ACCOUNTS AND AUDIT

HC Deb 28 July 1975 vol 896 cc1423-34

Mr. John Moore (Croydon, Central)

I beg to move Amendment No. 19, in page 8, line 34, leave out paragraph (b) and insert: '(b) to prepare in respect of each accounting year a statement of accounts in such form as the Secretary of State may, with the approval of the Treasury, direct being a form which shall conform with the best commercial standards and which shall distinguish between the exploration activities, the production activities and the other main activities of the Corporation'.

Mr. Deputy Speaker

With this amendment we may discuss Amendment No. 20, in page 8, line 38, at end insert: 'and such statements of account shall also include a statement of the amount of Petroleum Revenue Tax to which the Corporation would have been liable and the consequential adjustment to Corporation Tax, were the Corporation not exempted from paying Petroleum Revenue Tax by virtue of section 9 of this Act; Government Amendments Nos. 21, 22, 23 and 24, Amendment No. 25, in page 9, line 4, leave out from 'question' to end of subsection,

Government Amendment No. 26, and Amendment No. 27, in page 9, line 8, at end insert: '(2A) A statement under subsection (1)(b) or (2) above shall give separate information with respect to, and show as far as may be the financial and operating results of, each of the main activities of the Corporation or, as the case may be, of the group consisting of the Corporation and its subsidiary or subsidiaries in question; and if the Secretary of State so directs with respect to any statement required by the said subsection (1)(b) or it is so provided in any direction under the said subsection (2) for the preparation of a statement, this statement shall also give separate information with respect to, and show so far as may be the financial and operating results of, each, or such as are specified in the direction and the activities other than main activities of the Corporation or group '.

Mr. Moore

This is a very serious and important section of amendments relating to Clause 10, which is concerned with the accounts and auditing of the BNOC. I am sure that my colleagues and Labour Members would equally deprecate the degree to which we have to rush the proceedings. Obviously it would not be amiss for me to make reference to the 32 per cent. of the potential debating time tonight that has been spent partly in discussing potential devolution, a shocking indictment of the way the Government see progress on their Bill.

I turn now to the issues raised by this crucial series of amendments, which were discussed in Committee on Amendments Nos. 81 and 136. We tried to bring out two basic problems in Committee, and we have a third to raise tonight on the clause as they Government now propose it. The first was the degree to which the Bill, if not amended, would not include a breakdown that would allow us to analyse the commercial nature of the corporation and allow it to stand comparison with its competitors in the market. The second problem was exemplified in the phrase which I used that brought out the ire, wrath and distemper of the Under-Secretary—the "licence to lie" clause. I shall not use those words tonight. The phrase repeated the words of the Conservative Government's Gas Act 1972, allowing the BNOC to prevent Parliament and the public knowing the exact loss and profit position of the corporation. I cannot in the time allowed go into the details.

The third problem relates to the degree to which the BNOC is connected from the payment of PRT. I am sure that my right hon. Friend the Member for Wan-stead and Woodford (Mr. Jenkins) will wish to address himself to this matter on Amendment No. 20, and I hope that at the end of the debate I shall have leave to recommend to my right hon. and hon. Friends that we divide on Amendment No. 20.

Our amendments in Committee sought to offset these problems. I must draw to the attention of the Under-Secretary, the House and, through the House, the country the problems in terms of government, whichever party is in power. Let us call it a chatter to conceal rather than a licence to lie. Within the Bill as drawn—Just as within the Gas Act—there is ability for the corporation to do things that commercial corporations cannot do. No valid reason has so far been put before the Committee or the House for that.

We asked the Under-Secretary in Committee, but perhaps he was too concerned with the language I used, and he gave no answer. However, no single positive reason was given to argue the need for that section which I believe is so obnoxious to the practice of good government. We must have a positive reason if we are to allow methods serving the public less well than those used by commercial and other nationalised corporations, apart from the British Gas Corporation.

It was suggested in Committee that the reporting system in the gas industry had not worked too badly in practice. That is a fair observation, and one would not deny it. However, that would not seem to me to be a good argument from what I am constantly told is the revolutionary party on the other side of the Chamber. [Interruption.] I appreciate that such a party may exist more strongly below the Gangway, but I am addressing my remarks to the Government. It is all very well having a Doric chorus but, so long as it is impotent, it is more relevant for me to direct my remarks to the Treasury Bench.

10 p.m.

Although a similar provision may have been thought useful for the gas industry, my concern is not with precedent in that sense, because a bad precedent may create bad practice in the future. I accept that it has not done so hitherto, but it may well do so because we do not know what sort of Government we may have hereafter. It is, therefore, advisable to establish good canons of practice for the Government, recognising, as we must, that some less sincere and less capable Ministers, Ministers less conscious of their public duty than those in the present Government, and less aware of the full implications of the BNOC, may come to power. On that basis, therefore, I want to hear a positive justification for the clause as the Government propose it, and not just a reference to practices in the gas industry.

Second, and more important—this was brought out in Committee—we are not here discussing like with like referring to the gas industry. The gas industry is a State monopoly, and we are not referring to that in the same terms as we refer to the BNOC. In Committee the Under-Secretary spoke of the BNOC as a vital and virile—I think that those were his words—or robust commercial undertaking. This will be a commercial undertaking competing downstream with other commercial undertakings, and we cannot allow it to have accounting and reporting standards different from those adopted by other commercial companies. The British Gas Corfporation provides no parallel.

Concluding the debate in Committee, my right hon. Friend said: I conclude that, without publication of the accounts both for the corporation and for the consolidated accounts, no one will ever know whether the BNOC is operating commercially. No one will know the returns on its upstream and downstream activities. No one will know whether it is cross-subsidising one activity with another. No one will know whether it is engaged in unfair competition with its competitors. Those words have not so far been answered.

In reply to the debate in Committee, the Under-Secretary of State said: We shall certainly take away this clause and see whether we can make a concession at a later stage, so that the account shows some distinction in the different activities of the Corporation."—[Official Report, Standing Committee D, 1st July 1975, c. 994–7.]. That was the hon. Gentleman's comment or promise, but no essential change has been made in the clause. Tragically, there has been very little done to meet us. I accept that the Under-Secretary has tried to walk a little along the path, but all he has been able to do is encompassed in Government Amendment No. 26— if the notice so requires, the financial and operating results as far as may be of each of the main activities of the group in question. But it is still at the instigation of the Secretary of State, and the requirement we seek is not established within the Bill. That cannot be satisfactory. There remain, therefore, three basic requirements. First, we must have a better breakdown, and a statutory breakdown, within the accounts of BNOC to show the figures for its various activities. Second, we must remove the—shall we call it?—charter to conceal unless there is positive reason given for its retention. Third—I am sure that my right hon. Friend will discuss this at length if he has time—we must break out the PRT liability related to the BNOC so that it can stand the test of competitive comparison with other companies in the private sector.

Dr. Phipps

I shall not detain the House long, but I wish to comment on Amendment No. 20 and the effect of PRT exemption for BNOC. I am not sure whether this is a matter for my right hon. Friend the Secretary of State or for the Paymaster-General. I hope that my right hon. Friend will take it up with the Paymaster-General if necessary.

I accept that exemption from PRT is a legitimate way for the Government to finance the BNOC. The money would go to the Government anyway. However, there are effects of this exemption which have to be considered. There would be a fairly minor effect on the partnership between a company that was not liable to the tax and one that was. It might have difficulties when deciding the best way of financing a particular project—whether by borrowing money, or purchasing or leasing equipment. The taxation of each party makes a difference to the best way of proceeding. It may be that the best way for the BNOC would not be the best for another company.

The effect of unitisation is more important. If one has two parties to a unitisation, both of which, under the Government's 51 per cent. participation proposals, will be partnered by the BNOC, and the two sides of the field are different in commercial and physical terms, there will be a very great difference between the parties as regards liability to tax in coming to commercial arrangements for unitisation. It becomes more important if unitisation crosses national boundaries, as has happened between the United Kingdom and Norway, and may in future happen between the United Kingdom and Ireland. These are not insuperable problems, and I hope that my right hon. Friend will discuss them with the Paymaster-General.

Mr. Patrick Jenkin

Not for the first time, I wish the hon. Member for Dudley, West (Dr. Phipps) had been on the Standing Committee.

This was perhaps one of the most important debates that we had, and it left me with the greatest unease at the end. I refer particularly to Amendment No. 20 and to the exemption of the BNOC from petroleum revenue tax. We lost that argument in Committee, and I am not seeking to raise it again now. I want to make sure, however, that the effect of the exemption from PRT is plain and visible to all. In my relative ignorance of these matters, I had not referred to the unitisation argument, but it is every bit as strong as the argument about distortion of investment criteria between two partners in a single field with a single licence who have to arrive at common decisions.

There is also the argument about fair profits. If the BNOC is to sell oil downstream in competition with other companies which have to pay the tax, there is every temptation for the corporation to use the effect of its exemptions to shade its prices in a way that would be unfair to its competitors. Most important of all, there is the argument that this is merely a way of concealing the size of the borrowing requirement needed to finance the BNOC. In a sense, the profit, being a profit after corporation tax but before PRT, will merely be a bogus profit. That is the most serious argument of all. In seeking to justify the exemption, the Under-Secretary said: The main reason for proposing to exempt the corporation from petroleum revenue tax is that payment of the tax by it would not be consistent with the underlying realities of the corporation and its financial relations with the Government. Petroleum revenue tax is levied on the private sector companies to ensure that the nation gets a fair share of North Sea profits. Clearly no such requirement exists in the case of the British National Oil Corporation. If that were all, that would be an argument to which one would attach some weight. But it most emphatically is not all. The Under-Secretary, in replying to that debate, made it abundantly clear that he recognised that the arguments put to him from our side of the Committee had substance. When we referred to unfair competition he acknowledged that fact and promised that transfer prices would be on the basis of market prices. He has not been able to satisfy me that this will happen. He referred to provisions in the Oil Taxation Act, but equally he acknowledged that in the circumstances they might not be appropriate.

I hope therefore that the Secretary of State will tell us what steps the Government are to take to make sure that transfer prices downstream by the corporation will be on the basis of full market prices and that there will be no question of unfair competition steming from the exemption from PRT. The Under-Secretary acknowledged that differing criteria could be a problem and he offered to have talks with the industry. I would be grateful if he would tell us what progress is being made with these talks with the industry to try to iron out the problem.

The third aspect is dealt with by Amendment No. 20. In Standing Committee the Under-Secretary said: We will consider whether anything more needs to be done, perhaps administratively, to make the whole financial position absolutely clear. We have no wish to hide the effects of BNOC' exemption from petroleum revenue tax. Later he said: I assure him that we want to make the whole financial position absolutely clear."—[Official Report, Standing Committee D, 1st July 1975; c. 950, 953 and 972.] I welcome that, because it will go part of the way to meet our fears arising from this exemption. This is what the amendment seeks to achieve. It seeks to oblige those preparing the accounts to include a statement of the amount of PRT for which the corporation would have been liable, together with the consequential adjustment of corporation tax if it had not been exempted by Clause 9(1).

Our prime aim is to make sure that the extent to which the corporation is being financed by the bogus profit accruing to it as a result of the exemption is made abundantly clear to Parliament and the country. I do not accept the view put forward by the hon. Member for Dudley, East that this is a legitimate method of financing. The Government should have allowed PRT to be paid to the Exchequer and then for the corpora- tion to borrow what it needed in the ordinary way. The borrowing limit would then have been probably not £900 million but £2,000 million or more, but I can understand why the Treasury was reluctant to see that appear in the accounts at this time with the difficulties that it is facing.

As it is, exemption will allow a bypassing of this normal parliamentary control and the throwing up of a sham profit in the accounts of BNOC. At the very least there must be an obligation on the corporation to disclose what the amount would have been so that we could see exactly how much of this finance had accrued to it from this source. Amendment No. 20 provides that obligation.

My hon. Friend the Member for Croydon, Central (Mr. Moore) made a powerful case. The Government have gone a small part of the way to meet one of the points we made in Committee. So far they have not moved on Amendment No. 20, and, therefore, I hope that to save time, we do not divide on Amendment No. 19, but feel that if the Secretary of State does not accept Amendment No. 20 the House would be entirely justified in dividing in support of it.

10.15 p.m.

Mr. Benn

The proposal in Amendment No. 19 is that we should write into the Bill that the BNOC's accounts should conform with the best commercial standards. The phrase appeared in earlier legislation.

Mr. Patrick Jenkin

The earlier legislation was the right hon. Gentleman's own Industry Bill.

Mr. Benn

The right hon. Gentleman may be wrong.

Mr. Patrick Jenkin

It is in the Schedule to the Industry Bill.

Mr. Benn

I think that it is in the Labour Government's Post Office Act 1969, but all Labour measures have certain merits, which the right hon. Gentleman has identified. It is an arguable proposition, which he is not going to press.

When my right hon. Friend the Secretary of State for Industry tried to have a similar phrase included in the Conservative Coal Industry Act it was resisted by the then Minister of State. Ministerial fashions on the matter seem to change somewhat. I am advised that the phrase has no precise enforceable meaning and adds nothing to the requirements already in the Bill that there should be proper accounts. We are providing in our Amendment No. 26 that there shall be a distinction between different types of activity.

On Amendment No. 20 I should first tell the House, as I told the Committee, that whether or not PRT is payable by the BNOC has no practical effect. Therefore, the great feelings that were aroused on the matter are properly about accountancy practice and not about the net effect, because if the money were paid under PRT it would go to the Government in one form, and if it were not paid under PRT it would be available in another Government fund. That point should be stressed, because we are not concerned here with a matter of substance with regard to the financial position of the Government or the BNOC.

However, I said in Committee that we had no wish to hide the effects of the exemption of the BNOC from the petroleum revenue tax. Therefore, I can give an undertaking that the information mentioned in the amendment will be made available to Parliament and the public. However, the form in which that can best be done will require further study. There are problems about the calculation of the precise liability to PRT, and it might be better, to avoid unnecessary work in establishing a notional figure, to give a broad figure showing the effects on the BNOC of the exemption, but, being a broad figure, it would not be subject to the auditing procedure mentioned in the amendment.

Another question, as yet unresolved, is whether such figures should best be attached to the BNOC's accounts or to the National Oil Accounts. That is a matter to which we should give further attention.

My hon. Friend the Member for Dudley, West (Dr. Phipps) raised practical questions of two kinds. One concerned the effect of the exemption from PRT on partnership arrangements, particularly the difference between the economic benefits of leasing or buying equipment, and the tax implications. My hon. Friend's second point was about unitisation, and the effect that that might have. The latter point was not made in Committee, but we have given a clear undertaking that in working in partnership the BNOC will operate on a commercial basis. There is no reason why we should doubt that that statement of Government intent could be executed.

The right hon. Gentleman raised the question of transfer prices. The matter works both ways. One of the anxieties that the BNOC would have in partnership arrangements is that it would be on a perfectly transparent transfer pricing basis. That is embodied in the assurance that I have given about the commercial practice.

I move to the other amendments—Government Amendments Nos. 21, 22, 23, 24 and 26, of which Amendment No. 26 is the substantive one, the others being consequential. The group of amendments is put before the House in discharge of the undertaking given by my hon. Friend the Under-Secretary that we would arrange that the accounts of the BNOC would show separately each of the main activities of the corporation. It provides for separate accounts for separate activities only where consolidation accounts are produced. Arguably, the same provision should apply where there is no consolidation, where the corporation and its subsidiaries produce separate accounts. I believe that Amendment No. 26 represents a discharge of that obligation.

I must ask the House not to accept Amendment No. 25. There was an extensive discussion of this matter in Committee. The Government did not feel able in Committee to give an undertaking, and I refer the House to the arguments then used.

Mr. John Moore

It would be churlish of me not to thank the Secretary of State for his undertaking about the PRT figure. The House will want to study carefully exactly what he said. He used the expression "unaudited", and mentioned the figure disconnected from the legislation. Although because of the Secretary of State's comments I shall not ask my hon. Friend's to divide the House, and although he gave a clear undertaking, his response on other matters was totally unsatisfactory. In Committee his hon. Friend the Under-Secretary said: I am not familiar with all the detail of this and was not able to take the hon. Members argument very closely".—[Official Report, Standing Committee D, 1st July, 1975; c. 998.] He specifically did not answer the point that had been put to him.

It has been put again in this brief debate. We have asked for an explanation why the Government have used a phrase that was admittedly used by the Conservative Government in the Gas Act 1972, when there was no debate on the subject in Committee. We have been referred to what was said in Committee on this occasion, but then there was a complete absence of argument. What I said about PRT has not been satisfactorily answered. It is not enough for the Secretary of State to decide how the accounts are to be broken down. That should be laid down in the Bill.

Although the undertakings have been limited and although there has not been sufficient time, because the Government have rushed through their legislation so that undertakings have had to be given at the last minute on Report—and if there were more time, we should be able to get better legislation instead of having to hope and pray that the Government are able to concoct some way of matching their undertakings outside the legislation—in view of the Secretary of State's undertakings, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made:

No. 21, in page 8, line 44, at end insert "group consisting of the".

No. 22, in page 9, line 1, after "the" insert "group consisting of the".

No. 23, in page 9, line 2, after "showing", insert "— (a).

No. 24, in page 9, line 3, leave out "Corporation and the subsidiary or subsidiaries" and insert "group".

No. 26, in page 9, line 4, after "and" insert— (b) if the notice so rqeuires, the financial and operating results as far as may be of each of the main activities of the group in question; and".—[Mr. Benn.]