House of Commons Hansard Debates for 31 Jan 1994

Ms Angela Eagle (Wallasey) : I understand that when a tax is being introduced the Treasury examines its effects in particular areas. Can the Minister explain why he and his Department did not see fit to consult the airline industry? This tax came like a bolt from the blue. Why has the subsequent consultation been so quick? In fact, it is ending on the very day on which this clause is being debated. If the airline industry had been consulted, the Government could have been made aware of some of the difficulties that the details of the tax will create.

Sir John Cope : No Chancellor of the Exchequer discusses proposed taxes in advance of a Budget statement. The consultation with the airlines and others involved, to which attention has already been drawn, was launched on Budget day with the issue of a considerable paper giving

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further details and inviting general and very specific comments from those most immediately involved. The consultation process has by no means ended. Hon. Members know, although people outside may not be aware, that this is only the first of a series of debates that we shall no doubt have during the Committee stage--to say nothing of Report stage. Indeed, we have already heard that we shall be returning to some aspects of this duty and I can assure the hon. Member for Wallasey (Ms Eagle) that even now the consultation process is continuing.

Mr. Keith Mans (Wyre) : May I take it from my right hon. Friend's answer that in the coming weeks or months the airlines will have an opportunity to make representations about the way in which the tax will be collected and the date on which it should become operative?

Sir John Cope : Yes, indeed. Discussions with quite a number of parties in the industry are proceeding and we are open to more general representations from the people affected by the tax as well as from hon. Members on both sides of the Committee.

The air passenger duty fits the Government's strategy of shifting the burden, in part, from direct taxation by broadening the indirect tax base and it falls on a sector where expenditure is currently subject to very little indirect taxation because of the VAT zero rating that it enjoys as well as the use of duty-free fuel for international services and all domestic services to which the new duty will apply.

Mrs. Anne Campbell (Cambridge) : I have been listening very carefully to the Minister's comments about low taxation in this area. Can he assure the Committee that the tax will remain at the level at which it is being introduced and will not be raised before the next general election?

Sir John Cope : We believe that the tax has been set at the right rate, but obviously I cannot give an assurance about future Budgets--nobody could do that.

This tax brings us into line with many other countries, including some of our European partners. Having decided that such a tax was desirable, we looked closely at how it might best be designed. The results are before the Committee in the form of the Finance Bill.

Mr. Nigel Forman (Carshalton and Wallington) : My right hon. Friend has indicated that by introducing this tax the United Kingdom will not be putting itself out of line with other countries. I have a great deal of sympathy with that point. Can my right hon. Friend give the Committee a few examples of other countries which have such a tax and the levels at which they levy it?

Sir John Cope : I shall be happy to do so, though in no particular order. Denmark has a tax very similar to ours ; the rate for all international departures is roughly £6.50. In Belgium the amount is £9, depending on the airport of departure. Passenger tickets issued in the Republic of Ireland are subject to a rate of £5. Greece has a departure tax of £15, while in Canada Toronto has a transportation tax of approximately £10. In the United States--for instance, in Los Angeles or New York--the total figure for departure tax, federal taxes and customs fees is about £14. The situation is similar in Japan, New Zealand, Australia and Hong Kong. South Africa's figure is £6, and France

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has an airport tax of £2. One could give all sorts of examples. Obviously, there are differences of detail, including the detail of collection.

In deciding which way to go, we considered some of those models. We had to balance conflicting pressures. We wanted as much simplification and certainty as possible, and we wanted to impose the lowest possible costs on the Customs and Excise authorities and the business undertakings collecting the tax. We tried to secure the minimum disruption of established patterns and, above all, we sought fairness between the various people and interests concerned.

Mr. Mans : I am most grateful to my hon. Friend for giving way again, and I assure him that I shall not intervene a third time in his introductory speech. Can he confirm that in virtually all the countries that he has mentioned as examples of places in which taxes of this nature are imposed most of the funds raised are used for developing the infrastructure of the airline industry and do not simply go into the central treasury?

Sir John Cope : It varies. Some are straight departure taxes and others are federal taxes or customs fees. I readily acknowledge that some are closer to the example that I gave than others. As my hon. Friend knows, we have always been cautious about revenue being hypothecated to particular cases of expenditure.

I mentioned some of the factors that we took into account when designing the tax. They also applied--and this is relevant to the impact on the air transport industry--to the exemption of transfer passengers. We were concerned to maintain the international position of the British air transport industry and particularly that of Britain's hub airports, such as Heathrow, and to help the British airlines serving them by preventing the tax acting as a disincentive to passengers changing planes in Britain.

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Mr. Barry Porter (Wirral, South) : As to international comparisions, do other countries make any exemption or reduction in respect of small offshore islands? If so, have the Government addressed any such examples? If people have no alternative but to leave an island by air, and exemption were given, surely that would not upset the general principle.

Sir John Cope : I cannot give my hon. Friend an off-the-cuff answer, but I will endeavour to answer his point later.

My hon. Friend the Member for Wyre (Mr. Mans) made a point that has been raised in correspondence since the Budget, concerning the date of the duty's introduction. Many of the brochures promoting holidays to the end of October 1994 were published before the Budget, and a good number of holidays were sold from them before my right hon. and learned Friend's Budget statement. Accordingly, he has agreed that the date of the tax's introduction should be deferred to 1 November 1994. It would be unreasonable to expect tour operators to take the theoretical possibility of new taxes into account when entering into the price guarantees that they give their customers. The Government agreed to that special arrangement in 1994 to accommodate tour operators. I am

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sure that my hon. Friend, airlines, tour companies and others welcome that. It also allows us a little more time to prepare for the tax.

As to the Scottish islands, a number of people seem to have misunderstood my right hon. and learned Friend's Budget speech. Announcing the exemption for small aircraft, he said :

"This means, for example, that most flights between the Scottish islands will not bear tax."--[ Official Report, 30 November 1993 ; Vol. 233, c. 932.]

It was not his intention to relieve all flights to and from, as well as between the islands. He pointed out the consequences of the small aircraft exemption that he was proposing and documents published on Budget day made clear the precise details of the exemption that we had in mind.

Mr. James Wallace (Orkney and Shetland) : I do not quibble about the accuracy of that quotation as the exemption delivers exactly that stated, but the impression given by the Chancellor and in informal Scottish Office briefings was that the exemption was meant to cover many more cases. What inquiries were made of airline companies before the Chancellor presented his Budget as to how many people would be affected by the exemption? What estimate did the Chancellor have on Budget day of the number of passengers who would enjoy the exemption?

Sir John Cope : We made no direct inquiries of airlines or of anyone else outside the Government before Budget day, but a lot of public information was available to us about the number of flights, number of passengers, size of aircraft and so on which enabled us to make a fair estimate of the number of passengers who would be affected.

I said that there was misunderstanding in some quarters flowing from the phrase used by my right hon. and learned Friend in his Budget statement, but the detail was clear in the papers that we published on the day.

Mr. Alistair Darling (Edinburgh, Central) : If the Chancellor was right to give an exemption for travel between islands such as the Orkneys and Shetlands--I do not imagine that aircraft of the size that the Chancellor had in mind are used for the Western Isles--why would it be wrong to exempt passengers who want to leave an island to get to the mainland, which is the biggest communication difficulty? I do not see the reason for the difference in philosophy, unless the Chancellor believes that people want to travel only between islands and never to the mainland.

Sir John Cope : The effect will differ according to the particular flights that people use. My right hon. and learned Friend gave an example of one effect of exempting a small aircraft from duty, but the reasons went beyond that particular example. As I said, the aircraft affected by the duty do not pay excise duty on the fuel that they use, but most small aircraft--and many below the exemption limit--do pay it. Therefore, the tax will not apply to the smallest aircraft used by airlines. Incidentally, their value added tax position is also different.

Mr. Wallace : The right hon. Gentleman made that point to me in correspondence and it seems a wonderful post facto rationalisation of the situation in which the Government find themselves. The Paymaster General must know from the information available to him that the exemption would apply to the twin-engined Otter aircraft

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and to the Jetstream 31--both of which use kerosene and not avgas. Therefore, the rationalisation that the right hon. Gentleman just offered admits of exceptions. It has all the hallmarks of someone trying to justify an earlier statement.

Sir John Cope : If the hon. Gentleman will study the words that I used just now and on other occasions he will find that the lines of differential in respect of air passenger duty and the use of different types of fuel are not precisely coincident. Neither is the line of differential of VAT. Nevertheless, my remarks are true for a large number of the aircraft affected, as the hon. Gentleman acknowledged.

We remain of the view that it would not be appropriate to provide exemptions for certain parts of the country. It would be extremely difficult to distinguish between them and would add considerably to the complications of the tax for ourselves and for the airlines. However, there is obviously concern about the position of some services to the Scottish islands, and my right hon. and learned Friend the Chancellor and my right hon. Friend the Secretary of State for Scotland will continue to consider the impact of the duty on Scottish island routes. I do not want to pre-empt those discussions until the picture is clearer.

Mr. Andrew Smith : When does the right hon. Gentleman expect those consultations to be complete? It would be helpful if the Government could report the outcome of those deliberations before we vote on the matter in Committee.

Sir John Cope : I hope to report on those consultations in time for the convenience of members of the Standing Committee.

I wanted to give the reason for the special treatment of small aircraft. I have mentioned that many small aircraft, including air taxis, use dutiable avgas rather than duty-free avtur, so the argument about the low level of taxation in the air travel industry is not strong. The size criteria for exemption are based on the Civil Aviation Authority licensing requirements, which are taken from European Community agreements. They mean that under existing arrangements an airline which operates only aircraft below those sizes is subject to less rigorous requirements on its financial health than under existing arrangements. Those airlines, therefore, have a different sort of licence from airlines which operate aircraft above the size criteria. Linking those exemption criteria to the CAA licensing regime has the benefit that a large number of operators will know immediately, from the type of licence that they have, whether they will be liable to register. As well as that deregulatory benefit, levelling the exemption means that some of the flights mentioned will be exempt.

The threshold is sufficiently low to minimise the scope for distortion of competition on routes served by both exempt and taxable aircraft. If one studies the sizes of aircraft and their use on different routes, it is difficult to find any size criteria that have no effect on competition and cause no difficulty. That is not a reason to have no size exemption, but it means that it is difficult to choose one that is perfect in every respect.

Mr. Wallace : Can the Minister name one airline company in the United Kingdom which flies on scheduled routes in the United Kingdom and whose flights will all be exempt under the proposal?

Sir John Cope : I will not answer that off the cuff, but I hope to respond to the hon. Gentleman's question later.

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I assure him that there are quite a number of small companies that use only smaller aircraft and will be exempt.

The take-off weight and seating capacity of any aircraft will normally be determined by the aircraft's certificate of air worthiness, although there is a provision for Customs and Excise to examine such matters.

In moving the amendment, the hon. Member for Oxford, East (Mr. Smith) mentioned tourism. Most overseas tourists use aircraft only to travel to and from the United Kingdom and will be charged the £5 or £10 rate only on departure. The small number of United Kingdom and overseas tourists who take flights within the United Kingdom will be charged at the £5 rate. Even then, the duty is likely to be a very small proportion of the total cost of a holiday in Britain, so it will not be a significant influence on whether people choose Britain as a holiday destination.

The air passenger duty is, if anything, likely to have a small but positive effect on United Kingdom tourism. I understand that, among air passengers, three and a half times as many United Kingdom residents go on holiday overseas as overseas visitors come to take a holiday in the United Kingdom. Even if some overseas visitors were deterred from taking a holiday in the United Kingdom, it would be likely that more United Kingdom residents would be deterred from holidaying overseas. Many of those would choose to take a holiday in the United Kingdom, which would be of corresponding benefit to the United Kingdom tourist industry.

Ms Eagle : The right hon. Gentleman seems to want to have it both ways. A while back he said that the tax was so modest that it would not affect the number of passengers flying in. His Department has worked out the elasticity of those flights and has said that it is very small--only 2.5 per cent., as I recall. He has just argued, however, that people who may have gone abroad for their holiday will now abandon air travel and go instead to Bridlington, Bognor or Clacton. He cannot have it both ways. Does he say that the proposal will either affect or not affect the number of air passengers? 5.15 pm

Sir John Cope : I did not say that the proposal would have no effect on the number of air passengers. Nor did I say that it would have a large effect on the tourist industry. On the contrary, I said that it would have a small effect on the tourist industry and, in so far as it had an effect, it would be positive rather than negative for the reasons that I have given.

Mr. Forman : Have my right hon. Friend and his advisers considered the possibililty that the current rate of tax is so marginal that it could well be absorbed by the companies and not passed on to the traveller?

Sir John Cope : In some cases that may happen. It is difficult to be sure of the extent to which it will happen because the companies involved are competitive, need to make decisions about pricing and will no doubt make different decisions in different circumstances. The hon. Member for Wallasey (Ms Eagle) is right to say that we suggested that the best estimate that we could make was that air travel could be affected by about 2.5 per cent. She should consider that statistic in context : air travel would otherwise be expected to increase by 4 to 5 per cent. a year.

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Even if we are right about the 2.5 per cent., it means that there will be a slower rate of growth in the number of air passengers rather than a decline.

I find it slightly surprising that the Labour party should be so adamant about the matter because I have had drawn to my attention a copy of the report of the London Policy Forum. I understand that the hon. Member for Peckham (Ms Harman) was the chairperson of the economic working party of that organisation. It suggested a few months ago, just before the Budget, that it thought that

"a tourism tax should be considered."

It seems that it was already in the process of accepting that a tourism tax might have some validity even before the Budget. The proposal was made in September 1993 by a leading member of the Labour Front Bench finance team-- or at least in a document issued by an organisation of which she was the economic chairperson.

The same document also states that

"Labour will consider introducing an airport tax such as that levied in many other countries."

I do not say that in moving ahead and introducing such an air passenger duty we have built on suggestions made by the Labour party--that would be going too far--but we are not unique in looking in that direction.

Mr. Wallace : Clearly, the Treasury's researchers have not yet come up with an airport tax such as they have proposed in the plethora of policy documents that we Liberal Democrats seem to put out. [Interruption.] The Paymaster General is welcome to have a look ; if he finds any such reference, I shall be unpleasantly surprised. I am concerned about the impact of the tax on the Scottish highlands and islands. Both this proposal and the proposed tax on insurance premiums remind me of occasions when former

Chancellors--certainly Lord Lawson, and, I believe, the right hon. Member for Kingston upon Thames (Mr. Lamont)--announced the number of taxes that would be abolished with great flourish in their Budget statements ; now, the Government are introducing new taxes. As the hon. Member for Oxford, East (Mr. Smith) pointed out, there has not been much consultation, if any. Perhaps the Government thought that the fact they had not imposed VAT on passenger transport--there had been considerable speculation on that possibility before the Budget--the ground might have been softened for the introduction of some other transport-related tax.

I do not think that the general concept of an airport tax will get the adrenaline going and prompt the raising of placards outside every airport-- although the islands are an important exception. It is common experience for a traveller abroad to turn up at the check-in desk and discover that he must pay airport duty before he can leave. Although this is not the most sinister of taxes, it is important to watch out when any new tax is introduced : it may start at a modest level, but once in place it can easily be increased without the debate and scrutiny that we are being allowed in this instance.

The hon. Member for Ayr (Mr. Gallie) may well share the anxieties expressed by Jetstream Aircraft Ltd., which is in his constituency. The tax is being introduced at a time when the airlines' figures could scarcely be described as buoyant. A rate of growth such as that mentioned by the Paymaster General would certainly bring a smile to the

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faces of airline executives, but I know that, in recent months, the traffic level has stagnated--or, at any rate, has not risen to the extent suggested by the right hon. Gentleman.

The tax also comes at an unfortunate time for the aircraft industry. If the airlines are in difficulty, and are not sure how the tax will affect passenger numbers, they may understandably defer decisions on investment in new aircraft, which would feed through into the manufacturing industry. That, in turn, would affect companies such as the one in the constituency of the hon. Member for Ayr--at a point when the aircraft manufacturing industry has not, by any stretch of the imagination, been going through good times. The amendment has provided a useful peg on which to hang a debate about the impact of the duty on the economy of the islands, and remote parts of the mainland of Scotland. As the Paymaster General said, the Chancellor spoke in his Budget statement of air traffic between the islands, and--in the strictest sense--the proposed exemptions reflect that. However, the impression I gained at the time was that the Chancellor was conferring a much larger benefit, and similar vibes came from the Sottish Office.

The Paymaster General said that the Chancellor and the Secretary of State for Scotland were continuing to consider the impact of duty on the Scottish routes. I hope that he meant that the door had not been shut on the possibility of a future extension of the exemptions : perhaps he will even announce such an extension in this debate. My arguments, added to those of the hon. Member for Oxford, East, may help to persuade him. There is a good case for such a move. I know that the right hon. Gentleman has received representations from a number of sources in the airline industry, as well as from local authorities and many others who are concerned about the economy of the highlands and islands.

Mrs. Ray Michie (Argyll and Bute) : I agree that the Chancellor appeared to be very bountiful to the Scottish islands when he dropped the exemption proposal into his speech. A good deal of confusion was caused : we all thought that flights from the mainland to the islands, as well as flights between the islands, would be exempted. I was concerned to find that that was not the case.

In fact, there are very few inter-island flights--at least in my constituency. The Paymaster General should appreciate that return flights from Glasgow to Islay and Tiree already cost £100 and £124 respectively. The extra tax will impose a considerable burden--not on tourism ; these flights are a lifeline for the islanders.

Mr. Wallace : My hon. Friend has made a number of important points. I know that she has been at the forefront in putting her constituents' case : her constituents and mine will be particularly affected by the tax and, indirectly, by any downturn in tourism. My hon. Friend rightly pointed out that the exemption, as it stands, will not apply to a large number of people. I suspect that the overwhelming majority will be in my constituency, and I am thankful for small mercies ; but I should like more to be helped. If any airline in Scotland has an idea of the likely impact of the exemptions, it must be Loganair, which has many years' experience of serving the

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Scottish islands. It estimates that about 20,000 passengers will benefit--only a small proportion of those who travel to and from the islands.

Once the tax is introduced in the autumn, it will apply to the Dash 7, which flies to the Isles of Scilly ; but, in a Scottish context, it is likely to apply only to the Britten-Norman Islander, which carries eight passengers--or nine, if someone sits at the front with the pilot.

As my hon. Friend the Member for Argyll and Bute (Mrs. Michie) pointed out, a return ticket from Glasgow to Islay or Tiree costs about £125. The proposed tax constitutes a significant increase. The Paymaster General may not know quite how expensive it already is to travel to the Scottish islands. When people book their tickets to Orkney and Shetland at the travel agent, they are surprised at the cost. It is very expensive compared, for instance, with the cost of crossing the Atlantic.

I have here an airline ticket from Orkney to London, and the return from London to Shetland--for which I need not pay, courtsey of the Fees Office. It cost £447. Anyone who travels regularly within Europe would think that an exceptionally high fare--and the Government now propose to add duties to fares that are already extremely high. We are not talking about travel for pleasure or convenience ; we are talking about lifeline services which are an essential part of island living. To travel across the country rapidly, it is necessary to go by plane. I well remember the first time that I submitted a car allowance claim after becoming a Member of Parliament in 1983. I had travelled from my constituency to London on the ferry. I wrote down something like "9/10 September, Orkney to London". Someone from the Fees Office telephoned me and asked, "Was this a return journey, Sir?" I said, "Has it ever occurred to you how long it takes to travel by car from the Scottish islands to London?" If I always travelled back and forth by car, I would probably spend all my time on the road ; I would seldom be here.

This is a serious point, however. We cannot simply hop on to a high-speed train or other means of public transport ; airlines are crucial to livelihoods and island living. If the Government had sought to impose such a duty on train travel, commuters for whom trains are essential would be jumping up and down all over the country.

It is also important to emphasise that the flights about which we are concerned are very price sensitive. Passengers who travel through highlands and islands airports are more likely to pay their own fares. They do not rely on businesses to pick up the tab. They often comprise families who are travelling to visit relatives or to conduct their own family business.

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There is also much price sensitivity in respect of businesses in the highlands and islands. The very nature of business in the islands involves narrow profit margins. Those businesses cannot readily stand extra impositions. In addition, flights are very expensive for people who wish to visit the islands as tourists. The duty will be an added disincentive.

With regard to the tourism argument and the general imposition of air passenger duty, the Paymaster General said that what we might lose by way of people not travelling to the United Kingdom would be made up in respect of people from the United Kingdom not travelling abroad. However, those people will certainly not travel to

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Orkney and Shetland, to the Western Isles, or to Tiree or Islay if they have to pay the duty. It seems that we are going to suffer the full cost of the duty with none of the benefits.

Many people travel from my constituency to Aberdeen for hospital treatment. Although routine operations can take place in the islands, many people have to go to Aberdeen to have operations or to be treated as out-patients. Obviously, the air ambulance would be used for emergencies and that service is exempt from the duty. However, I am concerned about people who have to travel to Aberdeen for medical treatment on the scheduled flights. I often travel with such people on a Monday morning and sometimes travel with patients as they return to the islands on a Friday evening.

In a written reply, the Secretary of State for Scotland said : "It is not expected that Orkney and Shetland health boards will require to purchase many tickets"--

although my experience does not necessarily accord with that. "Any additional costs would be more than offset by the 4.5 per cent. increase in funding for the NHS in Scotland which my right hon. Friend has announced for the next financial year."--[ Official Report, 16 December 1993 ; Vol. 234, c. 892. ]

That may be so, but that funding was meant for health care. It was not meant to go on a circular journey back to the Treasury through air passenger duty. The money that will be lost will be lost to health care in the islands.

Perhaps the Government should examine the impact of the duty on their own pocket. The responsibility for the highlands and islands airports is about to be transferred from the Civil Aviation Authority to the Scottish Office. However, those airports are recipients from the public purse. If their passenger levels show a sizeable decline as a result of the duty, that will do them no good.

I am also concerned about the fact that the duty could lead to anomalies. Loganair has announced recently that it is restructuring its operation. During the past six weeks when travelling from Glasgow to Kirkwall and from Kirkwall to Glasgow, I turned up at the airport to board a Jetstream 31 which was the scheduled plane for that service. That plane has 18 seats, so I would not have been expected to pay the duty when I booked my ticket. However, I was told at the airport that, for operational reasons, I had to fly on a Shorts-360 which has 36 seats.

If the air passenger duty had been in place, I imagine that someone would have been standing on the tarmac demanding £5 from everyone before they could board the plane. I would probably have had the £5 on me. However, someone may have been returning from holiday with only £5 for the taxi fare from the airport into Kirkwall. That person would have had to spend his taxi fare before he could board the plane.

I may be taking things to extremes, but there is a potential anomaly. That anomaly is perhaps less likely as the Jetstream 31 is being withdrawn from that service. However, there will still be an anomaly in respect of passengers travelling from Kirkwall to Wick. Some of those journeys will take place on the eight-seater Islander aircraft which will be exempt from the duty. Others will be undertaken on the Shorts-360 and people will have to pay. A tax depending on the time of day one travels and on which plane the operator provides does not fulfil the criteria for the kind of taxes that should appear on the statute book.

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The Liberal Democrat amendment which was not selected extended further than the islands. It would have taken account of remoter areas from which travellers possibly could catch trains. Although one cannot take a train from Campbeltown, I suppose that one could take a train from Wick. However, the distances and travelling time would be great. We should consider mainland airports in remoter areas where, like many islands airports, air travel is essential.

I want to consider part of the Government's response. The Paymaster General referred to the criteria relating to the CAA licensing requirements. In a letter to me last week, he said :

"all holders of this type of licence will immediately know they need not register for the duty."

I asked the Paymaster General a question and I look forward to the answer. I do not know of any operators of scheduled services in the United Kingdom who would be fully exempt from the duty. Some will be partially exempt, but will have other services that will attract the duty.

The Paymaster General said that the Government do not want to disturb the airline operators. However, Loganair has made representations to the Treasury about the duty. It is clearly not terribly upset about the possibility of having some flights which might attract the duty while a greater number will be exempt. The operators believe that the extended exemptions are far more important for the viability of their businesses than any additional administrative difficulty in respect of being able to distinguish between the two types of flight.

Sir John Cope : Not many scheduled airlines will qualify wholly for the exemption as it stands, although Suckling, which flies from the constituency of the hon. Member for Cambridge (Mrs. Campbell), is one. Most of the air operators who do not run scheduled services will be below the limit. Those operators, of whom there are more than 100 including air taxi operators, will be below the level and will automatically be exempt as a result of the exception about which we are talking.

Mr. Wallace : I was careful and deliberately used the word "scheduled". I accept the Minister's point about unscheduled services. People may use an air taxi to travel from A to B or, for example, from Cambridge to London. That service is not a lifeline service, but people who use that service will benefit from the exemption. However, for people in my constituency and in the constituencies of my hon. Friend the Member for Argyll and Bute and of the hon. Member for Western Isles (Mr. Macdonald), those flights are lifeline services and they will not receive the benefit of exemption. I am not saying that the exemption should be withdrawn and I can see the administrative benefit. However, if people receive the benefit of the exemption on convenience flights and air taxis while the benefit is not extended to lifeline flights, that highlights a considerable anomaly and unfairness.

Sir John Cope : The hon. Gentleman should not forget what I said earlier. The people who use unscheduled services do, for the most part, pay VAT on their travel.

Mr. Wallace : I accept that. However, they will still benefit from this exemption while those who are not using the services as convenience services will have to pay the duty.

It has also been said that there may be anomalies elsewhere and other areas might call for a similar

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exemption. Where might that happen? I understand that the planes which currently service the Isles of Scilly would all fall within the exemption.

The same arguments apply to the Isles of Scilly as would apply to the Scottish islands in respect of lifeline services. The Paymaster General should say which other parts of the country depend on those services as lifeline services before he says that people all over the country will jump up and down, claiming that they want a similar consideration.

What would be the result of the concession? Again in correspondence, the Paymaster General said :

"The result of such concessions for all regions would undermine the concept of the duty and reduce the revenue to be raised from it, which might have to be made good from elsewhere."

In a written answer to me, he mentioned £2 million as the likely loss of revenue. Indeed, £1 million was mentioned to my hon. Friend the Member for Argyll and Bute, but it was not clear whether that was in respect of one-way travel. Therefore, if we are talking about traffic in both directions, it might be £2 million. For heaven's sake, if the country's economy has reached the stage at which the Government cannot withstand the loss of £2 million, we are in a far worse state than any commentator has led us to believe.

Mr. Andrew Smith : Does the hon. Gentleman agree that that £2 million would do incomparably greater damage to the islands than it could possibly benefit the Government's finances?

Mr. Wallace : The hon. Member for Oxford, East has taken the words out of my mouth. Seen from the perspective of the Treasury, £1 million or £2 million--I will not say that it is irrelevant--is peanuts, but, from the point of view of the highlands and islands economy, it is a considerable amount. The withdrawal of that amount could have a serious economic impact. I hope that such matters will be taken into account when the Secretary of State and the Chancellor of the Exchequer consider the likely impact of the duty.

Jetstream estimates that, according to available information--that is, an ABC flight guide and Department of Transport statistics--the revenue would be £380 million in a full year, which significantly exceeds the Government's estimate. I understand that the Government estimate revenue of £115 million in the first part year, £330 million in 1995-96 and £335 million in 1996-97. I understand also that the figure of £380 million excludes charter operations. Allowing for the fact that there appears to be the possibility of greater revenue than the Government have estimated, the loss made by extending the exemption for the islands' routes would be more than made up if the other figures prove to be right.

Jetstream argues that if the Government exempt all turbo-prop aircraft, that would account for only 9.6 per cent. of revenue. For example, the limit up to 69 seats amounts to about £36.6 million, whereas a limit of 70 seats and over amounts to about £347 million. The contrast shows that there is considerable room for the exemption to be extended so that the economies of areas that depend on air travel as a means of earning a livelihood and living can be properly taken into account.

I am grateful to hear that discussions are still going on, and I very much hope that we can persuade the Paymaster General and his right hon. Friends to make modest

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