Finance Bill (Hansard, 8 July 1986)

§ Mr. Norman Lamont

The hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) has a strong constituency interest in the oil industry and in the offshore supply industry. I appreciate what has prompted him to move the amendment and I am grateful for the restraint with which he did so. I noted the hon. Gentleman's comments about Mr. Dominic Lawson. I am not sure how seriously those comments were meant, but I assure the hon. Gentleman that all Treasury Ministers read Mr. Dominic Lawson very seriously.

The new clause seeks to widen the definition of expenditure qualifying for immediate PRT relief to include any development expenditure other than long-term assets incurred before total production from the field reaches 1,000 tonnes. Its intention, I assume, is to include all development expenditure although as drafted, capital expenditure qualifying for relief under section 3 of the Oil Taxation Act 1983 is not covered. In other words, the aim is considerably to extend the scope for companies to offset North sea costs against the PRT payable in respect of other fields. In that case, it is a new development because it breaches the present field-by-field basis of the charge.

The new clause represents a significant relaxation of the present North sea fiscal regime. The hon. Member argued that some relaxation is required to cushion the impact of the fall in oil prices. It would be wrong simply to focus on the rate of tax. Admittedly, that looks high, but it is only part of the story. Account must also be taken of the 261 especially generous reliefs built into the system. The net result is a regime that is well-tuned to adapt automatically to oil price movements.

On the Government's calculations, tax take on an accruals basis as a proportion of pre-tax North sea revenues remains almost unchanged in 1986 from the 1985 figure. If we compare tax with the pre-tax trading surplus —that is, sales revenue minus operating costs—we see that the proportion has fallen quite significantly. The North sea continues to provide substantial profits for the oil industry while the tax regime ensures that the Government bear their share of the consequences of the price fall. It should be remembered that these conclusions exclude the industry's downstream operations and these are generally more profitable than has been the case for some time.

The Government have long made it clear that one of the overall objectives of the North sea tax regime is to leave companies with adequate incentives for future exploration and development. It was with this objective in mind that we introduced in the 1983 Budget a package of generous reliefs aimed at exploration and new fields. In our view, there is no evidence that the tax system as thus reformed, is causing problems. Virtually all developments which are economic in pre-tax terms remain economic after tax. The hon. Member admitted that in his remarks and said that as yet there are no signs that developments were being held up. I am sure that the hon. Gentleman will not argue that something which was uneconomic before tax should be made economic after tax.

I assure the hon. Member that the Government are in no way complacent about the problems which could be created by the fall in oil prices. It is our practice to keep the overall impact of the regime under review and in recent months we have kept a particularly close watch on the position. We believe that it is especially important to maintain contact with the industry. In addition to our regular contacts, we have specifically invited the industry to submit evidence about the operation of the present regime in the new situation.

Some evidence has already come in and this is being analysed. In addition, we have made our own analysis, which suggests that where lower prices seem to be causing delays, tax cannot be blamed. Projects that are uneconomic after tax are almost always uneconomic before tax. In any event, as a result of the changes that we made in 1983, many of the next generation of projects are paying virtually no PRT and no royalties. They will be subject to the same regime as companies in the rest of the United Kingdom's industry and will pay only corporation tax.

262 Even if it appeared that some relaxation of the present regime were needed, it is not clear that the measures set out in the new clause would provide the answer. By providing an incentive to projects which would otherwise be uneconomic, distortions would inevitably be introduced into the system. Investment priorities would be determined in part by fiscal considerations. In general, there is no guarantee that the tax thus saved by the companies would be channelled into increased activity on the United Kingdom's continental shelf. Such activity might be channelled outside the United Kingdom altogether.

For these reasons, we do not believe that the cost of the proposed change could be justified. I have explained to the hon. Gentleman the extent to which we watch developments. For the reasons that I have given, some of which he has heard before, I cannot accept the new clause.