EXTENSION OF ALLOWABLE EXPENDITURE (Hansard, 10 July 1979)

§ Mr. Peter Rees
I beg to move amend-No. 64, in page 8, line 38, leave out from " Kingdom)" to " place " in line 40 and insert: and in paragraph (b) of the definition of ' production purposes ' in section 12(1) of that Act, after the words ' in the United Kingdom ' there shall be inserted the words ' or to the '.".

§ The Second Deputy Chairman (Mr. Richard Crawshaw)
With this we may take Government amendment No. 65.

§ Mr. Rees
I shall refer first to the clause in general terms, bearing in mind the interest expressed in the matter by the hon. Member for West Lothian (Mr. Dalyell).
Section 3 of the Oil Taxation Act defines allowable expenditure in limited terms. It allows only the cost of transporting oil to a landing point in the United Kingdom. This expenditure was important both from the point of view of calculating overall liability to PRT and the amount to which uplift might be applied.
On examination, it was found that this was not entirely fair to those who were extracting oil from the North Sea, because they were charged petroleum revenue tax eventually on the value of the oil at the 334 point of sale, which might be very different from the point at which the oil was to be landed. Therefore, in clause 19 an extension was proposed which was to extend the deduction to costs incurred up to the point where the oil could reasonably be expected to be delivered.
On further examination of the problem —which is highly technical and complicated—we found that even that did not do full justice to the oil companies, because the point at which the oil might reasonably be expected to be delivered was not necessarily the point at which it would be delivered to a purchaser. It was not the true point of sale by reference to which the PRT liability was actually to be calculated. So the point of these two amendments is to allow the oil companies the costs of transporting oil to a more distant point—that is, the actual point at which they are likely to deliver and could reasonably be expected to deliver the oil to the prospective purchaser.
This is what I referred to on Second Reading as the coincidence point, and the combination of the amendments with clause 19 will, I hope, achieve a fair balance, because the PRT is calculated on the value of the oil at the point at which it is actually delivered to the prospective purchaser. We feel that it is right that the allowable costs should reflect the actual costs of getting the oil to that point and not to some hypothetical earlier point which is not the real point of sale.

§ Mr. Dalyell
is Britain in any way disadvantaged in this matter in respect of oil refined abroad outside United Kingdom refineries?

§ Mr. Rees
The short answer is " No, it will not be."

§ Mr. John Garrett (Norwich, South)
I should be pleased if the Minister of State would elucidate subsection (2), concerning a change in the allowable expenditure affecting licensees where a 335 licensee buys equipment from another licensee, both operating in the same field. As we understand it, hitherto the cost to the supplier has been an allowable expenditure. But now the cost to the purchaser is being allowed, which could lead to an increase in the allowance—one might well expect it to do so.
What rules govern the price-fixing for the equipment in such a situation? Does this allowance apply if one licensee is the subsidiary of another? What might well be the cost of this new arrangement in respect of licensees buying equipment from one another where the two licensees share the same field?

§ Mr. Peter Rees
The basis of subsection (2), as the hon. Gentleman indicated, is to permit a person to deduct payments made to a fellow licensee in calculating his liability for PRT. The fellow licensee may either be another company involved contractually in the exploitation of the same block or, as the hon. Gentleman has pointed out, another company which has some shareholding relationship. It may be a wholly-owned subsidiary or a smaller shareholding nexus. Under the Act there is considerable restriction on that process, and the Government feel that it is perhaps an unfair restriction on perfectly legitimate payments.
There is—dare I remind the hon. Gentleman?—an override provision in one of the schedules to the Act which would not permit a payer of a payment to a fellow licensee to claim to deduct a sum in excess of the true market value of the assets acquired or the services provided, so there is, as I am informed, no likelihood of abuse. I am afraid that I cannot give a precise figure for the cost. I do not think that it is easy to arrive at a definite figure, but if the hon. Gentleman really would like it, I shall have a further go with my officials to see whether we can arrive at a credible figure, and I shall write to him if needs be. But these matters are rather speculative.

§ Mr. Dalyell
Why was an override provision considered necessary in the first place? The Financial Secretary, in a throwaway line, talked about circumvention by the oil companies, and that tends to confirm some of the worries that have been rather widely expressed. Is there a constant ding-doing battle between the Treasury and the Department of Energy on the one hand and the oil com-panics on the other? I think, indeed, that that is the fact of the matter. That is what my right hon. and hon. Friends on the Front Bench and many of the rest of us rather suspect. It is a very unsatisfactory relationship.
Earlier in the debate it was said by a Tory Member " We are the only people who need a BNOC." My hon. Friend the Member for Dunfermline (Mr. Douglas) gave the example of Norway, but in fact oil arrangements in other parts of the world are on a totally different footing. In Brazil, there is Petrobras, in Indonesia, there is Pertamina, and the Arabs have their own set-ups. We are somewhat unique in that our Government have not got the kind of set-up built into production which many of the other major oil-producing countries in OPEC have.
Although this matter sounds very technical, it seems to me to be the tip of an iceberg if there is this constant pressure going on to circumvent, one way or another, what is justifiable taxation. There is a very wide worry in Scotland, including along the whole of the coast among those who work in the oil industry, that we are not getting our fair share. Having taken part in some of the debates on the Scotland Act, I think that the Minister of State will acquit me of having any Scottish nationalist tendencies. My hon. Friend the Member for West Stirlingshire (Mr. Canavan) accused me of many things in the past and no doubt will do so in the future, but he will not accuse me of Scottish National Party tendencies. Not only the SNP but a great many other people are deeply concerned, if inarticulately, that we are not getting quite 337 as large a share as we ought to be. On this highly technical question, therefore, it seems that more explanation is required, and I wonder whether the Minister of State will comment.

§ Mr. Peter Rees
I am always happy to respond to the hon. Gentleman's invitations. Dare I say that I should be the last person to regard him as in any way tainted with Scottish nationalism, although I know equally well his deep concern for matters Scottish in the best and broadest sense. I suggest that his question should, however, have been addressed to his right hon. Friend the Member for Llanelli (Mr. Davies) who, when a member of the Labour Government, had a considerable hand in that matter, I suspect. I mean that in no spirit of dispraise.

§ Mr. Rees
Perhaps the Oil Taxation Act was passed before his time, but in any event the right hon. Gentleman was present during its early years and he could, I imagine, give at first hand a more authentic explanation of why the override provisions were introduced.
I turn now to the more general point raised by the hon. Member for West Lothian (Mr. Dalyell). I am sure that it would not be proper for me now, and certainly not the question immediately before the Committee, to debate whether North Sea oil should be exploited exclusively through some State oil company like BNOC or by a combination of State oil company and individual companies. That is a matter of general principle which hardly arises here, and I might well be out of order if I were tempted into it.
However, it is right to say that there is a constant process of adjustment both of the interests of the oil companies and, if I may put it in a rather grandiose way, the interests of the British people, as safeguarded by this Government and, I dare say, to the best of their ability by the previous Government. This process of adjustment involves looking at these fine points, which may, as the hon. Gentleman suggests, at the end of the day raise important issues of principle.
As to the reason why this provision was originally inserted in the schedule to the Oil Taxation Act, I suggest again, with 338 suitable modesty, that the right hon. Member for Llanelli might give a more satisfactory answer. But, regrettably, it has been found in other fields that taxpayers who feel a little oppressed by the weight of any particular system or item of taxation take such measures as are legitimately open to them—some hon. Members would say illegitimately—to adjust their liabilities, by pricing measures and so forth.
I think that, perhaps drawing on their experience in other fields and without aiming particularly at the oil companies or expressing by implication any view of them and their fiscal morality, the Government at the time inserted this provision in the orginal Act. I think that that is the short and simple answer, and I hope that it reassures the hon. Gentleman.