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Session 1999-2000
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Standing Committee Debates
Finance Bill

Finance Bill

Standing Committee H

Tuesday 16 May 2000


[Mr. Frank Cook in the Chair]

Finance Bill

(Except clauses 1, 12, 30, 31, 59, 102 and 113)

10.30 am

The Chairman: I remind members of the Committee either to switch off their mobiles or to put them on to silent alert. At our sitting on Thursday, Mr. St. Aubyn diligently drew attention to the fact that the explanatory notes were incomplete. I understand that revised sets of the notes are now available in the Room for those who require them.

The Financial Secretary to the Treasury (Mr. Stephen Timms): Thank you, Mr. Cook. The explanatory notes that were sent to the Vote Office were complete and accurate. However, those that were delivered to the Room omitted references to clauses 18 to 30, the fault for which lies entirely with the Treasury, and I apologise to the Committee for that.

Mr. Oliver Letwin (West Dorset): On a point of order, Mr. Cook. The Financial Secretary kindly offered to write to the Committee about the Treasury's predictions on interest rates. We have not yet received the letter. Can he offer us any advice in the meantime?

Mr. Michael Jack (Fylde): Further to that point of order, Mr. Cook. It would be pertinent for such information to be made available to the Committee in the light of today's announcement that the headline rate of inflation has now reached 3 per cent.

The Chairman: Documents circulated by the Minister are not a matter for the Chair.

Mr. Timms: Further to that point of order, Mr. Cook-

The Chairman: Order. I have just said that that matter was not a point of order, but the hon. Gentleman may continue.

Mr. Timms: I am grateful for your indulgence, Mr. Cook. I shall be writing to members of the Committee shortly.

Mr. David Heathcoat-Amory (Wells): Further to the point of order about the inadequacy of the explanatory notes, Mr. Cook. The Financial Secretary wrote to us recently saying that the schedule relating to the climate change levy was incomplete and failed to deal with problems of double taxation. He said that various amendments would be tabled in due course. The Government have now tabled an amendment that we could reach today, but it will not take us much further forward, given that it is no good our discussing such amendments unless we know the content of the regulations. The Committee is still in the dark about such matters. The Government said that they created a muddle and that the schedule is incomplete, but obviously the Committee is not to know in detail how the Government intend to deal with the serious problem of potential double taxation for the energy tax.

The Chairman: I understand that further notes have been circulated. The right hon. Gentleman's point is a matter for debate when we reach the appropriate point in the Bill, at which time we shall enjoy the exchanges that will take place. Unless there are any more points of order, let us now continue. I have had a disastrous weekend, so I do not want members of the Committee to add to it.

Clause 19

Changes in exemption from duty

The Chairman: Amendment No. 3 is not moved so we come to amendment No. 31.

Mr. Edward Davey (Kingston and Surbiton): I beg to move amendment No. 31, in page 15, line 20, after ``from'', insert ``or arrive at''.

The Chairman: With this it will be convenient to take amendment No. 32, in page 15, line 24, at end insert

    `or which comprises an island community which has no other means of public transport to the mainland of the United Kingdom for at least two months during a calendar year.'.

Mr. Davey: Thank you, Mr. Cook. I hope that today's proceedings, and my contribution, will make up for the weekend that you had. I am sure that right hon. and hon. Members will wish to add to your enjoyment of the Committee.

I welcome the clause, particularly proposed sections (4B) and (4C) and the exemption of the Scottish highlands and islands from air passenger duty. As the Government wish to put the exemption on an objective basis, the highlands and islands are not specifically referred to-but that is the only region that would fulfil the criteria on population density. Hon. Members from all parties have welcomed that much-needed provision, which the amendment seeks to improve. To explain why it is necessary, we need to look at the history of air passenger duty. It was a Tory tax, introduced in 1994 and doubled in 1997. It was one of the 22 tax rises made much of by Labour in the general election. While there were exemptions to the tax, for aircraft weighing less than 10 tonnes, or more than 10 tonnes but with 20 seats or fewer, that did not help many of the aircraft serving the Scottish highlands and islands. Indeed, it was estimated that more than a quarter of the inter-island flights were subject to air passenger duty, as were most of the flights for the mainland.

As the exemption is so necessary, we wish to extend it. The Treasury estimated in the mid-1990s that air passenger duty would reduce the number of flights by 2.5 per cent. I am told by the highlands and islands airports that in their area the reduction may have been greater. It is difficult to isolate the effect because there is an overall growth in air traffic, but those airports tell me that their projections of the growth in air traffic between the islands, and between the islands and the mainland, has been much slower than expected. They put that down largely to the introduction of air passenger duty. Whether or not one considers that the effect has been significant, there is a key principle involved, which the Government are right to address. There are remote areas in Britain that depend on air services for much of the year-indeed, sometimes all the time. Air passenger duty represents a much greater proportion of the ticket price in those areas because flights tend to be much shorter than others in the UK and abroad.

The situation is even worse when one looks at the logistics of it because many of the flights between islands and between the islands and the mainland are feeder flights, which connect with on-going flights, meaning that passengers pay even more APD. So it is not surprising that people living in the Scottish highlands and islands were miffed, to say the least, at the introduction of APD.

Labour Members, and many of my hon. Friends, opposed the introduction of the tax and the way in which it hits the remote areas of our country. In January 1994, when that year's Finance Bill was discussed in Committee on the Floor of the House, my hon. and learned Friend the Member for Orkney and Shetland (Mr. Wallace), now the acting First Minister of the Scottish Executive, highlighted the communities that he represented by saying:

    airlines are crucial to livelihoods and island living There is also much price sensitivity in respect of businesses in the highlands and islands In addition, flights are very expensive for people who wish to visit the islands as tourists. The duty will be an added imposition.-[Official Report, 31 January 1994; Vol. 236, c. 649.]

He made clear the Liberal Democrat opposition to air passenger duty and the damaging effect of the duty on his constituents. It is not surprising that the 1997 Liberal Democrat manifesto for the highlands and islands stated:

    We will exempt peripheral Highlands and Islands airports from Air Passenger Duty.

My hon. Friend the Member for Argyll and Bute (Mrs Michie) corresponded a great deal with Ministers at the time, pointing out that air travel was in no way a luxury or even a convenience for her constituents. The campaign has a long history, and I pay tribute to Labour Members who have fought for it in government. That is the reason for the clause.

The tax has been so pernicious that it is important that the exemption is right. We must consider how it will affect people on a practical level. In many of the communities, there is not a full range of health services as the population density does not warrant it. People taken ill have to use air services to go to hospital for some treatments. The communities often do not have the range of educational services that we enjoy on the mainland, especially in post-16 education, so students are dependent on air passenger services. Such remote areas often suffer from high levels of unemployment, so job search requires air travel. Also, the communities depend on tourism, so the tax can be significant to the economy. There is a strong case for exemption, but the Government's proposal goes only half way, almost literally. It applies only to flights from airports located in the highlands and islands, not flights to them. Amendment No. 31 seeks to put that right.

Given the strong case that I have outlined, which the Government clearly accept or they would not have put the clause in the Bill, why have they not proposed what amendment No. 31 suggests? The Financial Secretary will explain the Government's position in due course, but let me anticipate his remarks. I believe that their proposals are due to the European Court of Justice judgment that struck down the previous Government's exemption for all United Kingdom domestic return flights. The court found that that exemption went against article 90 of the treaty, which basically stated that one could not discriminate against services or goods from another country.

Can we read that judgment, and the way in which article 90 is being interpreted by the courts in other cases, to suggest that an exemption to return flights to the Scottish highlands and islands would also be struck down? I do not believe that we can, which is the key legal point. Other countries in the European Union give concessions on flights to some regions on the grounds that those regions are relatively remote, economically deprived or over-dependent on air transport. Those concessions exist elsewhere and have been upheld by both the Commission and the European Court. Other countries within the EU allow passenger duty exemptions or their equivalent to and from islands in remote areas. That is a strong case for the Government to accept the point. They might say ``Well, in other countries only the leg from those regional areas is allowed'', although I do not believe that that is the case. Under clause 19, flights that arrive at those airports could still be exempt.

10.45 am

I have been looking through commentaries on EU law, such as Weatherill and Beaumont's on EU law 1999, in which article 90 is discussed in some detail. They state-and the Government have clearly taken it on board-that if there is an objective justification for an exemption based not on nationality, but on other objective criteria, the Commission is unlikely to challenge it, and that if it were to be challenged, the European Court would uphold the national exemption. There has been some discussion on the matter but I will not bore the Committee by reading it out in full. It states:

    An objectively justifiable reason that is unconnected with nationality is capable of explaining the selection of the factor that operates indirectly to discriminate on grounds of nationality.

That commentary takes as evidence a 1986 case-the Commission v. Italy. It says that if some objective justification can be found, even if it indirectly discriminates on grounds of nationality but is still objective, it is allowable. That is clearly the Government's route and the amendment would develop that, while keeping within the objective criterion set out in new subsection (4C). That objective criterion is the key point.

In other areas of EU law, particularly with respect to article 91, the principle of proportionality is being applied. If a Government have a social and economic objective that involves a degree of discrimination and if the tax change is proportional to meeting that objective and does not create a large degree of discrimination to imports or services from other EU countries, it is acceptable. I understand that there are no non-UK EU airports servicing the Scottish highlands and islands airports, which is perhaps not surprising. It would not be out of proportion to introduce an exemption both to and from regional areas. It is certainly along the lines on which EU trade and tax laws have been developed by the Commission and the European Court.

Amendment No. 32 is similar and complementary to amendment No. 31 and the Government's proposal, but goes a little further using objective criteria. In the explanatory notes on clause 19, the Government explain the reasons for introducing an exemption to the Scottish highlands and islands by saying:

    This exemption has been introduced in recognition of the remoteness of the region and the reliance on air transport.

That is the rationale behind amendment No. 32. Some island communities that are not in the Scottish highlands and islands are heavily dependent on air services. I am thinking particularly of the Isles of Scilly that are dependent on air services for three, four and sometimes five months a year. I am grateful to my hon. Friend the Member for St. Ives (Mr. George) for the background information that he has given me to enable me to speak to the amendment. He is a diligent Member of Parliament who represents his community with some distinction.


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