Allowance Of Expenditure Onlong-Term Assets
I beg to move Amendment No. 29, in page 9, line 19, leave out
and (c) the asset is not a mobile asset '.
With this we are to take Amendment No. 35, in page 10, line 1, leave out subsection (6).
I believe that the Government are confused on the subject of mobile assets. The normal test for the reliability of a long-term asset is that an estimate has to be made of the length of time it will be used in the field, which is represented as a proportion of the life of the asset. The appropriate proportion of the cost is given as a capital allowance. If an estimate of the length of time it will be used for the field cannot be made, we must look at the past use of the asset. That applies to all assets except mobile assets. There is no possibility of applying to mobile assets such as semi-submersible drilling rigs and surface vessels the first leg of the test, which is to estimate what proportion of their life is likely to be spent in the field. We are driven back to the other test where only the capital allowance is given, and with it the uplift, by reference to the past use of the asset.9.0 p.m. I say that the Government have got themselves into a great deal of confusion because they seem to equate mobile assets with those which are intrinsically of a category where it is impossible to state with any degree of certainty whether they will be used for the field. That does not follow. There is no overriding reason why an asset which happens to be mobile is any more likely to be an asset the future use of which can be guessed than an asset which might be for the time being fixed. Modules may be fixed on to a platform, it may be that both gas and oil are being dealt with, the gas runs out and merely oil is being extracted. The gas equipment is not a mobile asset, however. The module is fixed with a crane and has to be removed with a crane, yet it is permissible to make an estimate or guess. Even if it is a semi-submersible rig intended eventually to occupy a permanent position as a production platform, simply because it starts by being mobile it is precluded from the test. That is what the Bill says. However, in a letter which I received from the Minister of State he hedged. In the last paragraph of his letter of 26th February he said:
In other words, if it is possible to say in relation to a single field that the asset is used for that field, the allowance is given for the lot, whether it is mobile or not. This represents a very substantial change in what I understood the hon. Gentleman to say in Committee about the treatment of mobile assets. As I read the paragraph of the hon. Gentleman's letter which I quoted, there is no question of limiting the capital allowance by reference to past use of the asset. Clearly in the case of a mobile asset the hon. Gentleman intimates in his Letter that the Inland Revenue will be prepared to say that the whole use of that asset will be with that field and, therefore, that it can all be allowed straight away. It all comes back to the fact that some mobile assets will be treated as if they were not mobile assets. The Bill is in error in ever drawing a distinction for mobile assets and making a separate category of them. The true categories are those for which it is possible to make an estimate and those for which it is not. We accept that, and we accept that it is necessary for the protection of the Inland Revenue that where an estimate cannot be made of how far the assets are to be used in the field, the second test should be applied by reference to past use. But there is no need to take a separate category of mobile assets and preclude them from the operation of the first test because, as the Minister said, in those circumstances he would treat them as though they were not mobile assets and use the normal test. The Government have got themselves into total confusion. They could get out of it by accepting these two amendments and taking out of the Bill any separate reference to mobile assets. Their position is not weakened if they are dealing with a mobile asset. Where an accurate guess cannot be made, the case falls into the second category. If it is a mobile asset but a guess can be made, it comes under the paragraph of the hon. Gentleman's letter which I have read and it will come under the first test. However, the Bill does not allow that. Apparently the Government's view is—once a mobile asset, always a mobile asset, unless an extra-statutory concession is made. This is a nonsensical way to legislate, and I hope that the Minister will accept the amendments." Where the mobile asset has been used solely for the field from the time of acquisition, the rules do not of course make any difference whatsoever ; they only affect the timing where an asset has been brought in from elsewhere. Thus if the Condrill is purchased specifically for a field in the North Sea there will be no restriction on the allowance."
The right hon. Gentleman was correct in one point—there is some confusion. He has failed to understand the implications of this part of the legislation. The test is the actual past use and the estimated future use of the field. That is a reasonable test for the fixed assets. I am sure the right hon. Gentleman will agree with me.We know what the past use of a fixed asset was and it is easy to estimate its future use. The future use of a mobile asset is more speculative. We can say what operation a mobile asset will perform but we cannot say in which field it will be used. This is the test that we do not have for mobile assets and which we do have for fixed assets. In the case of a fixed asset, if a piece of equipment is anchored to the seabed, we know what its future use will be. In the case of a mobile asset we know what its past use was—this is always known—but we do not know where the mobile asset will be used. It is location as well as its function that is in some doubt. This is why we have rules for accepting the speculative nature of future use. Although the rules need to be different, in the end allowances ate payable. It is a question of timing. In the absence of the certainty to which I have referred, the Bill, as drafted, should proceed.
I do not accept the Minister of State's argument. He has not addressed his mind to the point, so perhaps we had better leave the amendment to be negatived.
Amendments made: No. 34, in page 9, line 46, at end insert—
' Provided that, where the asset was not used for any purpose in the period between the incurring of the expenditure and the asset's first use in connection with the field, the expenditure shall for the purposes of this subsection be treated as having been incurred on the date when the asset was first used in connection with the field '.
No. 38, in page 10, line 7, at end insert—
. Provided that, where the asset was not used for any purpose in the period between the incurring of the expenditure and the asset's first use in connection with the field, the expenditure shall for the purposes of this subsection be treated as having been incurred on the date when the asset was first used in connection with the field '. — [ Mr. Patrick Jenkin.]
I beg to move Amendment No. 41, in page 10, line 11, leave out from including ' to end of line 12 and insert—' the earlier of the following periods, that is to say—
With this amendment, it will be convenient to discuss Government Amendment No. 207, and the following amendments:
No. 56, in Clause 5, page 12, line 19, after with ', insert the earlier of ( a)'.
Government Amendment No. 208. No. 57, in page 12, line 20, at end insert:
(b) the day on which any sum is received as mentioned in subsection (5) below '.
No. 58, in page 12, line 32, leave out Paragraph 2 ' and insert ' Paragraphs 2 and 3 '.
No. 109, in Schedule 4, page 42, line 19, leave out paragraph 1.
No. 110, in page 42, line 39, after ' exceeds ', insert the greater of ( a)'.
No. 111, in page 42, leave out lines 45 to 10 on page 43 and insert—
' ; and
(b) the smaller of the following amounts that is to say—
(i) the expenditure which would have been incurred in the acquisition of the asset if the transaction first-mentioned in this sub-paragraph had been a transaction between independent persons dealing at arm's length ; and (ii) if, in a previous transaction to which this paragraph applies, expenditure allowable under section 3 or 4 of this Act has been incurred by a person connected with the person first-mentioned in this subparagraph in the acquisition of the asset, the expenditure which would have been incurred in that previous transaction (or, if there has been more than one such transaction, the earlier or earliest of them) if it had been a transaction between independent persons dealing at arm's length, increased by an amount equal to any expenditure incurred by any person since that acquisition in enhancing the value of the asset.
(2) Where an asset is disposed of in a transaction to which this paragraph applies, the amount or value of the consideration received or receivable for the disposition shall be treated for the purposes of paragraph 4 below as being an amount equal to the expenditure which under sub-paragraph (1) above the person first-mentioned in that sub-paragraph is treated as having incurred.
(3) Section 4(13) of this Act applies to the preceding provisions of this paragraph ; and those provisions shall, with any necessary modifications, apply in relation to a disposal of an interest in an asset as they apply in relation to a disposal of an asset.
(4) This paragraph applies to any transaction between connected persons (within the meaning of section 533 of the Taxes Act).'
No. 112, in page 43, line 6, leave out from 'Act ' to the end of line 10.
No. 113, in page 43, line 11, leave out sub-paragraph (3) and insert—
' (3) Sub-paragraph (2) above shall, with any necessary modifications, have effect in relation to expenditure incurred by a person—
Clause 114, in page 43, line 13, at end insert:
'3. — (l) Where a person has incurred expenditure in the acquisition of an asset in a transaction to which this paragraph applies, he shall be treated for the purposes of sections 3 and 4 of this Act and paragraph 5 below as having incurred that expenditure only to the extent that it does not exceed the expenditure which would have been incurred in the acquisition of the asset if the transaction had been a transaction between independent persons (not being associated persons) dealing at arm's length.
(2) Where an asset is disposed of in a transaction to which this paragraph applies, the amount or value of the consideration received or receivable for the disposition shall be treated for the purposes of paragraph 4 below as being an amount equal to the expenditure which under sub-paragraph (1) above the person mentioned in that sub-paragraph is treated as having incurred, or would be treated as having incurred if section 4 of this Act applied to the expenditure incurred by him in that transaction.
(3) Section 4(13) of this Act applies to the preceding provisions of this paragraph ; and those provisions shall, with any necessary modifications, apply in relation to a disposal of an interest in an asset as they apply in relation to a disposal of an asset.
(4) This paragraph applies to any transaction between associated persons ; and for the purposes of this paragraph a person is associated with another person if—
(a) they are both participators in the same field ; or (b) one of them is a participator in that field and the other is connected (within the meaning of section 533 of the Taxes Act) with another participator in that field.
(5) Sub-paragraph (1) above shall, with any necessary modifications, have effect in relation to expenditure incurred by a person—
Government Amendments Nos. 209 and 210.
No. 115, in page 43, leave out lines 38 to line 25 on page 44 and insert:
' amount of the expenditure allowable under sections 3 and 4 of this Act shall be increased or reduced in accordance with the following provisions of this paragraph.
(2) If the appropriate amount exceeds that proportion of the expenditure incurred as mentioned in sub-paragraph (1) above which (taking into account any adjustments made under section 4(9) of this Act) has been allowed on claims made for earlier claim periods falling within the relevant period, the excess shall be allowable under section 4 of this Act on a claim for the claim period in which the disposal is made.
(3) If the appropriate amount is exceeded by that proportion of the expenditure incurred as mentioned in sub-paragraph (1) above which (taking into account any adjustments made under section 4(9) of this Act) has been allowed on claims made for earlier claim periods falling within the relevant period, the total amount of the expenditure allowable under sections 3 and 4 of this Act on a claim for the claim period in which the consideration is received or receivable shall be reduced by an amount equal to the excess '.
Government Amendments Nos. 211 and 212.
No. 118, in page 44, line 30, leave out sub-paragraph (6) and insert—
' (6) For the purposes of this paragraph
(a) "the appropriate amount" is an amount equal to the excess of the expenditure incurred in acquiring, bringing into existence, or enhancing the value of the asset over the amount or value of the consideration received or receivable for the disposition where the amount of that expenditure exceeds the amount or value of that consideration, and is otherwise nil ; (b) where— (i) the disposal is made in a transaction between connected persons ; (ii) the expenditure incurred in the acquisition of the asset in that transaction is not expenditure to which section 4 of this Act applies (or would apply apart from the proviso to subsection (1) of that section) ; and (iii) the consideration received or receivable for the disposition is less than the market value of the asset at the time of the transaction, the consideration shall be treated for the purposes of this paragraph as being an amount equal to that market value ; (c) "the relevant period" means the period consisting of the claim period for which the excess mentioned in sub-paragraph (2) above is allowable or the claim period for which the expenditure allowable falls to be reduced under sub-paragraph (3) above (as the case may be) and each earlier claim period back to and including that in which the expenditure incurred as mentioned in sub-paragraph (1) above was incurred ; and (d) section 533 of the Taxes Act (connected persons) shall apply.'
No. 119, in page 44, line 32, at end add—
' 5. — (1) Where the total amount of any expenditure allowable under section 3 or 4 of this Act is reduced under section 4(9) of this Act or paragraph 4 above upon either—
(a) the disposal of any assets (otherwise than in a transaction between connected persons) ; or
(b) the permanent cessation of use of any asset in connection with an oil field.
the amount falling to be taken into account under section 2(9)( b)(ii) or ( c)(ii) of this Act by reference to that expenditure shall not be reduced where the disposal or the cessation of use occurs ten years or more after the end of the half year in which the expenditure incurred in acquiring, bringing into existence or enhancing the value of that asset was so incurred ; and, where the disposal or cessation of use occurs less than ten years after the end of that half year, shall be reduced to the amount mentioned in sub-paragraph (2) below and shall not be otherwise reduced.
(2) The amount mentioned in sub-paragraph (1) above is an amount equal to the relevant fraction of the amount which under subparagraph (1) above would have fallen to be taken into account under section 2(9)( b)(ii) or ( c)(ii) of this Act if the disposal or cessation of use of the asset had occurred ten years or more after the end of the half year mentioned in that sub-paragraph.
(3) For the purposes of sub-paragraph (2) above "the relevant fraction is that fraction of which the numerator is the number of complete half years in the period beginning with the day on which the expenditure mentioned in sub-paragraph (1) above was incurred and ending with the day on which the asset was disposed of or ceased permanently to be used in connection with the field and the denominator is 20.
(4) For the purposes of this paragraph—
(a) "half year" means a period of six months ending at the end of June or December ; and
(b) section 533 of the Taxes Act (connected persons) shall apply '.
Government Amendment No. 213.
No. 126, in page 45, line 29, leave out (1) ' and insert (3) '.
This is a long list of amendments. I do not propose to speak to each one.Amendment No. 41 has, to some extent, already been met by Government Amendments Nos. 209–212. Schedule 4(4) was under severe criticism in Committee. These amendments are the Government's reaction to that criticism. Their effect could be rather confusing. If a participator sells an asset, his allowable expenditure will suffer a double restriction. The original paragraph 4 imposed a balancing charge on the participator, in addition to a restriction imposed already by Clause 4. The Government amendments remove this overlap, but in an unexpected way. The intention seems to be that the balancing charge mechanism will not apply at all. For example, it should not apply where the purchaser is a participator in the field or a person connected with the participator. If this is the intention, there is a technical defect in line 1 of Amendment No. 210. The words a participator in the field or "seemed to have been inadvertently omitted. In many cases, allowable expenditure will be recaptured on disposal of assets not by reference to the selling price but instead, under Clause 4, by reference to the period that the seller has used the assets in the North Sea as compared with the asset's total useful life. This makes for consistency with the treatment under Schedule 4 of transfers of assets between associated companies or companies which are participators in the same field and underlines the Government's apparent determination not to make the improvements in those areas which are sought in Amendments Nos. 110–114. The effect as a whole does not make for equity for buyer and seller. Amendments Nos. 56 and 657 are now substantially met by Government Amendments Nos. 207 and 208. Amendments Nos. 115, 118 and 126 sought to amend Schedule 4 and Clause 4. I should like to go into complicated detail on Amendments Nos. 209 and 210. I have already outlined the difficulties which they could create. I suggested that some words could have been omitted in line 38, on page 43. If they have been omitted intentionally, the effect—
Will the hon. Gentleman repeat the words?
If, in Amendment No. 210, before sub-paragraph (c) the words "a participator in the field or" have been omitted intentionally, Schedule 4(4), which is the only provision applying to a balancing charge mechanism on sale of assets will apply only where a purchaser is not connected with a participator—that is, presumably, any participator in any field.In our words, and subject to what comes below, it will hardly ever apply, since it is highly probable that a likely purchaser will have an associated company which is a participator in one of the North Sea oil fields. Paragraph 4 will apply to a seller—that is, it will effectively impose a balancing charge on him if the purchaser, for example company A, is itself a participator in the North Sea oil field but is not connected with any other person who is a participator and will not apply if company A is associated with a further company which is also a participator and will not apply if, instead, the seller disposes of the asset to a company associated with company A. I apologise for that rather complicated harangue, but this is what will happen if those words have been purposely omitted from the Minister's amendment. This could have far-reaching complications. If the Minister cannot grasp all the implications of this, perhaps he will agree to take the amendment away and arrange elsewhere to have it put right.
The hon. Member for Ross and Cromarty (Mr. Gray) was right when he pointed out the way in which Amendments Nos. 56 and 57 have been met by Amendments Nos. 207 and 208. The point he makes is a complex one. 1 would like to take advantage of his kind invitation to study this rather carefully. I age that it is a problem. I understand that there is a serious difficulty in taking the kind of action that would meet with his approval.Dealing with Amendments Nos. 109 and 114, if a participator incurs expenditure and it is allowed for PRT, and that participator sells the asset at a higher cost, the intention of the hon. Gentleman is that the allowance received by the person who has spent money on the asset will be refunded. When he sells the asset, when the allowance is repaid, the higher allowance—assuming that the asset has increased in price—is substituted. The argument is that there is no equity disadvantage to the Revenue. The disadvantage is that the original allowance was payable for the expenditure and there are a number of problems which follow.
The purchaser would be perfectly entitled to buy a different asset at the higher price and if he did so he would get the full allowance. What possible difference can it make if it happened to be an asset for which someone else has had an allowance which is fully repaid? I do not understand the difficulty. If the purchaser could buy an entirely different asset of the same sort, having to pay a higher price, why cannot he get an allowance for it?
The right hon. Gentleman is seeing only one possible consequence. I am sure that he will be the first to admit that there is more than one possible consequence to the selling of a piece of equipment. The seller may not wish to replace it or to purchase any other piece of equipment. There are a number of other possibilities that might occur to a seller.I had better say something about Schedule 4. What is provided for is that where a participator has incurred allowable expenditure on an asset, subsequent expenditure by another participator on acquiring the same asset will not be allowed. If a new participator comes into a field and acquires a share of the assets, the original cost of those assets stands as an allowable deduction and anything the new participator pays to acquire his share is left out of account. The proposal in these amendments is contrary to this policy. It would enable the allowable costs for PRT to be much increased whenever a new licensee bought his way into a field while apparently limiting his charge on the seller to the original cost. This is one of the consequences the right hon. Member for Wan-stead and Woodford (Mr. Jenkin) did not deal with. This would open up the whole question of the purchase of interest in fields. It would be wholly against what we had in mind when framing the legislation. If we were to permit each participator to make available assets, not at cost but at current market value it would merely encourage concerted arrangements under which each participator would write up the cost of his assets which he brought into the deal whether by way of sale or by hire. There are these other consequences. I am sure we can all think of more. Part of the Opposition's responsibility is to make sure that the revenue is not eroded. I know of their interest in the general point. They are happy to see the revenue eroded for certain individuals and interest groups in this country. If these groups were to obtain a larger proportion of the revenue, there would be a net loss to the British people. I hope that, looking at the matter in this way, the Opposition will take a more balanced view than they have shown on a number of occasions.
I am grateful to the Minister for dealing with the problem in some depth. The hon. Gentleman accepts that there is a problem. We shall want to study carefully what he said in reply to this matter. However, I hope that, after having had time to deliberate, he will still consider doing something in another place. In the meantime, we accept and will carefully study what the hon. Gentleman said. I hope that this will not necessarily be the end of the matter. I do not wish to withdraw the amendment.
Amendments made: No. 207, in page 12, line 9, after "then ", insert:
' (a) subject to paragraph (b) below,'.
No. 208, in page 12, line 20, at end insert:
(b) if a subsequent disposal of the asset by that person otherwise than to a person connected with him gives rise to the receipt of a sum that falls to be taken into account under subsection (5) below, being a sum not less than the price which the asset might reasonably have been expected to fetch if sold in the open market at the time of the disposal, paragraph (a) above shall apply with the substitution, for the reference to the day on which the asset's useful life is reasonably likely to end, of a reference to the day on which the disposal was made '. — [Mr. Dell.]
I beg to move Amendment No. 171, in page 12, line 22, at end insert:
The amendment ensures that the same expenditure shall not be allowed twice as abortive exploration expenditure. I am sure that the amendment will commend itself to the House.(2A) Expenditure is not allowable under this section in connection with an oil field if, or to the extent that, it has been allowed under Schedule 7 to this Act in connection with any oil field '.
Amendment agreed to.
Amendments made: No. 188, in page 12, line 26, leave out such strata "' and insert:
the end of sub-paragraph (iii)'.
No. 172, in page 13, line 5, leave out ' 75 ' and insert 51 '.
No. 173, in page 13, line 9, leave out 75 ' and insert 51 '.
No. 174, in page 13, line 15, leave out from of ' to end of line 16 and insert:
' whichever of the following periods ends later that is to say—
(i) the earliest chargeable period in which the company which is a participator in the old field in question was a participator in that field ; and
(ii) the chargeable period (for that field) in which the expenditure was incurred,
(or, if they are the same period, with the end of that period); and '.
No. 146, in page 13, line 18, leave out Clause 6. — [ Mr. Dell.]