a very active market in North sea field interests, and new entrants who want to benefit early from the investment allowance can choose to buy into a profitable field, which would give them a stream of income against which they could use the allowance in the first year. It is normal for North sea new entrants to do that, as it is a pragmatic response for those who want to gain those advantages. The problem that hon. Members have identified is more apparent than real, but we shall continue to monitor the situation and consider the impact.

The hon. Member for Kingston and Surbiton asked about not giving 100 per cent. allowances to small companies that lease and pay 40 per cent. tax. The upfront tax benefit will not be passed directly to the lessee, but might be passed indirectly in the form of lower rentals spread over the term of the lease. Extending the first-year allowances to assets for

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leasing would lead to more investment, and we have designed our measures to encourage new investment, as the hon. Gentleman knows. We shall continue to monitor the operation of the scheme.

Mr. Davey: The mechanism by which the Minister suggests that small companies might benefit from allowances would depend on contractual relationships, not Government policy. The companies are concerned because they are being hit by the extra corporation tax—which is Government policy—while getting nothing back from the Government. The mechanism that the Minister describes will give no succour to SMEs in the industry.

Ruth Kelly: As I said, we shall continue to monitor the scheme in operation. If the problem turns out to be real, companies will be welcome to talk to us about it. I do not believe that it is a problem, but we shall keep a careful eye on it.

5.15 pm

North sea oil and gas are scarce national resources. That is why they have managed, over such a long time, to produce returns that often exceed a normal commercial rate. At times, producers make large profits because of movements in the world oil price. Over the past few years, they have not generated a fair share of revenue for the Exchequer. In this measure, we have combined an increase in the tax take with a very generous first-year allowance, which will continue to stimulate new investment and activity in the sector.

I emphasise again that I am not in the business of forecasting what will happen around the world. However, these particular Budget measures should act as a stimulus to investment and activity in the sector.

The right hon. Member for Fylde points to DTI figures and suggests that the DTI is somehow more open and transparent than the Treasury. Of course, I do not accept that. We work in close co-operation. Work at the DTI informs our assessment at the Treasury; that is why we use those figures as the basis for our analysis and for the estimates that are published in the Red Book. I set out on the Floor of the House the basis for our entire analysis. I do not believe the figures that the oil industry has quoted; the new allowance will provide a generous cash boost for the industry at a time when it is expected to contribute a fairer share of revenue. For those reasons, I suggest to the Committee that it should not accept the amendments.

Mr. Flight: I remind the Committee that the amendment simply calls for a study of the impact of the Government's proposed measures to be made by the end of the year. It does not change the measures. It is strange that the Government should want to resist that, because either they will be proven right or the industry and we shall be proven right. Perhaps 31 December 2002 is a little early, but if I were doing the Minister's job, I would want to know whether I had got policy right and I would accept such an amendment. It is a commonsense proposal.

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The Minister rightly referred to oil and gas. The southern basin returns on gas are already negative and there are different calculations for oil as opposed to gas; gas is at a price equivalent to some £10 per barrel. These measures are to apply to both. How anyone at the Treasury can have thought that the measures would stimulate new investment in gas I cannot imagine—they will do the reverse. It is evident from the Red Book that the combined measures are designed to be substantially tax positive, raising £7.6 billion over eight years. The argument that the measures will encourage investment seems to be nonsense.

Our case is that, given the dramatically changing structure of the North sea, the wishful thinking aspect of combining accelerated first-year allowances and higher ongoing tax will not work. I was pleased to hear the Minister say that the Government would look further at the issue. She seemed to have taken the point that that might not be any incentive for new venture operations.

However, we think that any prudent Government—we have such a prudent Chancellor, after all—would double-check whether their theoretical calculations were correct, especially in relation to an industry that makes an important contribution to the current account balance and employs 260,000 people in Scotland. Therefore, I shall press the amendment to a vote.

Question put, That the amendment be made:—

The Committee divided: Ayes 6, Noes 17.

Division No. 5]

Davey, Mr. Edward
Field, Mr. Mark
Flight, Mr. Howard
Hoban, Mr. Mark
Jack, Mr. Michael
Luff, Mr. Peter

Brennan, Kevin
Casale, Roger
Cruddas, Jon
Cunningham, Mr. Jim
David, Mr. Wayne
Harris, Mr. Tom
Hendrick, Mr. Mark
Kelly, Ruth
Luke, Mr. Iain
McKechin, Ann
Marris, Rob
Pond, Mr. Chris
Ryan, Joan
Smith, Angela
Southworth, Helen
Sutcliffe, Mr. Gerry
Wright, David

Question accordingly negatived.

Clause 62 ordered to stand part of the Bill.

Schedule 21

First-year allowances for expenditure wholly for a ring fence trade

Amendments made: No. 94, in page 251, line 4, leave out 'within the relevant period'.

No. 95, in page 251, line 6, leave out 'not' and insert

    'at no time in the relevant period'.

No. 96, in page 251, line 8, after 'is' insert

    'at any time in the relevant period'.

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    No. 97, in page 251, line 11, leave out from 'periods' to second 'the' in line 14 and insert

    ', beginning with the incurring of the expenditure, first ends, namely—

    (a) the period ending with the fifth anniversary of the incurring of the expenditure, or

    (b) the period ending with the day preceding'.—[Ruth Kelly.]

Mr. Flight: I beg to move amendment No. 110, in page 251, line 41, leave out '24%' and insert '100%'.

In essence, the amendment would make the 100 per cent. first-year allowance apply to all assets, not only those with an alleged useful life of less than 25 years. Given that the rate of writing-down allowance on long-life assets is 6 per cent., the first-year allowance of 24 per cent. does not seem to be especially generous. Indeed, I should be interested to know how the Government came up with that figure, especially as oil and gas extraction is a long-term project, requiring assets with a useful economic life, which may be 25 years. The logic behind extending the 100 per cent. allowance to all investments is, first, that the proportion of assets in the long-life category is relatively modest, about 10 per cent., so the measure would not have a huge impact on tax revenues.

Secondly, many long-life assets turn out not to be long life, particularly as many of the fields currently being developed may not have a long life. In practice, what falls into such a category may not be used for 25 years. I understand that there was no logic to the Government's having selected 24 per cent. Under the new 40 per cent. tax regime, particularly when long-life assets represent a relatively higher proportion of the total investment, the lower 24 per cent. figure could lead marginally to negative decisions about investment prospects.

It is not a huge issue, but I wonder whether it is worth the candle to make such a theoretical separation. I wonder whether the Government are pinning their hopes on capital allowances keeping investment going and, therefore, whether it would be rather more practical and sensible to give the full 100 per cent. capital allowances to all investments.

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