The right hon. Gentleman raises an important question. I hope that the Minister addresses it in his response. I will come on to that issue.
In May, a Reuters report on these measures suggested that HMRC had
“allowed an industry with annual revenues of 2 billion pounds to pay almost no corporation tax for two decades”.
It also suggested that such arrangements have allowed drilling operators in the North sea
“to operate almost tax free for 20 years or more”.
It would be useful to know why the Government are acting now on those arrangements. I hope that the Minister will elaborate on that.
The Chancellor made an announcement in last year’s autumn statement that appears to have come as a surprise to many. He proposed the introduction of a cap on the deduction that is available to UK service companies on bareboat charters from connected companies. He also announced plans to ring-fence profits from other business activities so that the taxable profit could not be reduced by other tax losses. It appears that, because of the considerable lack of consultation before those announcements were made, the Government have significantly altered the plans to take account of the views of the industry.
The final proposals that are before us today will introduce a cap on the amount that service companies can deduct from their taxable profits through such leasing arrangements. The leasing deduction will be limited broadly by reference to a cap of 7.5% on the original cost of the asset or equipment. The cap was originally set at 6.5% but has been changed following the extensive consultation with the industry. Again as a result of the consultation, the cap will apply only to drilling rigs and accommodation vessels, which are otherwise known as “flotels”.