Memorandum submitted by Transport 2000
VAT STATUS OF
AVIATION
When VAT was introduced in the UK in 1973 public
transport was zero-rated on the grounds that trains and buses
were mainly used for travel to work, and that therefore, like
food, public transport was "essential".
Since then air travel has become much more widely
used, and cannot be classified as "essential". Around
80% of flights are for leisure and are discretionary expenditure.
Many surveys have shown that it is the upper income groups who
fly the most.
There is no reason why business travel should
not be subject to VAT, reclaimed in the normal way. Not to do
so creates a distortion in business expenditure.
Since air travel is provided by private companies
at a full market price there is no logic in giving it the benefit
of zero rating for VAT solely on the grounds that it is "public
transport".
Car travel is subject to VAT, both on the purchase
of new cars and on fuel. These days air travel is more akin to
car travel than to trains and buses, where there are still social
reasons for not charging VAT.
Thus there are sound fiscal reasons for imposing
the full rate of VAT on all air travel.
There are also strong climate change reasons.
One reason for the rapid expansion of air travel is its exemption
from fuel tax and zero rating for VAT. Imposing VAT would be described
by the aviation industry as a "blunt instrument" in
that it has no specific environmental purpose. In fact, however,
it would act directly to reduce the rate of growth in demand,
and thus to reduce growth of aircraft emissions.
Removing the zero-rated status of air transport
would mean that VAT was imposed on the purchase of airline tickets,
on the purchase and servicing of aircraft, on airport and air
traffic control services.
Zero rating
Zero rating is even more favourable than exemption
from VAT. Exemption takes a sale out of the VAT system, and so
VAT paid on supplies ("input tax") cannot be reclaimed.
Zero rating, on the other hand, means that VAT is regarded as
charged, but at 0%, and VAT input tax can be reclaimed.
Thus, for aviation, airlines and other providers
of air travel can reclaim VAT input tax paid on supplies such
as aircraft and other goods and services (including imported items,
on which VAT is normally charged). It is not generally realised
that, in addition to air travel not bearing VAT, airlines, unlike
almost all other companies, can reclaim VAT in their aircraft,
vehicles and general supplies for passenger services.
The EAC may wish to ask HMRC for figures on
the amounts of VAT input tax refunded to the UK air passenger
transport industry. The sum would seem likely to be large, given
that, for instance, the accounts for 2005-06 of British Airways'
(amounting to, say a fifth of the industry) show non-employee
costs of £5.5 billion, a considerable proportion of which
will have been spent in the UK on supplies subject to VAT at 17.5%.
Domestic flights
Britain is one of only four EU countries which
do not charge VAT on domestic flights. There would be no practical
problems in doing so.
On a flight from London to Edinburgh which might
cost, say, £50 the imposition of VAT at 17.5% would add £8.50.
It might be said that the Air Passenger Duty
already imposes a charge of £10 on the same flight, and that
therefore it is unnecessary or unfair to add VAT. But if APD is
regarded as a partial substitute for the lack of tax on aviation
fuel, as it was so described when introduced in 1993, there is
no reason why VAT should not be charged in addition to APD.
Flights within the EU
Under EU rules the UK is entitled to impose
VAT on the sale of airline tickets, but only for the proportion
of the journey within UK airspace. This would obviously be complicated
to administer and ineffective.
The UK could, however, be much more active in
pressing the EU Commission to recommend that all EU countries
should impose VAT on air travel. The Commission has recently been
engaged in a review of all VAT rates and exemptions to improve
efficiency and remove anomalies (we are not sure what stage this
review has reached).
VAT on flights within the EU would not fall
foul of the Chicago Convention or of the bilateral agreements
which prevent the taxation of aircraft fuel. There could be some
practical problems where air tickets were sold outside the EU,
for example for a ticket bought in the United States for a trip
from New York to Prague via Heathrow. Airlines of whatever nationality
providing flights between EU airports would have to register for
VAT in EU countries and would have to charge and account for VAT
on an appropriate element of air fares.
If all airlines were required to charge VAT
for all flights within Europe there would be no distortion of
competition between airlines. There would, however, be some perverse
incentive for the public to choose long-haul flights which do
greater climate change damage.
Flights to destinations Outside the EU
The Treasury maintain that, since VAT is an
EU tax, it is not possible to impose it on flights from the EU
to the rest of the world. If this view is correct, the problem
could be overcome by imposing a separate sales tax at 17.5% on
the sale of tickets for flights from the EU to destinations outside
the EU.
The cost of the VAT relief
One difficulty faced by those who have studied
this issue in recent years has been the adamant refusal of the
Treasury to give any figure for the cost to the revenue of the
zero-rating of air transport. This refusal has been based on the
difficulties of defining how the tax would operate (and also sometimes
on the Chancellor's pledge not to increase VAT).
It would be useful if the EAC could press the
Treasury to give separate estimates of the revenue which would
be raised by imposing VAT on (1) domestic flights, (2) EU flights
and (3) all flights, in addition to the figures for refunds of
input tax as suggested above.
We thought a brief comment on the other aspects
of the PBR might be helpful. Briefly, our comments are:
— welcome for the increase in
Air Passenger Duty and for the increase in road fuel duty, though
we are concerned that in neither case are there sustained long
term signals about future aviation and fuel costs;
— concern about the lack of measures
on car fuel economy, such as vehicle duty, company cars or employee
car ownership schemes; we note however the promise of action on
some of these in the Budget and await this with interest;
— concern about the assumption
in the Stern review, carried forward into the Eddington review,
that reductions in carbon emissions from the transport sector
are more costly and difficult than in other sectors;
— welcome for some aspects of
the Eddington Review, notably on road pricing, but concern about
other aspects, including continuing support for road building
and airport expansion and limited support for public transport;
— concern about the Barker Review,
especially its proposals for removing the needs test on retail
development, review of green belts, removal of maximum car parking
standards and the presumption in favour of development (proposed
by Eddington as well in respect to transport projects); and
— concern about the wholesale
failure to integrate transport and land use planning, as evidenced
by the separation between between Eddington on transport and Barker
on land use planning. This failure to link transport and planning
will result in sigtnificant extra carbon emissions and dependence
on high-carbon lifestyles.
January 2007
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