House of Commons - Aviation Strategy

Aviation Strategy - Transport Committee Contents

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.[262] 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.[263]

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 of transport.[264] However, the low levels of taxation have to some extent been addressed by the introduction in 1994 of Air Passenger Duty (APD).[265]

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.[266] 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.[267] 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.[268]

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.[269]

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.[270] 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 to 2020;
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.[271]

104. During our inquiry we heard calls to either freeze or scrap APD.[272] 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".[273] 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.[274] 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.[275] It was also argued that differential rates of APD might help to shift demand away from capacity constrained airports.[276] Unsurprisingly, the more capacity constrained airports in the south east were opposed to this suggestion.[277] The airlines were also opposed to differential rates of APD and were concerned that they would have unpredictable effects.[278] There are 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.

DEVOLUTION

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.[279] 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.[280] However, we were told that this might be problematic, as passenger traffic might be lost from the north of England to Scotland.[281] While we 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

263 AS 106, para c.iv [Institution of Mechanical Engineers] Back

264 QQ 670-671 [Keith Allott]; AS 010, para 2.4 [HACAN]; and AS 109, para 17 [Greenpeace] Back

265 AS 042, Annex A [Stop Stansted Expansion] Back

266 AS 058, para 11 [British Airline Pilots' Association]; and AS 078 [Scottish Passenger Agents Association] Back

267 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

268 AS 110, para 1.5 [British Airways] Back

269 Q 95 [Michael O'Leary]; and AS 020 [BAR UK] Back

270 Q 8 [Paul Simmons] Back

271 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

272 Q 95 [Michael O'Leary]; Qq 280-281 [Willie Walsh]; Qq 452-453 [Corin Taylor, Mike Spicer, and Rhian Kelly] Back

273 Q 826 [Rt Hon Patrick McLoughlin MP] Back