Finance Bill

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Mr. Edward Davey: The Minister is arguing that, if amendment No. 31 was accepted and flights that arrived at remote airports were exempt, too, it would cost the UK taxpayer huge amounts of money. Will he give the Committee an estimate of the amount? The types of airports that he has mentioned are not as regularly serviced from this country as he seems to think.

Mr. Timms: My off-the-cuff estimate is about 10 million. There are significant numbers of flights from the United Kingdom to Iceland. The whole of Norway could be affected. There is a technical problem because the sparsity parameter that we have used under new subsection (4C), although well defined within the European Union, is not so well defined in other parts of the European Economic Area, including Norway.

Mr. Letwin: Notwithstanding his animadversions on my faith, the Financial Secretary has not explained himself clearly. Is the underlying logic of his argument that, if we were to define flights as being exempt if they arrived at places with such a level of inhabitation, we would also have to exempt those places outside the United Kingdom with such a level? Despite the fact that they would not have been designated by order, why does not the reverse logic apply? Why is it not the case that, by exempting as the point of origin places designated by order as having a low inhabitation, we need to designate places outside the United Kingdom as points of origin with low inhabitation? I do not understand why destination and origin are fundamentally different.

Mr. Timms: I shall endeavour to explain the position. We would not be allowed to withhold designation by order from areas within the EEA that meet the sparsity threshold-to do so would lay us open to legal challenge- so we would have to designate such areas in addition to the highlands and islands. Air passenger duty is levied only on flights departing from UK airports. That is the reason why the problem that the hon. Gentleman described does not arise. We levy duty on a flight from the UK to the highlands and islands, for example, and would have to treat flights from the UK to Iceland in the same way.

The duty applies only to flights leaving UK airports. Air passenger duty is not applied to flights leaving other airports, in Iceland or anywhere else. Therefore there is no problem with exempting flights leaving from the highlands and islands. I apologise for that slightly long-winded way of answering the question, but I hope that the point is now clear.

Mr. Letwin: I think that I have understood the gist of what the Financial Secretary is saying; I had missed some of it before. To ensure that I have now understood, I shall recapitulate. Because the only point at which the tax is levied is that of departure at a UK airport, it is not a problem that we do not exempt flights to Iceland, for example, because we can exempt only those flights starting in the highlands and islands, knowing that all flights from there, to whatever destination, will be exempt and hence not fall foul of the EU treaty provisions. So far, so good. I understand the next leg of the Financial Secretary's argument to be that we cannot do the same for flights arriving there because all flights from any UK airport to any place falling under the inhabitation rule would then have to be designated as exempt. That is also so far, so good. However, can the Financial Secretary explain why it would be impossible to solve the problem by having a negative air passenger duty for flights that are, in effect, return flights from the highlands and islands to the nearest point? Specifying only that the flight should have started in the highlands and islands would achieve the same economic effect. That would solve the problem admirably. There may be 13 other such solutions, but is the Financial Secretary not as clear in his mind as are Opposition Members that something needs to be done to address the problem?

Mr. Timms: I am intrigued by the idea of a negative rate of air passenger duty-I have no idea how that would work and I suspect that the airlines would have something to say about such a concept, given the complexity of calculating it.

To sum up the position in a nutshell, the only area that meets the sparsity threshold in proposed new subsection (4C), and which would therefore be exempt from APD, is the highlands and islands. That is why this measure is sound and proof against legal challenge. It constitutes a substantial improvement on the present position. Flights to, from and within the highlands and islands will bear significantly less duty than at present. Whether an arrangement involving negative duty could be implemented is an interesting speculation.

Mr. Edward Davey: New subsection (4D) gives the Treasury the ability to define the region referred to in terms of population density. Given that the Treasury has that freedom, will he tell us whether the court has ever questioned definitions of regions made by national Governments, and against which criteria it has done so?

Mr. Timms: I cannot quote the hon. Gentleman any precedents, but we understand that an arrangement conferred that benefit only on a region in the United Kingdom. Regions with the same characteristics in other parts of the European Economic Area would be liable to European Union challenge.

11.15 am

Mr. Davey: It is an important point. Most flights from the UK to Iceland, Norway and Sweden are to cities with high population density and large, international airports. There must be few flights from UK airports to airports inside or outside the EU with low population densities, so I question the Financial Secretary's estimate of 10 million. It seems unbelievable.

Mr. Timms: We are using an EU definition for population density, which is called NUTS 2-the nomenclature of units of territorial statistics 2. NUTS 2 areas have a population density of not more than 12.5 persons per sq km. That statistic is defined at a regional level. Some regions meet the NUTS 2 figure, but have reasonably sized populations.

Mr. Letwin: Like Stockholm.

Mr. Timms: No, Stockholm would not qualify. Northern Sweden, not the whole of Sweden, would meet the sparsity threshold. The whole of Iceland would fall within the category, and it would account for most of the 10 million.

Mr. Burnett: If the clause were approved by Parliament and an international airport that took individuals to Singapore, Paris, Rome and so forth were constructed on a remote island in Scotland, what would be the levy on those flights so far as the tax is concerned?

Mr. Timms: Nil.

On amendment No. 32, as the hon. Member for Kingston and Surbiton said, planes that weigh less than 10 tonnes or have fewer than 20 seats are exempted from air passenger duty. That applies to flights to and from most UK island communities. I understand that there is only one operator for the Isles of Scilly, which is Skybus. As the hon. Gentleman said, the aircraft that it operates qualify for the exemption from duty.

Mr. Davey: Just to clarify, there is another operator. British International operates a helicopter service.

Mr. Timms: I am grateful for that information. The hon. Gentleman acknowledged that accepting the amendment would make no practical difference to the current air passenger duty liability of travellers from island communities.

The hon. Gentleman said that circumstances might change in the next few years, and if larger aircraft were to operate and the Government chose to introduce an exemption, we would need a better trigger than the one proposed in the amendment. He may agree. The amendment would mean that any public transport competitor to an airline-for example, a ferry operator-could ensure that there was no exemption from air passenger duty by running an occasional service so that there was not a two-month gap in availability. If the intent was to do as the hon. Gentleman spelt out, we would need a mechanism other than the one proposed in the amendment, and one that was compatible with EU law. The reaction of the European Commission to that is difficult to assess. It might regard it as consistent with its regional policy, although it might object to a new definition different from that used to justify the exemption to the Scottish highlands and islands under new subsection (4C). In practice, the amendment would not assist smaller island communities. If it were to change, a different way would have to be found if it was thought desirable to introduce some exemption.

Let me sum up the benefits of the change. We are removing the conflict with European Union requirements-left behind by the previous Government-without increasing the rate on any economy fares; halving the United Kingdom duty for all those people flying from the United Kingdom to other parts of the European Economic Area; halving the rate of duty for single flights within the United Kingdom; halving the duty on flights from the highlands and islands to other parts of the United Kingdom; abolishing the duty within the highlands and islands and forgoing revenue of about 80 million a year. The change is one of the measures in the Budget that will contribute significantly to a reduction in the overall tax burden. It is a great package, and I commend it to the Committee.

Mr. Letwin: I am sorry to detain the Committee further, but I think that the schoolmasterly verdict from the Financial Secretary and his assistants-

Mr. Burnett: I am sorry to interrupt the hon. Member as he is getting into full flow, but it would be helpful if he could speak up because I cannot hear him very well.

Mr. Letwin: I apologise to the hon. Gentleman. In my efforts to be sure of addressing you, Mr. Cook, I failed to convey my remarks to the hon. Gentleman. The schoolmasterly verdict on the Financial Secretary's effects is, ``Good boy, but must try harder'', because what he has described is Euro-madness. It may be that there are substantial intricacies in delivering a rational solution so that people who have to fly to Glasgow, for example, are not to be put at a disadvantage compared with people who have to fly to some other destination within the highlands and islands. It may be that some category of definition that is-with, I presume, unconscious irony-described as the ``NUTS definition'', causes that intricacy to occur. I know not and moreover I care not, in the sense that it must be helpful, within the rules laid down by the European Court of Justice, to devise some rational scheme that delivers the right result. That might be by a process of discussion with the Commission, by a process of more imagination being exercised domestically, or by a combination of those things.

It cannot be the case that the European Union has so arranged itself that a manifest unfairness is the necessary outcome. If that were the case, it would suggest that the United Kingdom Government, at some opportune moment, should promote some change in the arrangements within the European Union to prevent that from occurring. If it occurs for the United Kingdom, presumably it will do so for other countries. Everyone has an interest in a rational outcome. Therefore, I stick by my verdict that this is not a rational proposition. Nothing that the Financial Secretary has said suggests that it is. He suggested that nobody in Whitehall had yet been able to devise a scheme that created a rational outcome and was coherent with what was understood to be the strict ruling of the European Court of Justice.

This is a classical case because, by trying to be absolutely sure that we do things in a way that is iron-clad vis--vis the European Union, we are needlessly sacrificing a national interest. We should think more flexibly and laterally to achieve the required result.

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