HC Deb 16 July 1987 vol 119 cc1313-25 5.19 pm
Sir William Clark (Croydon. South)

I beg to move amendment No. 48, in page 45, line 40, leave out from `not' to 'an' in line 41.

The First Deputy Chairman of Ways and Means (Sir Paul Dean)

With this it will he convenient to discuss the following amendments: No. 63, in page 45, line 45, leave out subsection (2) and insert— '(2) This section has effect in respect of gains or disposals made on or after 14th May 1987.'. No. 49, in page 45, line 45, leave out subsection (2).

Sir William Clark

This amendment relates to roll-over relief. It is available to most industries in our fiscal system. Rio Tinto-Zinc challenged the Inland Revenue over whether it could deny roll-over relief, and took it before the special commissioners. The case related to the oil industry. The special commissioners ruled that RTZ was entitled to roll-over relief. The Inland Revenue then said, "All right, we will alter the law." If the Inland Revenue wishes to do that, it is fine, but I regret the fact that the Bill states that roll-over relief was never available to the oil industry. This is retrospective legislation.

If a Labour Government had introduced retrospective legislation, we would be screaming blue murder. Ministers should alter this clause, preferably as I have suggested in amendments Nos. 48 and 49. Roll-over relief is available to other industries, and I do not understand why the oil industry should be singled out for this penal treatment.

It is said that, since the Government grant licences to oil companies, they arc entitled not to allow them some fiscal advantage which is available to other industries. That cannot be correct. Although the Government issue licences to the oil companies, private enterprise exploits those licences. Had it not been for private money, North sea oil would not have been developed as quickly as it has been developed over the years. If the clause remains as it is, it will have an inhibiting effect on oil exploration in the future, which would be detrimental to our economy. The retrospective element is bad.

I am heartened that one hon. Member said: In my view, it is a most unsatisfactory principle"— he was talking about retrospection— because of the degree of uncertainty it introduces into the affairs of the business men of this country which we legislators so constantly exacerbate. If we establish this principle of retrospection, we are on a slippery slope down which we shall be heading like Gadarene lemmings, and I am delighted to be on this side of the Committee in opposing the principle."—[Official Report, Standing Committee A, 6 June 1978, c. 747.] That was said by my hon. Friend the Paymaster-General. I know that he will not have changed his mind. Nor will my right hon. Friend the Financial Secretary to the Treasury, who said yesterday in a debate on another clause that he was diametrically opposed to retrospection. At least two Treasury Ministers are on record as saying that they oppose retrospection.

Mr. Neil Hamilton (Tatton)

Does my hon. Friend recall the debates on the Finance Act 1975, which introduced capital transfer tax, and the complaints from Conservative Members that the tax would apply from the date of its announcement but the details of which would not be revealed until 18 months later?

Sir William Clark

My hon. Friend reinforces the point that I am trying to make, and I am grateful to him for jogging my memory and that of other members of the Committee. The Conservative party has always turned its face against retrospection. Perhaps the Government will say that the clause will not affect any company which has appealed before the date of Royal Assent, but only one company would be involved in that—Rio Tinto-Zinc—and the judgment was in its favour.

What has happened to the other oil companies? When there is some disagreement between the taxpayer and the Inland Revenue, it is a well-known practice to send the case to the commissioners as a test case. Other taxpayers wait until the result of that test case is known before doing anything about it. Indeed, when a case is pending, the Inland Revenue—it might be too brutal to say that it drags its feet—is in no hurry to settle the disagreement between it and the taxpayer. I hope that my hon. Friend will not argue that the oil companies had the opportunity to appeal. This is the test case principle.

This matter is fundamental to the philosophy of the Conservative party and the Government. I agree with my hon. Friend the Paymaster-General and my right hon. Friend the Financial Secretary that in no circumstances should we have an element of retrospection. If the Government or the Inland Revenue wish to change their minds, they should change the law, but they should not make the law retrospective. I urge my right hon. and hon. Friends to remove the element of retrospection. I appreciate that time is short. Report stage of the Bill will be on Monday and Royal Assent must be obtained before the House rises next Friday. There may not be time to do as I suggest in this Finance Bill. But I hope that my hon. Friends will assure me that the Government will take the matter seriously and include it in next year's Budget. If they do that, it must cover past and future roll-over relief.

I have kept my speech brief because we started late. I hope that the brevity of my speech will not militate against the seriousness with which my hon. Friend treats the matter.

Mr. Tony Blair (Sedgefield)

There is general agreement that clause 80 raises some important questions in relation to the oil industry and retrospection and the principles that should govern the House of Commons when considering whether to pass retrospective legislation.

We debated the principle of retrospection on an Opposition amendment to clause 62, but it is right to debate the matter again because there are significant differences between the considerations that affect clause 62 and those that affect clause 80. This case relates to the availability of roll-over relief for oil companies on the disposal of their business assets. In normal terms, the capital gains tax liability on the disposal of assets can be deferred or rolled over if the proceeds are used to acquire replacement assets. If a company sells its buildings, land or fixed plant or machinery, and uses the proceeds to purchase new land, buildings or fixed plant or machinery, roll-over relief is available. Deferral can usually be obtained until the replacement asset is disposed of.

The difficulty in relation to oil companies arises on what happens to their licences, especially the process that is called farming out licences. I am far from being an expert on the oil industry, but I understand that farming out operates as follows. The Department of Energy awards a licence to an oil company. That company will complete its initial working obligations, which might include the drilling of one or more exploration wells. It might not make an immediate commercial discovery, so, to share the risk of continuing exploration and discovery, it farms out a share of the licence to another company in return for the further drilling expenditure being paid by that "farmingee"—if I can use that ugly word. I did not coin that word. It was used by the United Kingdom Offshore Operators Association.

5.30 pm

Company A may spend a certain amount of money on exploration, then decide to sell 50 per cent. of its licence to company B in return for company B spending a certain amount of money on further exploration work. The Revenue is insisting that company A, the original licensee, should pay immediate capital gains tax on the expenditure contributed by company B, the company to which the licence has been farmed out. That farm-out is considered to be a capital gain.

Sir Trevor Skeet (Bedfordshire, North)

Surely there is no capital gain. If a third company is brought in, that company will take over the obligations of the initial company that obtained the licence. At the development stage I can understand that profit will accrue, but such profit will not accrue at the exploration stage.

Mr. Blair

The hon. Gentleman may have misunderstood my argument. The Revenue considers that there is a capital gain, but the oil companies do not. That is the issue between them.

When company A farms out 50 per cent. of its licence, it does not get any cash. Therefore, the oil companies believe that there is no capital gain and that it is perfectly right to defer liability. We are aware that the Revenue takes a different view. However, I believe that a test case was referred to the special commissioners by RTZ and judgment was given in favour of the company.

Sir William Clark

I have already said that.

Mr. Blair

I was listening, but it is important that the issues are made clear.

It is not the case, as it was when we debated clause 62, that everyone had always agreed that a particular tax relief was not available, but then the special commissioners suddenly found a loophole so that that tax relief became available. The Financial Secretary argued for retrospection in clause 62 on that basis.

I understand that the oil companies have never accepted that they were not entitled to this relief. The oil companies' understanding puts this matter in a critically different position from other areas of retrospection. It is not as though the test case in front of the special commissioners suddenly discovered a loophole that no one believed existed before. The oil companies have always taken issue on this matter.

I welcome the Economic Secretary to this Finance Bill debate. If the oil companies have always argued that they should be entitled to this roll-over relief, the Minister cannot advance the same argument as was used in favour of clause 62. Many cases are pending, awaiting the outcome of the test case. The Revenue's position is curious because it takes a particular view. It will allow a case to go to a hearing. If it wins the case, it is perfectly happy; but, if it loses the case, it immediately introduces legislation to reverse the effect of that decision. What is the purpose of allowing the matter to go to court if the Revenue intends to introduce legislation reversing the effect of the decision, should it go against the Revenue? Many people are waiting to take their cases to court on the basis of the outcome of the test case. It is unfair that they should be prejudiced as a result of waiting for the test case to be heard.

Can the Minister give us an idea of the sums of money involved? I have always made it clear that we do not regard the principle of retrospection as absolute in the sense that we are prepared to support the principle if the sums of money involved are large or there are extenuating circumstances. There must be a balance between the principle of retrospection and the funds that are involved in a particular case. We want to know whether such extenuating circumstances exist in this particular case. Is this retrospection in clause 80 simply in accordance with what the law has always been perceived to be, or does it directly affect the interests of a group of people and make the law retrospective contrary to their understanding of the law over a period of 22 years? Those important points require an answer.

Sir Trevor Skeet

I believe that my hon. Friend the Member for Croydon, South (Sir W. Clark) has revealed an important point of principle. It is not clear which side of the Committee is responsible for the initial error. I remember that many years ago the Burmah Oil company took its case to the House of Lords and succeeded. The result was that legislation was passed to reverse that decision. A decision on RTZ was taken by special commissioner Judge Patrick Medd in April 1987, but now that decision has been reversed.

Clause 80 has established an extremely bad principle for the international oil companies. Let us consider the case of Enterprise Oil, set up by the Government. In the countries where it operates licences abroad, whether it be Indonesia, the Netherlands, France, Italy, the United States or Canada, the farm-out of licences is not subject to tax. Therefore, it is not wise to establish a principle in the United Kingdom that can be avoided.

This is a difficult period for small operators in the North sea and elsewhere as a result of cumulative tax levels. The tax on revenues at marginal rates works out at about 86 per cent. The notional capital gains tax under clause 80 will be a deterrent to exploration.

The effect of a combination of falling prices, varying exchange rates and the escalating cost of equipment and services in the North sea has led to serious difficulties. In the past 12 months the price of crude oil has risen from $8 to $20 a barrel, but in sterling terms it has risen from £4.96 to £13. The smaller oil operators in the North sea have come out of the deal extremely badly. This is not the time to consider using capital gains tax in the way outlined in clause 80. The roll-over procedure, which was advocated many years ago, should be used.

The retrospective element has been adequately dealt with in previous debates. I do not believe that there has been any tax avoidance. A case was brought before the special commissioners, and I believe that the judgment reached was realistic and equitable. Since the mid-1970s there have been roughly 200 farm-outs, of which only about 12 cases have been settled. There will be appalling difficulties for the industry and for the Revenue if all those farm-outs have to be settled in the next two years. Indeed, cases can refer back to 1965 with subsequent complications.

I believe that the Treasury has failed to distinguish between farm-outs made during the exploration and appraisal period—that practice has accelerated the fullest exploitation of the North sea—and those made after the grant of annex B approvals at the beginning of development. If, for example, a company wants to sell an interest in the Forties field or wants to sell an interest in a production capacity to the Japanese it is right that it should fall for assessment for capital gains.

Mr. Dick Douglas (Dunfermline, West)

I apologise to the Chairman and the Committee for not being present earlier. As we deal with the vexed question of annex Bs, can the hon. Gentleman, given his knowledge of the industry, tell us how many annex Bs are not applied for or are held up because of fears in relation to this clause?

Sir Trevor Skeet

I do not have the figures, and that fact can be put down to the Department of Energy. I should have thought that some had been held up, but not a great number. The Inland Revenue says that enormous profits can be made, but I believe that all this can be rendered nugatory.

The risks and the uncertainties inherent in making an assessment today on future problems are shown in the RTZ case. The Inland Revenue had calculated a profit of £18.46 million which would be shared by the consortium, RTZ's share being £7.1 million, based on 35 per cent. interest. Those are fantastic figures and I dare say were matters of negotiation between the parties. On further assessment, the revised figures were £150,000, RTZ's share being £48,000. The arrangement that the Inland Revenue uses for its computations may impress hon. Members, civil servants and others, but it is pure guesswork. If it is pure guesswork, there is no reason why the exploratory elements operating in the North sea should be affected by it.

I should like to emphasise some further points. There is no real gain at the exploratory stage if a licence is farmed out from A to B, because B will have to put in the money to develop the field. In many cases, there will be no discovery. If, as in one in 10 cases, there is a good discovery, it may mean that the field will be productive for the benefit of all. With roll-over, when earnings begin to materialise, the company will be in a position to pay. Front-end loading or commitment is totally unrealistic in respect of legislation. Front-end loading affects the cash flow of the smaller firms much more than the bigger ones. It is much more equitable for demands for CGT projections to be carried forward to the time when the fields come into operation. I hope that my right hon. Friend the Financial Secretary will consider my remarks carefully and bring about changes next year.

Mr. Alex Salmond (Banff and Buchan)

I shall make a brief contribution because many of the points have been made. There are two issues at stake. The first concerns retrospective legislation. During last night's debate on clause 62, the Financial Secretary made it clear that the Government did not like retrospective legislation and that only in certain circumstances would it be a good idea. One of his key points was about the fact that the taxation commissioners had overturned what he described as the "generally understood" position. The Financial Secretary made that point no fewer than seven times in his contribution on clause 62. He used "generally understood" twice, "widely accepted" four times and "accepted" once.

As I said yesterday evening, I do not understand how the Government can possibly maintain their position on clause 80 if they follow the arguments used on clause 62. Whatever the rights and wrongs of this clause, there is no question but that there was substantial controversy about whether farm-ins were eligible for roll-over relief on capital gains taxation. It was not a "generally understood" position. If there were such a position, the industry would have felt that roll-over relief was available at least for certain types of farm-ins. If there is consistency in the Government's position on clauses 62 and 80, they will have the grace to withdraw or amend clause 80.

The second issue is whether this is the right moment to tighten oil taxation. We have heard some oil price figures, but we should also consider the number of exploration and appraisal wells drilled. At the end of last month 22 exploration and appraisal wells were being drilled, substantially more than in the spring this year, when there were only 13. The number is much less than at the end of 1985, when the total was 50.

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The industry is in a severe state. Part of the responsibility must lie with the Government's headlong and unwise pursuit of low international oil prices. [Interruption] The Government encouraged and welcomed the decline in world oil prices. That was a mistaken policy for a major oil producer.

At this time it is unwise further to tighten oil taxation and further to restrict the necessary flexibility of people farming in to oil licences. In a previous incarnation the Economic Secretary knew something about this industry, so surely he accepts that it is a good idea to have this flexibility. If a company has fulfilled its obligation and been encouraged by the wells drilled, although no definite discovery has been made, it is a good thing for another company to be allowed to introduce new capital for further exploration wells. Surely the Government do not want to reduce flexibility and lessen the ability of other companies, especially small ones, to have particular licences, discover new fields and therefore secure the industry's future. I very much hope that, given those arguments, the Government will revise their position.

Mr. Michael Morris (Northampton, South)

I support the submission of my hon. Friend the Member for Croydon, South (Sir W. Clark). My right hon. Friend the Financial Secretary should be under no illusion that the oil industry believes that this is a not a very cumulative tax. Add to that the retrospective element, which goes back 22 years—it has not just happened in the past year or 18—months—and there is a double problem. I think that my right hon. Friend the Chancellor will recall, if he is prompted by my right hon. Friend the Financial Secretary, that when he was Secretary of State for Energy he commented to the Treasury that the implementation of the advance petroleum revenue tax was wrong in terms of its timing and measures. The Treasury did not listen but, 12 months later, it changed the law because it found that the oil industry was right and that the effects were detrimental to the industry.

We are interested in further exploration in the North sea. Farming out has been a practice in some parts of the world, especially in the North sea, for years. The practice is not only well proven but helps small companies and British companies. If clause 80 remains as it is, the major companies will not be adversely affected. The Shells, BPs and Amocos of this world will be able to shrug it aside and carry on, but the British companies and small companies—the very ones that we want to develop—will lose. I very much hope that my right hon. Friend the Financial Secretary has listened to the comments of my hon. Friend the Member for Croydon, South.

Mr. Peter Hardy (Wentworth)

I can be relatively brief because many of the arguments have already been deployed.

The Committee is indebted to the hon. Member for Croydon, South (Sir W. Clark) for tabling these amendments, although I did not think that it was entirely gracious of him to seek to take the credit for the development of our offshore industry purely for private enterprise. He may well be more interested in taxation than in energy, but he should recognise that the public sector has been involved substantially. This is not an amendment or a cause that should he approached in quite so partisan a fashion, but it is right that we should consider the matter seriously.

The fact that the response appears to have been rushed is serious. It is a rather spiteful and swift response, not made at a gracious speed, to a decision by the special commissioners that the Government find discomfiting. It certainly does not seem entirely reasonable that the measure should have been rushed through in this way without, apparently, adequate consultation with the industry. I am beginning to wonder—perhaps the hon. Member for Bedfordshire, North (Sir T. Skeet) shares my concern, to judge from his comments—whether the Treasury consulted the Department of Energy at all. The effect of the measure would surely run contrary to the interest and policy that have long been adopted by that Department. Its effect has already been described by the hon. Member for Banff and Buchan (Mr. Salmond) and other hon. Members, who recognise that the effect of the clause, if unchanged, will be to reduce the level of offshore activity.

My concern is not really a fiscal one, but has to do with energy policy. The Government have an obligation to ensure that we maximise the levels of extractions from each field in the North sea. That requires substantial investment. A tax policy that deters investment will mean that the amount of oil that we extract will fall. While oil prices have risen, though not, perhaps, on the significant scale that some hon. Members may have expected, the Minister cannot deny—he has experience of this—that oil prices in the 1990s will rise more substantially than they have in the past year or two. If that is the case, the Government should try to ensure that such a level of investment is maintained offshore as guarantees the encouragement of tertiary extraction, orders for British industry and technology and the opportunity for British companies to which hon. Members have referred.

All those aims will be embarrassed if the Government go ahead with this rather draconian step of retrospection. The hon. Member for Croydon, South (Sir W. Clark) may be much more opposed to the principle of taxation than I am; perhaps I take a more austere view of the cause of taxation than he does. While I accept that retrospection seems harsh—and, accompanied by inadequate consultation, it is even more severe—I believe that the Government may well be giving my hon. Friends and me some ideas. The prospect of retrospection is obviously alien to a civilised society. On the other hand, I suppose that a new approach to the wealth tax, accompanied by some retrospective arrangement, might have some attractions, although I do not suggest that the Minister withdraw his clause for fear of that prospect.

However, I suggest that the Minister does not go ahead with the proposals until there has been adequate consultation with the oil industry and the Department of Energy to establish what the estimated effect of the measure is in terms of long-term energy policy and of maintaining a viable offshore industry. If the Minister examines the matter from that standpoint, he will make significant changes to the clause. If not, the Government will stand accused—with justification—of acting in a high-handed and draconian manner that is contrary to the best interests of sensible energy planning and development in the United Kingdom.

Mr. Peter Rost (Erewash)

I support the amendment moved by my hon. Friend the Member for Croydon, South (Sir W. Clark). Indeed, I could hardly fail to do so, having been a member of the Energy Select Committee in the last Parliament that spent the six months in the run-up to the election on a detailed and intensive study of the North sea oil industry, the effects of the lower oil price on declining activity in the industry and the problems facing it. We made a great many detailed proposals and recommendations and we are still waiting for a response from the Government. Naturally, we hope that the response in the Budget is not their only one.

One thing emerged clearly from that detailed report. We took a great deal of evidence, including evidence from the Treasury and the Department of Energy. Although the fiscal regime was, in our view, reasonably fair at that time, we made one specific recommendation that relates closely to the amendment. The report was published during the general election and has probably not been fully noticed yet by the House, but it certainly will have been noticed by my right hon. and hon. Friends on the Front Bench, even if the Treasury has not taken much notice of it. Our report is certainly relevant to the amendment: Although the system of North Sea taxation is not the one which, with hindsight, might be most desirable, we have no fundamental criticisms to make except to emphasise the need for the Treasury constantly to watch developments in the rest of the world and to ensure that North Sea taxation is never a disincentive to activity. During the present critical period, the government, if anything, should err on the side of the taxpayers rather than the Revenue. We broadly welcome the two concessions contained in the 1987 Budget, though we believe that it is arguable that both should have been somewhat more generous in the broad national interest. We now find that, at the last moment, the Treasury appears to have thrown in, not only retrospectively, but in a rather penny-pinching manner, a proposal that will undoubtedly have a damaging effect on continuing exploration activity. In view of the long lead times required and the slow-down in investment in the North sea that has already taken place, what is needed now, if anything, is a little pump priming by the Treasury rather than disincentives.

The retrospective nature of the measure is bad enough. My right hon. and hon. Friends in the Treasury are well aware of the detailed workings of the oil industry; they understand what farm-outs are about, and that they are as much a part of the oil industry structure as, for example, reinsurance and some underwriting are at Lloyds, or partnerships or consortia are in the rest of industry. However, the Revenue does not seem to understand that. To propose to tax farm-outs for capital gains before the true nature of the reserves of oil have been proved as economic seems ludicrous. The proposal is unacceptable not only because it is retrospective, but because it would undoubtedly hinder further development in the North sea.

The whole of clause 80 should be deleted until there has been more meaningful discussion with the oil industry to find a compromise. There are certainly plenty of precedents for proper negotiation, and the oil industry has always been prepared to come up with a compromise solution. In this case, it appears that the industry has not been properly consulted. Without amending or deleting clause 80, we shall be imposing a tax on the transfer of licences in cases in which no commercial discovery has yet been made in a way that will undoubtedly provide a major disincentive to further development. If there is not a major concession on this point, drilling activity will decline in precisely those critical years when we should be accelerating development in order to maintain self-sufficiency for the United Kingdom. If there is not a major rethink by the Treasury, the proposal will be not only counter-productive, but a penny-pinching, badly timed measure that is contrary to the best national interest.

Mr. Douglas

I shall be extremely brief and I apologise again to the Committee for my lack of attendance.

The Financial Secretary to the Treasury should know better, because he has had deep experience of the Department of Energy, and he knows that there are distinct differences between exploration and appraisal and the development stage. What would one be trying to do, either front the point of view of the nation's industrial and commercial interests or from that of future tax revenue? The measure would tie the oil companies at the exploration and appraisal stage. This clause is a backward step and would restrict exploration.

I am not saying that the oil companies are not slick chicks and know how to manipulate taxation. On occasion the Government have been too generous in their taxation policy; I have made that plain. We are talking about trying to entice companies to specific licences in cases where either the consortium as a whole or one or two members on the licence have said, "We have carried out our exploration drilling, but we are in some difficulty and cannot go forward because of cash flow." They then look round to see if they can find someone who will come in. The company that comes in will not necessarily invest cash but may do something in kind. It will drill a couple of holes and get a share of the licence. That is totally in the national interest and seems a sensible way to proceed.

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I take it that all hon. Members received a note from the United Kingdom Offshore Operators Association. It talks about companies A and B and says: 'A' should pay immediate capital gains tax on the £10m expenditure contributed by 'B', which is considered to be a gain by 'A' on 50 per cent. licence disposal to 'B'. Does the company pay on the total £10 million? We must be clear about that.

There is another vexatious problem about which one of the Ministers in the Department certainly ought to know better. Annex Bs are not given away like Omo gift coupons. They have to be analysed in great detail by the Department and the operator or the consortium that is operating the licence. It surprises me that apparently there have been no discussions on this matter between the Department of Energy and the Treasury. I plead with the Government, in the interests not only of the oil companies but of ensuring a much more even development of the North sea, to examine these matters and to have discussions with the oil companies. There is ample precedent for this.

The original Bill on oil taxation was moved by Edmund Dell and envisaged that tax procedures did not start immediately. If my memory serves me right, they started at clause 10 which gave more time for discussion with the oil companies. That was under a Labour Government.

These are delicate and difficult matters and the Minister will not cave in all at once under the pressure of the points that have been made. There are good technical and national reasons and long-term taxation advantages for not inhibiting the oil companies. If they are inhibited, it will inhibit the eventual tax flow from the development of the fields. The Government ought to know better and ought to behave much more sensibly.

The Economic Secretary to the Treasury (Mr. Peter Lilley):

I join other hon. Members in thanking my hon. Friend the Member for Croydon, South (Sir W. Clark) for giving the Committee the chance to debate the two most crucial aspects that are raised by the clause. They are obviously matters of concern to hon. Members in all parts of the Committee. They are the issue of retrospection and the question whether the refusal of roll-over relief inhibits exploration activity. I shall begin by discussing retrospection.

Both the inland Revenue and the oil industry have proceeded for a number of years on the basis that oil licences did not qualify for capital gains roll-over relief. The industry did not like this situation. Indeed, it lobbied annually for the law to be changed to make gains on oil licences eligible for such relief. However, the very fact that such lobbying efforts were made illustrates that there was broad agreement about what the law was—if not about what it ought to be. For example, before the 1983 Budget the United Kingdom Offshore Oil Industry Tax Committee wrote to my right hon. Friend the Chancellor saying: CG rollover relief is not available under Sections 115–121 CGTA 1979 for a capital gain accruing on disposal of an interest in a petroleum licence … UKOITC propose therefore that the law he amended. Similar representations have been made by either Brindex or UKOITC before almost every Budget since then. In previous Finance Bills, my hon. Friend the Member for Croydon, South has put down amendments to change the law on these lines, as have my hon. Friends the Members for Havant, (Sir I. Lloyd), for Devon, North (Mr. Speller), for Wansdyke (Mr. Aspinwall). and for Bedford, North (Sir T. Skeet).

There has been broad agreement about what the law is. The hon. Members for Sedgefield (Mr. Blair) and for Banff and Buchan (Mr. Salmond) said that there was considerable uncertainty about the law. I think that they were referring to another aspect of the capital gains law as it applies to oil licences. It is whether a gain arises on the transfer of an interest in an oil licence when no cash changes hands. That was in dispute until fairly recently, but a settlement was reached and the parties to the settlement agreed that a gain did arise and settled with the Revenue.

Only one company continued to pursue a case with the special commissioners and, as has been recognised, that was Rio Tinto-Zinc. It pursued the separate point about whether such a gain was eligible for roll-over relief. The resultant decision by the special commissioners casts doubt on this long-established application of the law. In that case, the special commissioners determined that an oil licence could qualiy for roll-over relief. Of course, a ruling by the special commissioners applies only to the specific case from which it arose and could be reversed in a higher court. To allow the matter to proceed through the courts would mean a long period of uncertainty and litigation until the courts had determined whether, and if so in what circumstances, gains on oil licence transfers are eligible for roll-over relief. Therefore. the Government announced on 14 May their intention to introduce clause 80 to establish the legal situation beyond doubt.

I well understand the odium that attaches to the word "retrospection". Changes in the law which retrospectively upset the established and accepted legal basis on which people have planned their lives clearly are odious. However, the clause has no such disruptive effect. On the contrary, it reaffirms the legal validity of the established and accepted understanding on which the industry and the Revenue have planned their affairs up to now.

About £ 1 50 million of tax on past gains is at stake. The hulk of this arose from a comparatively small number of sales of interests in developed fields. If these amendments were accepted, they could possibly give rise to an unexpected windfall gain to the companies that sold their interests in a field, and a corresponding windfall loss to the Exchequer and taxpayers. That is not right.

Mr. Douglas

The Economic Secretary should look carefully at the words that he is using. He spoke about "interests in developed fields." A cash flow could be available. It seems that the Minister is asking for tax to be paid at the exploration and appraisal stage and not at the development stage. There is a substantial difference.

Mr. Lilley

That is an important point, and it is an important distinction that has arisen in the debate. As I recall, no hon. Member, nor the industry, has ever argued that there would be any economic benefit or industrial gain from allowing roll-over relief on developed fields. The practical consequences of capital gains tax roll-over relief on oil exploration are restricted to exploration licences.

My hon. Friends the Members for Croydon, South, for Bedfordshire, North, for Northampton, South (Mr. Morris) and many other hon. Members have drawn this distinction, as has the industry, and they have argued that the lack of roll-over relief may inhibit transfers of interest during the exploration stage. I agree that such transfers can be beneficial. It is in the public interest that licences be in the hands of those who are most enthusiastic to develop them and who have the cash to do so.

Sir Trevor Skeet

My hon. Friend has used a very blunt instrument—the Finance Bill—to bring about the change. What happens to the other 50 or 70 prospective claimants who feel that they have a case but who are not as lucky as RTZ? Will they lose out?

Mr. Lilley

If my hon. Friend will contain himself, he may find that there is good news in store for them.

It is desirable that there is no unnatural inhibition of transfers at the exploration stage, not only because we want licences to be in the hands of those who have the greatest interest in developing them and the greatest ability so to do, but so that companies can spread the risk where appropriate.

My hon. Friends pointed out that, typically in these cases, no cash gain arises when a company farms-out in return for the farmer-in agreeing to undertake a programme of work on the block.

Having listened carefully to what hon. Members and the industry have said in the consultations that we have had recently, I am persuaded that a distinction could be made. However, it is not one that can sensibly be sorted out in the compass of this Finance Bill. Accordingly, while we believe that clause 80 should be enacted unamended, I propose to discuss further with the industry over the coming months the possibility of introducing some form of roll-over relief for gains, past and present, on work programme farm-outs at the exploration phase where no cash profit is realised. If those discussions are fruitful, and I cannot guarantee that they will be, the legislation could not be introduced until the spring 1988 Finance Bill.

I hope that my hon. Friends the Members for Croydon. South, Bedfordshire, North, Northampton, South and Erewash (Mr. Rost), as well as Opposition Members, will find that this goes some way towards meeting the points that they have made, and 'that it will reflect not only the work that they have done on the clause this year, but the efforts that they have made in previous years to obtain such relief. I hope that in the light of that my two hon. Friends who have tabled amendments will feel inclined not to press them.

Before I sit down I shall respond to some of the points that have arisen in the debate. It was suggested that the oil industry is not entitled to roll-over relief, but that is not the case. Roll-over relief is available for plant and equipment in the North sea. It is only in regard to oil licences that there has been a general understanding that it was not available.

Another point was whether the RTZ case that was before the special commissioners was a test case. It was not in any sense a test case. The other parties that had been involved in the earlier case as to whether a gain arose had settled, accepted that it did and had not pursued the question whether they were entitled to roll-over relief. As far as I know, there are no outstanding claims for roll-over relief from any company in the North sea, other than the company that is protected by a subsection of the clause.

My hon. Friend the Member for Bedfordshire, North suggested that as a result of the main provisions of clause 80 the law would be affected as far back as 1965. Because there is normally only a six-year period during which back claims can be made, it merely alters the situation for the past six years. If the potential concession that I have announced is satisfactorily agreed, that would apply only to roll-over relief on developed fields.

My hon. Friend the Member for Bedfordshire, North also mentioned that gains at the exploration stage were guesswork. There is an element of estimation, but, as a result of the change in the process of estimating gains that has recently been announced by the Inland Revenue, partly following the settlement relating to whether gains arose, the measured gain will be smaller than was previously thought to be the case.

6.15 pm

The hon. Member for Dunfermline, West (Mr. Douglas) asked whether UKOOA's statement that oil companies would have to pay the full £10 million was correct. Under the recently revised method of valuing farm-out concessions, that is not correct. It may become hypothetical or academic, but they will be liable only for a fraction of the £10 million, which reflects the probability of success.

My hon. Friend the Member for Erewash mentioned the Select Committee report, in which he played a distinguished part. The Treasury has found that valuable and we have read it with care. He will note that the representations that were made to him confirm the general point that I was making, that the industry did not have any doubts about the existence of the law on roll-over relief and that it did not express any doubts about the uncertainty attached to it. That reinforces the general point that I was making with regard to retrospection.

I hope that that covers most of the specific points that have been made.

Mr. Michael Grylls (Surrey, North-West)

The concession that my hon. Friend has given is helpful and practical. In view of that, I do not intend to pursue my amendment. It has been a useful debate and the House is grateful to my hon. Friend for what he has said.

Sir William Clark

We have had an interesting debate and it has shown the advantage and value of such debates.

As the House knows, I am a consultant to Texaco. These debates are valuable because they demonstrate how the implications, technicalities and fiscal changes that harm the industry are sometimes overlooked by the Inland Revenue. I say that with the greatest respect to the Revenue and I am not trying to denigrate it in any way.

With regard to retrospection, the assurances that my hon. Friend the Economic Secretary has given go a long way. In view of the unequivocal assurance that in next year's Budget we will have a clause that gives roll-over relief to the exploration element of the industry and that it will not only apply from 1988, I beg to ask leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Clause 80 ordered to stand part of the Bill.

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