HC Deb 16 March 1993 vol 221 cc179-80

One of the main objectives of this Government's tax reforms has been to eliminate tax rules which distort investment decisions. This was the driving force, for example, behind the far-reaching reform of the corporation tax system in 1984. Today I wish to carry this principle through into another important sector of the economy—the North sea, and in particular petroleum revenue tax, or PRT.

When PRT was introduced in 1975, the North sea oil sector looked very different—oil prices were very high and the typical oilfield was relatively large. The purpose of the new tax was to ensure that the Exchequer got its fair share of the large profits to be made in the North sea, while companies were left with a reasonable return on their investments.

However, as the North sea has developed, the PRT regime has come to look increasingly anachronistic. As profits in many existing fields attract a marginal tax rate of over 83 per cent. there is little incentive for companies to keep costs under control or for additional investment in existing fields. Moreover, as a result of the uniquely generous allowances that are available, the Exchequer is no longer getting a fair return. In 1991–92, the PRT regime actually cost the Exchequer £200 million.

As many in the oil industry recognise, this is neither reasonable nor sustainable. The North sea tax regime has to be placed on a clear long-term footing, so today I intend to set out a major reform which will raise revenue in the medium term and give the oil industry a stable framework to plan ahead.

I propose from 1 July this year to reduce the PRT rate on existing fields from 75 per cent. to 50 per cent., and for new fields I propose with effect from today to abolish PRT entirely.

It follows that, for new fields, I also intend to scrap all the allowances that go with the existing PRT system, including, for example, relief for exploration and appraisal expenditure that can be set against PRT on existing fields: but contracts entered into before today for exploration and appraisal will continue to get relief against PRT on existing fields for the next two years. Allowances that can be claimed within existing fields will remain essentially unchanged.

This reform will greatly simplify the tax regime for new fields, disapplying at a stroke some 300 pages of complex legislation; and it means that the only tax on new oil fields in the North sea will be corporation tax—at 33 per cent., the lowest rate of business tax in the industrialised world. Britain will have a competitive tax regime which strikes a reasonable balance between the interests of the industry and those of the nation as a whole.

The paradox of this reform is that, despite the abolition of PRT for new fields, and the reduced rate for existing fields, after 1993–94 it will actually raise revenue for the Exchequer. I expect the yield in 1994–95 to be some £300 million and in the following year to be some £400 million.