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"We have gone for the rough-and-ready approach. I understand the points that are being made about some of the anomalies with capital cities, particularly Washington in relation to destinations in other US states and in Caribbean countries. However, I suppose that a rough-and-ready calculation is precisely that, and one can always find anomalies."---[Official Report, Finance Public Bill Committee, 2 June 2009; c. 165.]
The current Exchequer Secretary indicated during the Report stage of the Finance Bill on 8 July 2009 that the Government were looking again at how the new bands were impacting on Caribbean countries. We are now six months further on, and still the rough-and-ready approach has not been refined to rectify the unfairness on those in the Afro-Caribbean community in this country who wish to maintain their traditional family links with the Caribbean by travelling there regularly.
The Exchequer Secretary has been corresponding with me on this matter for nearly a year. She points out that resolving that unfairness against the Afro-Caribbean
community is not as easy as it would seem. Bearing in mind that her predecessor made it quite clear that the banding system was a rough-and-ready approach, I suggest that all Commonwealth countries should be put in a separate band. We are continually told, rightly, that the Commonwealth is a special institution that is based on ties between all the countries, with the Queen as its head and the United Kingdom as the mother country. Such a suggestion may be rough and ready, but it is no more so than the current banding system. It has at least as much logicality, because up until the late 1960s every Commonwealth citizen had an automatic right to come to the United Kingdom and settle in the mother country, without any immigration controls being placed upon them. I therefore hope that the Minister will specifically indicate to our Afro-Caribbean community whether the Treasury intend rectifying the financial anomalies that have arisen through the rough-and-ready approach, and when they intend to do so.
The matter will not fade away, and anger in the community will become even greater if nothing is done and the increase in rates takes place on 1 November 2010. That is the sole reason why I asked for this debate. I appreciate that the Minister may want to talk about the principles behind air passenger duty and the banding system, but she does not need to do so. Instead, she needs to concentrate her mind, if she will forgive my saying so, solely on the question that I pose again and again: does she believe, as a fair-minded person- not as a Treasury spokesperson-that it is fair or equitable that a celebrity family, such as David Beckham, Posh and their three children, can travel to and from their adopted home in Hollywood and pay £300 in air passenger duty in November 2010, while a husband and wife in my constituency, working in low-paid jobs in the NHS, who take their two children to see their grandparents in the Caribbean have to pay exactly the same amount?
The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): I congratulate my hon. Friend the Member for Birmingham, Sparkbrook and Small Heath (Mr. Godsiff) on securing this debate. This issue has been raised with both me and the Chancellor by my hon. Friend and many hon. Members.
Before I get into the detail, I should like to say that I agree with my hon. Friend about our relationship with the Caribbean, and with his excellent points about the contribution to this country of the Caribbean community and the many other people who have come to these shores.
My hon. Friend has already mentioned some of what I am about to say, but I would like to start by talking about the background in order to explain how we came to this point. I will come to the Caribbean specifics later, but it is important to put those in context.
Air passenger duty was introduced in 1994 to broaden the tax base. There was a two-band structure, charging a different rate for flights to European and non-European destinations. Since its introduction 16 years ago, rates have changed only four times, including a reduction in economy travel rates in 2001. Rates were frozen between 2001 and 2007 and again for 2008-09.
In 2008, the Government consulted on proposals to replace APD with a per plane tax, considered carefully its evidence and merits and decided against introducing it at that point. That is why we announced in the 2008 pre-Budget report that we would reform the existing APD regime from its two-destination band structure to a four-band structure. Several factors were behind that decision. We felt that we needed to ensure greater stability in tax policy at a time of great economic uncertainty and global challenges-the world was moving on. In addition, a unanimous agreement was reached by EU member states in October 2008 to include aviation in the EU emissions trading scheme. There was a need to maintain commitment to environmental objectives, especially to ensure that the structure of aviation tax sent environmental signals to passengers and the industry alike.
In the economic circumstances, we needed to mitigate the potential impact on the airfreight sector, and the impact on employment in this sector and on the wider business community that relies on airfreight services. We also needed to mitigate the potential impact in the regions on direct employment and connectivity. The need to avoid the disruption and costs associated with the transition to another tax had to be considered, as did the relative simplicity of reforming the existing APD regime better to reflect environmental impacts. Many respondents suggested that any banding system should have more than three distance bands and that tax should be levied on final destination. We implemented the reforms on 1 November 2009.
Compared with the previous system, the reform of APD raises revenue and strengthens the tax's environmental signal. Although the externalities arising from air travel are hard to calculate precisely, APD was not designed to be an exact match for this cost, but as a revenue-raising instrument. However, where possible and appropriate, it is right for the structure of revenue-raising taxes to reflect environmental benefits, as in the case of the reformed APD, which it is estimated will save an additional 0.6 million tonnes of carbon dioxide in 2011-12, contributing to reducing the risk of dangerous climate change.
The introduction of four bands into the reformed APD reflects the responses to the consultation on a per plane tax, which highlighted that aviation taxation should recognise distance flown as a factor. To strengthen the environmental signal in APD, destinations have been banded in a straightforward, transparent, and administratively simple way. The bands have been set at 2,000-mile interval, and what band a country falls within is determined by how far its capital is from London.
A geographical banding structure balances the aim of sending a stronger environmental signal with the need to make the reforms easy to implement. Ticketing systems are based on national territories, so it is easiest to base the tax on countries. Any banding system will contain some discrepancies, and although reform might remove some, it will create a set of others. Using capitals as a proxy for countries was, in our judgment, the most straightforward approach globally.
I recognise that my hon. Friend and the many hon. Members who have written to me feel that the reform of APD will affect travellers to the Caribbean. The tax on an economy class ticket to the Caribbean will rise by £35 per person after the two tax increases of 1 November
last year and 1 November this year. That is not likely to be the only factor affecting ticket price, or the sole determining factor in the decision whether to purchase a ticket. The same £35 increase will apply to any other country whose capital is in the same band: that is, between 4,001 and 6,000 miles from London.
One point raised by my hon. Friend and in letters to me is that tickets to the western US attract a lower rate of APD than tickets to the Caribbean. However, APD rates to the US cannot be split into the eastern and western halves of the country without adding significant administrative complexity. Even if they could, of course, that would not affect the absolute rate of APD on tickets to the Caribbean.
My hon. Friend mentioned Russia. As I said, airline ticketing systems are based on national territories. In the case of Russia only, ticketing distinguishes between the eastern and western halves of the country. We have been able to design the tax to incorporate that distinction because it is administratively easy for the airlines to do so, but that is not the case in the USA. As I said, any banding system will contain some anomalies.
However, the Chancellor and I have committed to continue considering the issue to work out whether there is a way to mitigate the impact of APD reform on ticket prices to the Caribbean within the constraints of European and international law, as well as considering the effect on the public finances. Given the fiscal situation, the Government cannot accept options, such as just decreasing APD rates, that would reduce the APD revenue expected. We also cannot move the Caribbean countries alone to another tax band without objective justification. The Chicago convention on international aviation requires us to treat other countries equally.
My hon. Friend also raised the possibility of putting Commonwealth countries into a separate band. Unfortunately, such a move would be illegal under European Community law, as well as discriminatory and thus contrary to the Chicago convention. The Government have considered basing the tax or tax band on the exact distance of flights, rather than the distance to the capital. However, that would be illegal under the Chicago convention, to which the UK is a signatory. Some have suggested that moving to a per plane tax would help, but there is no reason to assume that moving to such a tax would result in less tax on flights to the Caribbean. In fact, implementing a per plane tax, as consulted on in 2008, would have resulted in more tax being paid on flights to the Caribbean than the reformed APD.
The UK and other like-minded states believe that the current practice of exempting aviation from taxation on fuel used for international services is anomalous and has succeeded in increasing the International Civil Aviation Organisation's focus on the environment. However, it has not yet been possible to reach consensus within ICAO regarding specific economic instruments.
I have listened with interest to what the Minister has said. I understand that administrative simplicity, over-ticketing and the Chicago convention are important. Does she think it fair that a family of two adults from the Afro-Caribbean community, working in poorly paid jobs in this country, who take their two children to the Caribbean, should after 1 November pay
£300 in air passenger duty, whereas a celebrity family travelling with their three children to Hollywood would pay exactly the same?
Sarah McCarthy-Fry: The point I am trying to make is that unless we attach a specific tax to a destination any banding system will create anomalies, so that some people pay the same in one band as people in another. We are not, under international law or the Chicago convention, able to be exact about distance so as to bring about the fairness my hon. Friend wants. We are trying to devise a system as close as possible, within the constraints of international law, to an environmental system.
The reason why we cannot use the exact flight distance is that that is too close to using fuel as a proxy. That is the point I am trying to make with the International Civil Aviation Organisation, so that we can begin to address the matter. We are committed to engaging actively with our European partners to press for greater action on aviation's environmental impacts.
Air passenger duty is an important contributor to Government revenue, and we must remember that flying is a relatively under-taxed activity. No fuel duty is paid, and there is no VAT on tickets. The reform of APD is intended to ensure that flying contributes its fair share to public services, as well as to strengthen the environmental signal of the tax.
I assure my hon. Friend that we shall continue to consider the issue to work out whether there is a way to mitigate the impact of APD reform on ticket prices to the Caribbean within the constraints of European and international law.
Mr. Godsiff: As I said, I have been corresponding on the matter for quite a long time. The Minister gave assurances during consideration on Report of the Finance Bill that the Government were considering it. I am grateful, but when will the decision be taken? It is more than six months since the Minister said that the Treasury was considering it. For example, is it likely to happen before 6 May-to pick a date out of the air-or perhaps some time after that?
Sarah McCarthy-Fry: I can say only that as yet we have not found a way of mitigating the situation within the constraints of European and international law. I cannot give a time scale, because we are still looking. It is not as if we had found a solution and were deciding whether to implement it. We have not yet found a solution within the constraints of the law. The area is not straightforward; it is a very complex area of European and international law. All that I can say is that we shall continue to look for a solution.
Mr. Adam Holloway (Gravesham) (Con): I am grateful for the opportunity to have this debate on the finances and capabilities of the Foreign and Commonwealth Office. As we know, last week the financial health of the Foreign Office was put in the spotlight by the Minister of State, Baroness Kinnock, when she revealed cuts to FCO operations, including the counter-terrorism programme in Pakistan-facts that many of her colleagues in recent days have been trying to airbrush out. However, over the past three years my colleagues in the shadow foreign affairs team, particularly Chloe Dalton, have been assiduous in uncovering the extent of the black hole in the FCO's finances. We welcome this debate, which will help to give the issue the wider attention that it merits.
The Foreign Office has obviously been under financial constraints for several years. As a result, from May 2007 onwards the FCO has closed 34 high commissions, embassies and consulates, including in Honduras and El Salvador and on the island of Madagascar. We have opened new offices in places such as Banja Luka, Basra and Kirkuk-but offices ain't the same as embassies. The FCO also withdrew funding from the UK defence attaché network, not understanding the huge value added there. It ended its contribution to scholarships for some Commonwealth students, which will be a huge long-term downer for the UK. It shut the FCO language school, cut the number of civil servants from 6,000 to 5,600 and downgraded 115 positions in embassies that used to be performed by UK diplomats, passing them instead to no doubt able locally employed nationals of the host state. It also began making the argument for virtual embassies and laptop diplomats in parts of the world where this country felt it could no longer afford permanent missions.
"a progressive decline in the capacity of the Foreign Office to cover every aspect of diplomacy."
"jeopardising the FCO's important work"-
But then, in the autumn of 2007, the Treasury decided, in negotiations with the Foreign Office over the 2007 spending round, to withdraw what was known as the overseas price mechanism. Let us be clear: the OPM was a system that ensured that the Foreign Office, which has to spend more than half its budget overseas, was neither worse off nor better off as a result of overseas inflation and movements in currency exchange rates. That is a pretty sensible thing, one would think. Crucially, the OPM ensured that the Foreign Office, which, unlike any other Department, including the Department for International Development and the Ministry of Defence, operates in more than 120 currencies worldwide, could-I quote from the FCO's resource accounts from 2007-08-
"maintain its purchasing power at a level equivalent to that of Home Departments",
which do not have to spend the bulk of their budgets overseas. When sterling rose and the FCO could buy more foreign currency with the pound, the excess was returned to the Treasury. Conversely, if sterling dipped, the Treasury compensated the FCO. In the last three years before the OPM was withdrawn, albeit in different economic circumstances, the FCO returned more than £20 million to the Treasury's coffers.
In short, the mechanism allowed the FCO to plan its activity overseas with confidence over a number of years. A glance at the FCO's responsibilities, which include countering terrorism and weapons proliferation, shows why such continuity matters. Also, 69 million British citizens travel overseas each year and, according to FCO figures, 12 million British citizens were living overseas in 2007. For British tourists and expats alike, the embassy can be the first port of call when they get into difficulty. It is estimated that 100,000 people will go to the World cup in South Africa this year, and obviously our mission or missions will have to deal with any problems that arise. It is therefore very surprising that Foreign Office Ministers did not stand up to Treasury officials when they sought to strip away this important protection, and that the implications of the change were either brushed aside or, even worse, not realised.
The timing was almost as good as when the Prime Minister decided to sell our gold reserves-at completely the wrong time in the market. Within six months of getting rid of the OPM, sterling plummeted. According to Sir Peter Ricketts, the pound fell by 25 per cent. against most currencies over the following period, wiping away a significant proportion of the spending power of local FCO budgets.
Parliament was not informed of the planned change, and not a squeak of protest has been heard from the Foreign Secretary or his colleagues. Repeated written parliamentary questions from my right hon. Friend the Member for Richmond, Yorks (Mr. Hague), asking what position Ministers took on the proposed change and how many times it was discussed, have been rebuffed. It is worth noting here that the Foreign Secretary has had 14 different Ministers since he got the job. Such upheaval has coincided with the most difficult period in the FCO's finances, which prompts the question whether FCO Ministers were too busy fighting for their jobs to stand up for this critical mechanism.
The only explanation we have to date is the rather bizarre statement by the Secretary of State for Work and Pensions, the right hon. Member for Pontefract and Castleford (Yvette Cooper), who said that the FCO lacked the "incentive" to take currency movements into account and needed to be brought in line with practice in other Government Departments. That completely disregards the fact that no other Government Department has a fraction of the foreign currency exposure of the FCO.
Ministers are now trying to brush aside the issue, implying that the FCO's difficulties are merely the product of the tough financial environment and ignoring the fact that this was an own goal, a self-inflicted wound. If Ministers believe that this change was right and was in the interests of the country, why will they not come out and say so? I hope the Minister will state clearly whether he believes that this new arrangement is appropriate and give a full account of the reasons for it.
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