6 Taxation |
Fuel duty and VAT
100. The 1944 Convention on International Civil
Aviation, also known as the Chicago Convention, established an
international agreement that aviation fuel should be exempt from
tax. In the UK, airlines are therefore exempt from paying fuel
duty. Airlines are also exempt from paying VAT. The European Commission
favours taxation of aircraft fuel, however an attempt to introduce
this through a worldwide agreement to overturn provisions in the
1944 Chicago Convention was rejected by ICAO.
As a compromise, Directive 2003/96/EC allows EU Member States
to tax aviation fuel for domestic flights and through agreements
on a case by case basis with other EU member states.
101. We heard that the loss of tax revenue meant
that the contribution of aviation to the UK economy was overestimated
and that aviation should be taxed in the same way as other modes
However, the low levels of taxation have to some extent been addressed
by the introduction in 1994 of Air Passenger Duty (APD).
Air Passenger Duty
102. APD is charged on a per passenger basis
on all passenger flights from UK airports. UK APD rates are higher
than those charged by any other country in Europe, many of which
have abandoned such taxes as being damaging to the economy.
Many of the airlines we heard from were opposed to high rates
of APD, as were representatives from airports, the tourism industry
and UK businesses.
British Airways told us that it is:
putting UK aviation at a unique and increasing disadvantage
among European competitors. APD distorts international markets
and undermines the UK's attractiveness as a destination for business
and tourism. APD is the highest aviation tax of its type in the
world, while several European countries -Belgium, the Netherlands,
and Denmark - have in recent years abandoned their aviation taxes
in recognition of the economic damage they had done.
Mr O'Leary told us APD was a "complete disaster
and has caused visitor numbers to the UK to decline" and
BAR UK told us that rates had become so high, that they were even
causing diplomatic protests.
103. Paul Simmons, from easyJet, told us that
ideally, HM Treasury should carry out "a fully costed study"
to assess the industry's assertion that APD is damaging UK plc.
In the absence of such a study, a consortium of UK and Irish airline
operators commissioned PricewaterhouseCoopers LLP (PwC) to "provide
an evidence-based assessment" of the role of APD in the UK
economy. The PwC report concluded that:
- abolishing APD could boost
UK GDP by 0.46 per cent in the first year, with continuing benefits
- the GDP boost to the UK economy would amount
to at least £16 billion in the first three years and result
in almost 60,000 extra jobs in the UK over the longer term; and
- abolishing APD would pay for itself by increasing
revenues from other sources such as income tax and VAT. This net
benefit, even after allowing for the loss of APD revenue, would
be almost £500m in the first year.
104. During our inquiry we heard calls to either
freeze or scrap APD.
When we questioned the Secretary of State for Transport, he expressed
an interest in the PwC report but informed us that this was "a
matter for the Chancellor [
and] we have to bear in mind
how much APD raises".
The Chancellor of the Exchequer subsequently announced, in his
2013 Budget, that APD would rise in line with the Retail Price
Index from April 2013 and again from April 2014.
105. We recommend that
HM Treasury conduct and publish a fully costed study of the impact
of APD on the UK economy. We would, in particular, like to know
what the Government's view is of the PwC conclusion that abolishing
APD would pay for itself by increasing revenues from other sources.
If such a study produces clear evidence that APD has a negative
effect on the UK economy and Government revenue, we recommend
that APD is significantly reduced or abolished.
DIFFERENTIAL RATES AND APD HOLIDAYS
106. High rates of APD were considered to be
a barrier to the introduction of new services, particularly at
airports outside the south east. For example, Manchester Airport
failed to attract a direct route to Kuala Lumpur, and APD was
cited as one of the key factors in that decision.
The airports and representatives of businesses in regions outside
the south east were broadly in favour of introducing differential
rates of APD or introducing an APD holiday to help encourage the
development of new routes.
It was also argued that differential rates of APD might help to
shift demand away from capacity constrained airports.
Unsurprisingly, the more capacity constrained airports in the
south east were opposed to this suggestion.
The airlines were also opposed to differential rates of APD and
were concerned that they would have unpredictable effects.
complex issues and vested interests to be taken into account in
any consideration of the merits of differential rates of Air Passenger
Duty. We recommend that the Government carry out an objective
analysis of the impacts such a policy might have. On the other
hand, we see merit in the concept of an APD holiday and recommend
that this be introduced for a 12-month trial period for new services
operating out of airports outside the south east. After this time,
the DfT should assess the extent to which it has led to the development
of new routes.
107. In 2012, the Government devolved to Northern
Ireland the power to set APD rates for direct long-haul flights
departing from Northern Ireland. The Northern Ireland Assembly
has decided to set APD rates for direct long haul flights at zero.
One of the reasons for this move was that passengers in Northern
Ireland were increasingly travelling across the border to take
flights from Dublin that were significantly cheaper due to lower
levels of taxation. We heard calls from the Scottish Chambers
of Commerce that APD should also be devolved to the Scottish Parliament.
However, we were told that this might be problematic, as passenger
traffic might be lost from the north of England to Scotland.
accept the need to devolve responsibility for Air Passenger Duty
(APD) in Northern Ireland, we do not support further devolution
of APD at this stage as it may have negative impacts, for example,
in the north of England.
262 AS 106, para c.iv [Institution of Mechanical Engineers] Back
AS 106, para c.iv [Institution of Mechanical Engineers] Back
QQ 670-671 [Keith Allott]; AS 010, para 2.4 [HACAN]; and AS 109,
para 17 [Greenpeace] Back
AS 042, Annex A [Stop Stansted Expansion] Back
AS 058, para 11 [British Airline Pilots' Association]; and AS
078 [Scottish Passenger Agents Association] Back
For example: Q 92 [Dale Keller]; Q 125 [Andrew Cooper and Eddie
Redfern]; AS 040 [IATA]; AS 044, para 2.8 [Manchester Airports
Group]; AS 046, para 19 [London Chamber of Commerce and Industry];
AS 078 [Scottish Passenger Agents Association]; AS 050 [A Fair
Tax on Flying Campaign]; and AS 094, para 4.a [Flybe] Back
AS 110, para 1.5 [British Airways] Back
Q 95 [Michael O'Leary]; and AS 020 [BAR UK] Back
Q 8 [Paul Simmons] Back
PricewaterhouseCoopers LLP, The economic impact of Air Passeneger
Duty, February 2013; and British Airways Press Office, Scrapping
Flight Tax Could Pay For Itself And Create 60,000 Jobs, Says Pioneer
Study, 4 February 2013 Back
Q 95 [Michael O'Leary]; Qq 280-281 [Willie Walsh]; Qq 452-453
[Corin Taylor, Mike Spicer, and Rhian Kelly] Back
Q 826 [Rt Hon Patrick McLoughlin MP] Back
Q 479 [Emma Antrobus] Back
Q 389 [Robert Sinclair and Paul Kehoe]; Q 419 [Graeme Mason and
Craig Richmond]; and Q 499 [Paul Gilbert] Back
Q 207 [Brian Ross]; Q 389 [Andrew Harrison] Back
Q 180 [Colin Matthews]; and Q 181 [Stewart Wingate] Back
Q 50 [Simon Buck]; Q 51 [Sian Foster]; Q 52 [Paul Simmons]; Q
100 [Otto Grunow] Back
Northern Ireland Affairs Committee, Second Special Report of Session
2012-13, An air transport strategy for Northern Ireland: Government
Response to the Committee's First Report of Session 2012-13,
HC 960 Back
AS 059, para 8 [Scottish Chambers of Commerce] Back
Q 281 [Willie Walsh]; and Q 453 [Mike Spicer and Rhian Kelly] Back