The implementation of new rates
of Air Passenger Duty
97. In the course of the statement on the 2006 Pre-Budget
Report, the Chancellor of the Exchequer announced that Air Passenger
Duty would be doubled with effect from 1 February 2006.
As we have already noted, we intend to comment further on the
environmental implications of this tax change when we report on
our forthcoming inquiry into Climate change and the Stern review:
the implications for HM Treasury policy on tax and the environment.
In this section, we are concerned with the timing of the implementation
of the new rates of Air Passenger Duty. It is quite usual for
tax changes to come into force very soon after their announcement
in a Budget. As the Chancellor of the Exchequer pointed out, changes
to fuel duty often come into force almost immediately.
The 2006 Pre-Budget Report included an announcement that the increase
in fuel duty approved in principle by the House of Commons after
the 2006 Budget would come into force from midnight on 6 December.
It is an established practice for tax avoidance measures to be
announced in the Pre-Budget Report as well as in the Budget and
to have immediate effect. The Code for Fiscal Stability makes
clear that "consultation may not be possible in areas which:
(a) carry the risk of significant forestalling activity by existing
or prospective taxpayers; or (b) could lead to significant temporary
distortions in taxpayer and market behaviour, including disruption
in financial markets".
98. The last significant changes to rates of Air
Passenger Duty were announced on 21 March 2000 and came into force
on 1 April 2001. On that occasion, the Government explained the
length of the period between the announcement and the implementation
by stating that this would "allow airlines and tour operators
plenty of time to adjust their marketing and pricing strategies
to the new structure".
Both the Board of Airline Representatives in the UK and Mr Whiting
drew attention to the administrative difficulties and cost implications
of the much shorter notice period on the current occasion, particularly
in relation to tickets purchased before 6 December 2006 for flights
on or after 1 February 2007, where airlines had to decide whether
to charge such passengers or bear the costs of the duty themselves.
Treasury officials stressed that Air Passenger Duty was "a
tax on airlines", not on individual passengers, and the Chancellor
of the Exchequer characterised it as "a departures tax
not a bookings tax
not a ticket tax", so that it was
for airlines to decide whether to pass on the additional costs
The Chancellor of the Exchequer indicated that the additional
yield from the increased rates amounted to about £80-90 million
a month, and the Treasury estimates that around £165 million
of additional revenue will accrue from the implementation of the
higher rates during the current financial year.
99. The increases in Air Passenger Duty announced
in the 2006 Pre-Budget Report can be viewed as retrospective in
two senses. The first element of retrospection is that airlines
will be liable to pay the tax for departures on or after 1 February
2007 regardless of whether tickets were purchased before the new
rates were announced. The second element of retrospection is that
the liability to pay Air Passenger Duty at the new higher rates
will effectively be incurred before the House of Commons has authorised
the increase; such authorisation will take place only after the
officials initially asserted that the announcement of changes
in the rates of duties which would come into force before the
Budget and the ensuing parliamentary approval was a "perfectly
standard procedure" and offered to "come back"
to us with "specific instances" when such changes had
been announced in a Pre-Budget Report which would then come into
force before the Budget.
The Treasury has not subsequently provided us with any such instances.
100. Pre-Budget Reports share many of the characteristics
of a Budget, but they remain different in terms of the procedure
of the House of Commons. A Budget is followed directly by the
passage of financial resolutions which provide initial and provisional
parliamentary authority for the collection of taxes and duties
at higher rates pending the passage of the Finance Bill. The Pre-Budget
Report does not give rise to any such formal decisions of the
House of Commons. Where tax changes carry a significant risk
of forestalling activity or could distort market behaviour, it
is often appropriate for those changes to come into effect immediately
upon their announcement, even if formal parliamentary approval
cannot be granted for some time thereafter. However, we have received
no evidence to suggest that such considerations apply to the changes
to the rates of Air Passenger Duty announced in the 2006 Pre-Budget
Report. As a general rule, we consider that, where increases in
rates of duties or taxes are proposed in the Pre-Budget Report,
those increases should not come into force until after the House
of Commons has had an opportunity to come to a formal decision
on the proposed increase following the Budget. We draw the attention
of the House of Commons to the unusual timing of the implementation
of the increases in Air Passenger Duty, for which the Treasury
has not cited any relevant precedents.