The hon. Gentleman raises an important point. Again, it would be helpful if the Minister addressed that concern in his response. I will come on to that matter a little later.
New schedule 1 introduces a new form of ring fence that is similar to that imposed in respect of ring fence corporation tax for companies that operate on the continental shelf. The ring fence will be applicable to the composite activity that is the subject of this measure. That means that, although profits within the ring fence will only be taxed at the standard corporation tax rates and not the higher rates that apply to oil and gas producers, it will no longer be possible to reduce those profits through other tax reliefs that are derived from activity outside the UK continental shelf.
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To summarise, lease rental payments will be capped at 7.5% of the original cost of the asset being rented, and even those capped rental costs may be offset only
against profits that arise from activities outside the ring fence. The tax information impact note suggests that those changes will yield £135 million to the Exchequer this financial year, with similar revenue yields—slowly declining—forecast for the next four years.
I understand that the measures have changed substantially from those originally set out in December, following what was—quite rightly—an extensive consultation with the industry. Although the Opposition support any attempt to clamp down on tax avoidance, there still seem to be substantial concerns about those measures from within the industry, particularly regarding how the Government have approached the changes, as well as what impact they will have on an industry that makes a vital contribution to the public purse and, of course, the UK’s energy security.
On the Government’s approach, I remind the House of the last time the Chancellor made significant changes to the UK continental shelf fiscal regime, which was described by the Financial Times as “clumsy”, and
“handled in the least helpful way possible.”
In Budget 2011, the Chancellor announced an increase in the supplementary charge—an additional tax on ring-fenced profits from oil and gas extraction—from 20%, which was the rate set by the last Labour Government, to 32%—a 12% increase. He argued that any tax increase was in the interests of fairness and cited rising oil prices, but in reality the Chancellor needed to raise revenue to pay for the delays in planned fuel duty rises, and scrapping the fuel duty escalator.
In the autumn statement last year, the Chancellor announced major changes to the oil and gas fiscal regime—effectively tax increases on both occasions—without any prior discussion with the industry. As my hon. Friend the Member for Bristol East (Kerry McCarthy) pointed out at the time, the charge was
“poorly targeted, has potentially serious unintended consequences for the industry, and is certainly not a policy that they got “right first time”, and all because the Government did not consult on their decision.”—[Official Report, 3 May 2011; Vol. 527, c. 600.]
In 2011, HMRC conceded that the increase in the supplementary charge would risk the economic viability of some marginal oil fields. We therefore tabled an amendment to last year’s Finance Bill, calling on the Government to conduct a proper review of the impact of the tax increase. The tax information impact note for those measures states:
“The measure could increase the day rates by up to 10% on new contracts for drilling rigs and accommodation vessels”,
yet goes on to suggest that such increases will be “insignificant” to companies—those on the UK continental shelf may disagree. The final sentence of the tax information impact note states that the Government will review the impact of those measures in a year’s time—perhaps a tacit acknowledgement that they could be more detrimental than the Government’s optimistic assessment seems to suggest.
Considering the many similar concerns about the impact that the changes will have on certain fields and their economic viability—including from within the Treasury—I would be grateful if the Minister would inform the House how many fields, already marginal, his Department has estimated will become uneconomically unviable as a result? Considering that such assessments were carried out in 2011, presumably they have also been made on this occasion.
When the Government increased the supplementary charge in the 2011 Budget, The Times reported that big oil firms such as Statoil and Centrica were freezing their investment decisions—reportedly worth more than £6 billion—or temporarily closing fields as a result. Again, there are concerns in the industry that if the additional tax costs are passed on in higher day rates—and many, including the Government, expect that they will be—that will lead to higher exploration costs in the sector as a result of the increased cost of renting drilling rigs.
As Oil & Gas UK has pointed out, driving drilling rigs out of the UK continental shelf may only compound the problem of low levels of exploration and production. As the Wood review recently identified, exploration is now at a critically low level. Even more worryingly, production fell by 38% between 2010 and 2013.