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Allowance Of Expenditure (Other Than Expenditure On Long-Term Assets And Abortive Exploration Or Development Expenditure)

Volume 888: debated on Wednesday 19 March 1975

The text on this page has been created from Hansard archive content, it may contain typographical errors.

Amendments made: No. 185, in page 7. line 9, after oil ', insert won from the field that was so '.

And No. 186, in page 7, line 12, at end insert:

' ( ff) the initial treatment or initial storage of oil won from the field ;

( fff) disposing of any oil won from the field which is disposed of crude in sales at arm's length ; '.—[ Mr. Dell.]

I beg to move Amendment No. 160, in page 7, line 36, at end insert:

' or has been allowed under Schedule 7 to this Act in connection with any oil field'.
The amendment deals with the problem of companies going back into fields they have abandoned. It removes the risk that the same expenditure might be claimed both as abortive exploration expenditure and for a field. As the Bill stood before the Committee stage this would have been virtually impossible. Since abortive exploration expenditure was defined as expenditure which cannot become allowable for any field, and following representations that on this definition it could have been argued that no expenditure was indisputably abortive the amendment was put down.

The possibility was put to us that a company might go into a field, might abandon it and might subsequently reenter. It is to deal with examples of this kind that the amendment has been introduced.

The amendment appears to us both sensible and necessary for the protection of the revenue.

We have no objections to it, and I am grateful to the Minister for his explanation.

Amendment agreed to.

Amendment made: No. 187, in page 8, line 9, at end insert:

(iii) a building or structure used or to be used for initial treatment or initial storage of oil ; or '.—[ Robert Sheldon.]

I beg to move Amendment No. 167, in page 8, line 17, at end insert:

' but nothing in paragraph (e) above shall be taken to apply to a payment made by a participator in pursuance of a contract whereby expenditure incurred for any of the purposes mentioned in subsection (1) above is to be shared between that participator and any of the other participators in the field'.
This amendment meets the point that was made by the hon. Member for the New Forest (Mr. McNair-Wilson) in Committee. It has the peculiarity that it has the same number as the amendment which corresponded to it in Committee. It would allow expenditure incurred for developing a new field where under the terms of agreement the participator would be entitled to a share in the field. The amendment would allow him to go ahead and develop it. As worded, the paragraph disallows expenditure incurred by a new participator in developing the field. The amendment ensures that the clause will not have this effect.

We welcome this Government concession on the "farming-in" point. It is, as the Minister said, a coincidence that it has exactly the same number as the amendment we moved in Committee, and perhaps there is some significance in that. The amendment broadly meets the point we raised and should help those participators who jointly share in the benefits of another company's work in a field.

Amendment agreed to.

I beg to move Amendment No. 23, in page 8, line 17, at end insert:

Provided that nothing in paragraphs (d) and (e) above shall prevent the allowance of any amount payable under an agreement made before 19th November 1974 and paid not later than six years after the date on which tax is first due on the profits from the field'.
The amendment is designed to meet a point which I hope we can prevail upon the Government to accept. We discussed it at length in Committee and referred to it again this evening, and it concerns the provision in Clause 3 for the disallowance of interest. We have also discussed with that point the related provision for the disallowance of payments which are output-related. The amendment is directed to the latter point.

In Committee we argued that it was necessary, in the financing of fields, that companies which could not raise money on their balance sheets but had to go for project financing—for off-balance-sheet financing—should have the maximum flexibility to finance their loans in ways which might be unconventional, certainly unconventional outside the oil industry. One way in which this has been done, both overseas and certainly in one case in this country of which I know, is that the payments made to the companies which put up the finance partly in the form of fixed interest and partly in the form of payments are related to output. The amendment is directed to the latter category.

The Government have said, and we regret—we voted on the matter in Committee but we have not sought to raise it on Report—that such payments should not be allowed. We proposed in the amendment that disallowance should not operate retrospectively so as to disallow payments made under agreements arrived at before the Bill was published. Agreements have been entered into—for example, agreements for the Piper Field, some details of which no doubt have been published, although I have not seen the agreements—providing for off-balance-sheet financing, for project financing, with part of the payments related to the output from the field. Such an agreement was made during the election. The Minister of State and I had an exchange on this matter during the Second Reading debate.

The effect of the provision in the clause which we seek to amend is to ensure that those payments are not allowed for PRT but that the company must pay PRT before deduction of the royalty payments. That seems to us to be monstrously unfair. This is the only complete off-balance-sheet financing package which the oil industry has been able to nego- tiate. If. as I understand is the case, a substantial part is in the form of payments which are not allowed and presumably, therefore, are intended to be covered by the uplift, it is very unfair because a company which did not have to make any payments would be equally entitled to the uplift so that a company which found it necessary, as happened. I understand, with Thomson Scottish, to raise but was unable to raise the necessary finance to develop the field on its balance sheet had to make an agreement of this sort.

The House has always resolutely set its face against retrospective fiscal legislation save only if there has been something in the nature of a blatant anti-avoidance device. There people may reasonably take the view that the taxpayer risks legislation to close the loophole in a way which may defeat his expectations. Here the taxpayer had no reason to believe that this form of payment would be hit at in the way proposed in the Bill. It is an important matter on which I hope the Minister of State will give us some comfort.

8.45 p.m.

The amendment covers a point which was partly dealt with in Amendment No. 167. The concession made in Amendment No. 167 relates to a harder aspect of this general case, the position where the terms of entry into the field are allowed for the reasons we gave and are exceptional when the agreement is dependent on developing the field. We are concerned here with the more general case where oil-related payments are to be made, and these are equivalent in effect to profit-sharing arrangements. We have to devise means of ensuring that there is no loss of PRT, as clearly there would be with an arrangement of that kind.

It may be said that that could be overcome by allowing the payer to deduct the PRT from his oil-related payments. If I recall correctly, this matter was discussed in several exchanges in Committee. There are some agreements of that kind which contain a provision enabling the licensee to recoup PRT on the oil-related payments. This may be a matter which the right hon. Gentleman has not considered before, but there is a probability that the claim for repayment of PRT might come under the double taxation agreements and as a result there would be a loss of revenue to this country. For that and other reasons which I have given, we are unable to accept the amendment.

I realise that the Minister of State is bound to follow the arguments he addressed to the Committee on the same point. His reference to double taxation agreements does not take us far. The company to which I referred is a United Kingdom resident company—as are all licensees. The company operates in this country and does not remit dividends abroad.

The Minister in Committee said that it might be possible to find a way whereby the payer could deduct PRT even if that were confined only to cases in which agreements had been made before the Bill came into operation. We accept that for the present the Government have set their face against any allowance of interest or similar kinds of payment, but that should not operate to defeat existing rights under agreements which pre-date the publication of the Bill. The Minister said:
"I would ask the right hon. Gentleman, in his present spirit of active co-operation "—
I always show a spirit of active co-operation.
"at least, he has gone as far as to identify the problem that we both faceif he has any appropriate means to suggest whereby we may collect the tax, we shall listen with interest In the absence of such effective means, however, I am unable to accept the amendment." — [Official Report, Standing Committee D, 30th January 1975 ; c. 523-24.]
That is a matter to which we should address our minds in the next few weeks or months. No doubt we shall have an opportunity in Finance Bills this year, next spring or next summer—we seem to have three or four such Bills a year—to amend the tax. There is a genuine hardship.

However, in view of what the Minister said it would not be right to press this matter, though I stress that there is a problem on the retrospective element.

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendments made: No. 168, in page 8, line 28, after for ', insert:

, or acquiring an asset or an interest in an asset to be used for the purpose of,'.

No. 169, in page 8, line 30, leave out for '.

No. 232, in page 8, line 31, at end insert ' or

( d) providing any installation for the initial treatment or initial storage of oil won from the field: '.

No. 239, in page 8, leave out lines 32 and 33 and insert:

' but expenditure incurred in hiring an asset shall not so qualify unless the asset is used in carrying out works for a purpose mentioned in paragraph ( a), ( b) or ( c) above or works for the provision of any such installation as is mentioned in paragraph (d) above '.

I beg to move Amendment No. 240, in page 8, line 37, at end add:

' (7) The Treasury may from time to time by order with respect to expenditure allowable under this section add expenditure on any purpose other than those specified in subsection (1) above as allowable expenditure; and any such order may contain provision for consequential relief from tax and may from time to time be varied or revoked by a new order under this subsection '.
We have already dealt with the pattern of expenditure allowance and have touched on the fact that, unlike any other tax which we have considered, the Bill decides the items of expenditure which are allowable and disallows everything else. I shall not repeat the arguments made in Committee, but despite all the careful thought which has been given to the Bill by Ministers and by the Treasury, we cannot be absolutely confident that we shall succeed in sweeping into the provisions of Clause 3 all the items of expenditure which should be allowed.

I am grateful to the Minister of State for letting me see a copy of the letting written by Mr. Dalton of the Inland Revenue to the Oil Industry Tax Committee setting out the kind of expenditure which the Inland Revenue thinks would be allowed. But I am sure he will recognise that it is one thing for an official in the Inland Revenue to give an indication of the kind of expenditure he would expect to be allowed and another thing to consider what happens when a particular case arises and is challenged and tested in the courts and if the courts then have to look at the wording of the legislation. We need a safeguard or long-stop, to give the Government power to take action if they find that, inadvertently, they have left out of the Bill something which should have been included. We should not have to wait for the next Finance Bill to put that right but should be entitled to make an order to add an additional item to Clause 3—in the same way as, in Committee. we added the provision for redundancy payments. Such an order would give the Government power to take action. After the Bill has left the House tonight, it will be too late to do anything about the matter in this legislation. We feel that it is a reasonable caution to have an order-making power.

I am grateful for the kind words uttered by the right hon. Member for Wanstead and Woodford (Mr. Jenkin), who talked of the careful consideration which the Government had given to the Bill. I certainly endorse those remarks.

This is an attempt by the Opposition to say that something may have been omitted, although they are unable to pinpoint it. We have asked them repeatedly to tell us where the Bill falls short of any provision which might be required. We have received no reply, except that we should permit ourselves to take action if we find that we need extra measures. Words to that effect are always listened to sympathetically by any Government. If we had devised a list of articles or pieces of equipment for which an allowance should be given, the right hon. Gentleman would be right in thinking that everything had been covered and that nothing had been overlooked.

We are not concerned with a list of items. We are concerned with purposes. In discussing the intent we can more readily achieve comprehensiveness than with a list of items. When we haw, asked those in the oil industry or the Opposition what purposes have been omitted there was no answer, for the good reason that it would be difficult to give such an answer without fundamentally changing what we wished to allow. From time to time Finance Bills change the intent. Since we have that longstop, I think it best to leave the matter there.

I recognise the familiar arguments on this point which were addressed to us in Committee. This is not a point of any significance. However, it would seem to me to be a minor improvement and a useful safeguard to add to the Bill. The problem is not that the Government have not included a list of items. The problem arises because the Government have adopted an inclusive instead of an exclusive test such as that for income tax, profits tax and corporation tax. Allowance should be made according to ordinary accounting principles, unless specifically prohibited by the Bill. Under the Bill allowance is given only if the items come within Clause 3(1). Nevertheless the hon. Gentleman is right. There is a Finance Bill every year, if not two or even three. If we find that we have not thought of everything a change can be made in a later Finance Bill.

Amendment, by leave, withdrawn.