Taxation of North Sea Oil
The Government's objective in taxing North Sea oil operations must be to strike a balance between the nation's claim to a share in the profits from this national resource and the right of those engaged in the risky business of oil exploration and development to a fair return on their efforts. Since my last Budget, world oil prices have increased dramatically. North Sea oil prices, which follow world prices, have risen by more than half, from about $20·70 to about $33·75 a barrel.
This substantial change has greatly favoured the oil companies. I therefore propose, for chargeable periods ending on 30 June next and subsequent periods, to increase the rate of petroleum revenue tax from 60 per cent. to 70 per cent. At the same time, I propose to rectify some anomalies in the PRT rules concerning transfers of North Sea interests between oil companies and the taxation of gas. These are changes that the industry has requested. I also propose to introduce special PRT provisions for fields that span the median line between the United Kingdom and the Norwegian continental shelves.
I have one further proposal on petroleum revenue tax. It relates to the collection of tax. The PRT structure gives companies very early relief for capital expenditure. This means that PRT is not collected until some considerable time after a field has come on stream. The increases in oil prices have greatly strengthened the industry's cash position. I am satisfied that PRT payments can in future be made somewhat earlier. The Petroleum Revenue Tax Act 1980 went some way in that direction. I now propose to go slightly further.
We shall require companies which are liable to PRT for the chargeable period to 30 June 1981 to make at the beginning of March 1981 an advance payment for that chargeable period at a rate of 15 per cent. based on 1980 liabilities. Advance payments for later chargeable periods will be made in the same way but not necessarily at the same rate. These advance payments will be offsettable against normal payments of PRT.
In total, the changes in oil company taxation are expected to bring in an extra £535 million, making a total of petroleum revenue tax, corporation tax and royalties for 1980–81 of rather over £4 billion. We are thus ensuring that the nation as a whole secures a proper share of North Sea profits this year.
North Sea oil adds to national income mainly through increased Government revenues and oil company profits. Though the sums of money are large, we must not exaggerate them. Even in the years of peak production later this decade, no more than 6 per cent. of GNP is expected to come from the North Sea—equivalent to perhaps two years of the kind of economic growth we achieved in the 1950s and 1960s. This makes it all the more important that we should use the oil wisely, with an eye to our long-term economic interests. In particular, we should take the opportunity offered by the growth of oil revenues to bring the level of public sector borrowing steadily down, and this is what our medium term strategy envisages.
In recent weeks there has been a good deal of comment about the profits declared by the clearing banks. Some represent a "windfall" to the banks, which arises from the combination of high interest rates and the fact that interest is not paid on current accounts. The windfall element is not a sign of enterprise or efficiency, as the banks themselves recognise. But it is equally irrational to attribute these profits to some wickedness on the part of the banks. They need the major part to strengthen their capital base, which would otherwise have been eroded by inflation.
There could, of course, be a case in principle for a special tax related to the windfall element in these profits, and I shall be considering that further. However, it has not yet been established that such a tax is either practical or entirely desirable in today's conditions.
Leasing, in which the banks have been heavily involved, has grown rapidly in the past few years. Underlying that growth has been the 100 per cent. capital allowance, which leasing companies can claim on assets bought for leasing. The present rules apply to equipment leased to United Kingdom industrial and commercial companies, which would qualify in their own right for these tax incentives if they were to purchase the equipment for themselves. I do not propose any changes in transactions of that kind. Leasing finance of that sort has become an important—in many cases an essential—source of finance for investment in manufacturing industry. However, under the present tax rules these 100 per cent. allowances apply to all leased equipment. Thus, leasing effectively extends the benefits of tax incentives to certain users—such as overseas companies, certain public bodies in the United Kingdom, and consumers—who would not qualify for tax incentives if they had purchased the equipment themselves.
I propose to end those anomalies. As from 1 June expenditure on leasing involving these users will normally qualify only for 25 per cent. tax allowances. There will be transitional provisions for leased television sets. Though the extra revenue in 1980–81 will be negligible, the saving in a full year will be over £200 million.
These provisions will replace, from 1 June, the stopgap provision for foreign leasing which I proposed on 23 October, when announcing the abolition of exchange control. They will also include measures to end the growing abuse of leasing by individuals for tax avoidance purposes. However the Motability scheme for leasing cars to disabled people will continue to benefit from the existing provisions.
I have already referred to the difficult problems that many companies will be facing in the coming year, with great pressure on their liquidity. I have considered how far it would make sense for the Government to help them by major tax reductions. Such help could be provided only at the expense of much higher personal taxation or higher borrowing and thus higher interest rates. I believe that the greatest service which I can perform for business is to reduce the burden of financing the public sector and thus to get down interest rates. I have, therefore, given precedence to that objective.
Corporation tax and stock relief
However, there is, as I observed last June, a clear need to re-examine the corporate tax structure. I have already undertaken that there will be full consultation before changes are made. I understand that the accountancy profession will be publishing its new standard on current cost accounting later this month. We will, therefore, publish a Green Paper later this year, reporting the results of our general review of the present corporation tax provisions.
Meanwhile, I do not think that it would be right to change the rate of corporation tax or to make major changes in its structure. But I do propose one important concession to help companies which face a particular difficulty. A number of businesses in manufacturing, and certain areas of distribution, are concerned about the recovery charges which they will face as a result of reductions in stock levels likely to arise either because of the general pressure on liquidity, or in some cases as a result of the steel strike.
I propose, therefore, to allow a substantial part of the stock relief recovery charge consequent on a reduction of stocks to be deferred for one year. This change will be subject to certain conditions, dependent on the extent to which stocks are financed on trade credit. The new relief will be given for business accounts ending after 1979–80. The cost is estimated at £210 million in 1980–81 and a further £125 million in 1981–82. While further relief is justified in the cases to which I have referred, there is criticism that the present stock relief may confer an unjustifiable advantage in certain circumstances. This is a complex matter on which detailed consultation will be needed, but my intention is to legislate next year in respect of accounts on which tax will generally be payable on 1 January 1982. This will give enough time for consultation.
I propose another modest measure affecting business taxation. I intend to provide relief for redundancy payments in excess of the statutory minimum paid when a business stops trading.