Finance Bill


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Mr. Hands: On a point of order, Mr. Atkinson. We have not had a chance to discuss whether the Opposition amendments are being withdrawn.
The Chairman: The Opposition amendments were not the lead amendments in the group. If the hon. Gentleman wants to press any to a vote, he should let me know and they can be moved at the appropriate point.
Schedule 40, as amended, agreed to.

Clause 86

Oil assets put to other uses
Question proposed, That the clause stand part of the Bill.
Mr. Hands: Thank you, Mr. Atkinson, for your guidance on our amendments to schedule 40. I assume that it will be convenient to discuss schedule 41 at the same time as the clause. The issue addressed by schedule 41 is another aspect of the problem that I raised in relation to clause 83 and schedule 38. Because of its size the relief on decommissioning costs assumes such importance that it can override all other considerations when a field is nearing the end of its life.
One of those considerations is the potential to adapt the infrastructure already in place to use fields for gas storage, carbon capture or wind power. Having taken oil or gas out, it is possible to pump gas or the carbon emissions from an onshore power station back in. That is the basis of carbon capture and storage. But that requires leaving the pipes and all the other related infrastructure in place. Companies are under a legal obligation, as we explored on clause 83 and schedule 38, to remove all that infrastructure from the seabed when it is deactivated. As the legislation stood, had they allowed a change of use, companies would have had great difficulty in recouping the decommissioning costs later, which is the basis of the measure today.
3.30 pm
As the Government’s November paper found,
“Industry argue that effective access to decommissioning relief is a critical issue when considering the economics of a change of use project, and that the current treatment is extremely likely to result in a change of use activity not going ahead where it utilised existing infrastructure that was expected to have a substantial decommissioning cost.”
In other words, we are looking at tax relief for decommissioning infrastructure and at whether we want to encourage its use for other purposes, such as carbon capture and storage, wind power and so on.
Carbon capture or schemes involving power generation do not fall within the North sea ring fence. Equally, there are clear potential benefits from allowing infrastructure to be reused. Schedule 41 represents the Government’s view following many years examining the problems of and opportunities for change of use. We welcome it, even though it has been a long time coming. Many changes are still theoretical and we are a long way from seeing North sea carbon capture projects or some of the other uses under discussion. However, measures that enable such projects to be at least considered are welcome.
The debate provides an opportunity to put three important questions to the Minister, which may assume greater significance if decommissioning begins to be postponed. First, what level have Government liabilities for relief for decommissioning reached? Secondly, how are the liabilities likely to be distributed over future years and decades? Thirdly, are they included in the Government’s accounts or are they another example of off-balance sheet liabilities, like PFI projects and public sector pensions? Those questions are important. I am not entirely clear how the future liabilities are dealt with on the Government’s balance sheet.
Many of the current potential change of use projects are at best marginal economically, and the potentially significant tax charges that could have arisen on implementation of the projects were a major disincentive to companies even starting to evaluate such projects, so the changes appear to move us in the right direction.
The Opposition value all efforts to make CCS and alternative energy generation more attractive through the tax regime. The changes remove a barrier, but they do not, in themselves, ensure that these important industry developments take place. Nevertheless, we welcome the provisions, but I await the Minister’s explanation of where future liabilities are accounted for.
Ian Pearson: I am glad that the official Opposition welcome clause 86 and schedule 41. Their purpose is to remove tax barriers to the reuse for other activities of oil and gas infrastructure. I shall briefly go into detail on the schedule. It removes potential tax barriers where oil and gas production assets are reused for so-called “change of use” projects, particularly, as the hon. Gentleman noted, carbon capture and storage, gas storage and wind power generation.
The schedule has three main effects. First, it ensures that a petroleum revenue tax charge does not arise when a PRT asset is subsequently used for another purpose. Under current legislation, when a PRT asset is used for an activity unrelated to oil production, a portion of the PRT relief given for the cost of the asset is clawed back. That could entail a significant tax charge for the company in question and may deter it from embarking on change of use projects. The schedule removes the possibility of such a tax charge. It has been welcomed by the industry as well as by the hon. Gentleman.
Secondly, the schedule will ensure that profits from change of use projects that reuse PRT assets are not liable to pay PRT. Again, the existing rules state that income derived from PRT assets is liable for PRT no matter how the asset is used. However, change of use profits are clearly beyond the intended scope of the PRT regime, which was designed primarily to capture the super-profits from oil and gas production. Consequently, the schedule will remove such income from the scope of PRT.
Finally, the schedule will ensure that companies that embark upon a change of use project can still gain access to the same tax relief for the cost of decommissioning infrastructure that they would have had at the end of oil and gas production. Again, that will remove the existing perverse incentive to decommission infrastructure, rather than to reuse it, which is an objective we support.
The Government believe that the UK will gain major benefits from the removal of the barriers to change of use projects. As I have mentioned, such projects can make a significant contribution to reducing carbon emissions and to ensuring that the UK has a secure energy supply. As the hon. Gentleman will be aware from today’s statement in the House on climate impact projections, there is a need to continue the drive to develop a low-carbon economy in the UK. We should ensure that, where appropriate, the tax system provides sufficient incentives for things that are public policy goods and removes perverse incentives not to do such things. That is widely accepted as the right thing to do.
It is important to recognise that such projects have the potential to bring investment and employment to the North sea long after the production of oil and gas has ceased. In addition, the deferral of the decommissioning of oil and gas infrastructure by companies will benefit the UK by deferring the point at which the Exchequer must give tax relief for decommissioning expenditure. Given the economic circumstances, that will benefit Government overall.
The clause will ensure that when a company is faced with whether to decommission depleted oil and gas infrastructure or reuse it for a change of use project, it will not be deterred from engaging in activities that could be beneficial to the company and to the UK as a whole. That is why I believe it should stand part of the Bill.
The hon. Member for Hammersmith and Fulham mentioned decommissioning costs. Those are currently estimated at £20 billion. Tax relief could lead to the Government effectively paying 50 per cent. of that. The time scale will depend on how and when the assets are decommissioned. That will depend on a range of variables, such as the prevailing oil price.
I am not currently able to advise the hon. Gentleman on accounting practices, but am more than happy to write to him with the detail.
Mr. Hands: I must say I am surprised that the Minister is unable to tell us what is the accounting practice for this potential liability of up to £10 billion. That sounds like rather a large amount of money to be unaccountable. Is he sure that he is unable to provide us with more certainty about where it is placed?
Ian Pearson: I am at this stage, but the hon. Gentleman has raised a valid point. I am happy to write to him and Committee members with further information on that.
Clause 86 and schedule 41 are important and I urge hon. Members to support them.
Question put and agreed to.
Clause 86 accordingly ordered to stand part of the Bill.
Schedule 41 agreed to.

Clause 87

Former licensees and former oil fields
Question proposed, That the clause stand part of the Bill.
Mr. Hands: I shall be fairly brief on clause 87 and schedule 42 as we are advancing towards clause 89—
The Chairman: Order. I am sorry to interrupt the hon. Gentleman. Speaking of being brief, I warn the Committee that by 4 o’clock we will have sat for three hours. At about that time, I propose to have a short adjournment.
Mr. Blizzard: On a point of order, Mr. Atkinson. Thank you for that announcement. We had an agreement to finish clause 90 and the corresponding schedule today. I think the mood of the Committee is that it would be better if we could finish it without adjourning, so I hope that we can have a common purpose and move that way. Would you permit us, if necessary to go a little beyond 4 o’clock in order to expedite that?
Mr. Hands: Further to that point of order, Mr. Atkinson, we did not have that agreement. I was saying that we should stick to the schedule laid out by the Government at the beginning of the Bill, which would mean that we will continue discussing oil when we return on Tuesday. Clause 89, schedule 44, on which we intend to have a Division, is very substantial.
The Chairman: These are matters, not for the Chair, but for the usual channels. I am giving guidance to the Committee because, unlike honourable Members, the Clerk and I cannot keep going out, so after about three hours, it is useful to have a break. If the Committee is aiming to get towards the end of the business on oil, I will be flexible about when we adjourn, however, at 4 o’clock or slightly after, I propose to adjourn the Committee. That is in the hands of Committee Members and the usual channels.
Mr. Hands: Thank you, Mr Atkinson, for that clarification. I mentioned clause 89, but we are on clause 87 and schedule 42. Schedule 42 deals with the oldest, or first-round licences, that are due to expire in 2010 and proposes a way in which extended licences can be issued, and decommissioning relief against petroleum revenue tax, PRT, can be carried over for the licence holder, after both extension and expiry. The existing position for PRT, which applies, as we know, only to fields developed before 1993, was summarised in the Government’s consultation response in November:
“When a field reaches the end of its productive life and decommissioning costs are incurred, to the extent that such costs are deductible for PRT purposes, any losses arising can be carried back for offset against profits from the field without limit, subject to the retention of the licence or within two chargeable periods of the relinquishment of the licence”.
As I understand the PRT regime, a chargeable period is a period of six months. I think the Minister is confirming that. So, under current legislation, PRT relief for decommissioning expenditure is not available to a company if those costs have been incurred for more than 12 months—two PRT periods—after it has ceased to be a licence holder in respect of that taxable field. The new rules will allow relief for such expenditure, but will also ensure that any income that may arise in respect of the assets in question will also be chargeable to PRT.
The changes, as I understand them, provide necessary clarity on what should happen if a license expires, or is due to expire, before this can happen. As it stood, if a company ceased to be a licensee, its obligation to decommission would remain, but finding itself outside the PRT regime, it would not have been able to relieve this cost against the PRT it had previously paid. Companies will now continue to be deemed to be licence holders for PRT purposes after the licence has expired. The extended licences themselves will be deemed to have expired at the point when production stops. We think this is a relatively neat solution to that problem, it has been broadly welcomed and addresses a real issue. We therefore see no reason to oppose the solution that DECC has put forward and that schedule 42 would implement.
Ian Pearson: I am very pleased that the Opposition is in agreement with clause 87 and schedule 42. We have discussed this with industry, we believe it is the right way forward and I welcome the hon. Gentleman’s support.
Question put and agreed to.
Clause 87 accordingly ordered to stand part of the Bill.
Schedule 42 agreed to.

Clause 88

Abolition of provisional expenditure allowance
Question proposed, That the clause stand part of the Bill.
3.45 pm
Mr. Hands: Clause 88 and schedule 43—I presume that it will be convenient to debate the schedule at the same time—relate to the abolition of the provisional expenditure allowance. Provisional expenditure allowance has, as the Government suggest, ceased to be appropriate. It was intended to provide relief against PRT for start-up costs, but as no field that has started up since 1993 is subject to PRT, it is no longer required. Moreover, its continued existence has caused claw-back problems for some companies that have been hit by what the Government refer to as unintended and detrimental tax charges. Further provisional expenditure already granted will be clawed back in the following 12 months. No one appears to be in favour of its retention, and we do not represent an exception.
As we know, PRT differs from other taxes in that expenditure relief does not reduce a company’s tax liability until the expenditure has been claimed by the company and allowed by HMRC. When the expenditure has been claimed and allowed, it reduces PRT for the next half-yearly assessment—the six-month PRT assessment period—rather than necessarily for the half-yearly period in which it was incurred.
To compensate somewhat for the consequential timing disadvantages that might, therefore, ensue, section 2 of the Oil Taxation Act 1975 provides for a provisional allowance for each chargeable period. That provisional allowance is calculated under section 2(9)(a) and section 2(11) of the Act by reference to two components. If the first is greater than the second, the difference between them is the amount of provisional allowance to be given in the assessment together with any expenditure already allowed and linked to the chargeable period. Conversely, if the second exceeds the first, no provisional allowance is due. This is a rather complicated set of provisions. We have checked the Act to ensure that we have got things absolutely straight.
The first of the two components—remember that if the second exceeds the first, no provisional allowance is due—under section 2(9)(a) of the 1975 Act is 5 per cent. of the amount included in the participator’s return—under section 2(2) of the 1975 Act—in respect of its estimate of the total sale proceeds or market values computed in accordance with section 3(2) of sales and appropriations of oil for the chargeable period. The participator’s estimate of the market value of non-arm’s length disposals is used regardless of whether the oil taxation office subsequently agrees a higher or lower figure to be included in the assessment under section 2(5)(b) and section 2(5)(c) of the 1975 Act.
If the participator fails to submit a return and an estimated assessment is made, no provisional allowance is available. Once a return is made, a provisional allowance based on the incomings returned is made automatically.
Let me return to our consideration of whether the second component exceeds the first. The second component is the amount of any expenditure claimed under sections 5 and 6—but not any related supplement—which was incurred in the chargeable period in question and which has been allowed by the oil taxation office for inclusion in the assessment for that chargeable period. That is an outline of what we have in front of us, which this clause and schedule are seeking to abolish.
As for the clawback, the 5 per cent. allowance is provisional and section 2 of the 1975 Act prescribes a clawback of the relief given. Subject to additional rules, also in section 2, any provisional expenditure allowance given in a particular chargeable period is clawed back in the next but one chargeable period.
Section 2 of the 1975 Act modifies the basic rule in two ways. Under section 2(10)(a), where expenditure allowed in a chargeable period was incurred in the immediately preceding period and provisional allowance was given in that period, a further adjustment is required. The clawback in the computation of any 5 per cent. provisional allowance given in the last but one chargeable period will be increased by an amount equal to the expenditure now allowed which was incurred in respect of the immediately preceding chargeable period—the six-month periods under which the petroleum revenue taxation operates—or the 5 per cent. provisional allowance of the immediately preceding chargeable period, whichever is the lower figure. However, under section 2(10)(b) of the same Act, the clawback of provisional allowance given for the last but one chargeable period is reduced by the equivalent amount of any increase made under section 2(10)(a) of the Oil Taxation Act 1975 in the assessment for the immediately preceding chargeable period.
My point is that those seem to be fiendishly complicated regulations, and the clause and the schedule before us appear to have the worthy aim of simplifying our tax code and seeking to extract those regulations from it. No one seems to favour their retention, and we certainly do not represent an exception.
 
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