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This is a House of Commons Committee report with recommendations to the Government. The Government has two months to respond.
Date Published: 11 June 2019
1. Air Passenger Duty (APD) is a tax levied by the UK Government on passenger flights from UK airports, which came into effect on 1 November 1994, after being announced as a new levy at the November 1993 Budget.1 The then Chancellor of the Exchequer, Rt Hon Kenneth Clarke MP, introduced the tax stating:
[ … ] Air travel is under-taxed compared to other sectors of the economy. It benefits not only from a zero rate of VAT; in addition, the fuel used in international air travel, and nearly all domestic flights, is entirely free of tax. A number of countries have already addressed this anomaly. I propose to levy a small duty on all air passengers from the United Kingdom airports.2
2. APD is charged on a per-passenger basis from UK airports to domestic and international destinations and is payable by the operator of the flight. The rate of the duty varies according to passenger destination and class of travel and is usually passed onto the passenger in their ticket price.3
3. In Wales APD is not devolved, with rates currently set by the UK Government. This is despite “repeated calls” from the Welsh Government to the UK Government for devolution of the tax.4 In Northern Ireland, APD was devolved to the Northern Ireland Assembly for long-haul flights only, in 2012.5 The Scotland Act 2016 made provision for the full devolution of APD to Scotland, but issues concerning the Highlands and Islands airports have led to a delay in its implementation.6
4. APD currently raises around £3.4 billion a year for the UK Exchequer and was described by the Exchequer Secretary to the Treasury, Robert Jenrick MP, as “a significant revenue raiser”.7 HMRC estimates that Wales currently contributes £6 million in APD to the Exchequer - 0.2% of total UK APD8 - which Mr Jenrick acknowledged was a “small sum”.9
5. The Welsh Government receives an annual block grant from the UK Government, changes to which are primarily determined by the Barnett Formula.10 This block grant can be used to support spending by the Welsh Government on any devolved function, although the Treasury sets restrictions on how much can be spent on day to day (“resource”) costs, and how much on capital spending-investment in assets.11 In its written evidence, the Welsh Government states that if APD were devolved to Wales, then its “funding would be correspondingly reduced through a block grant adjustment”.12 It states that “this is likely to be initially equivalent to the amount of APD revenue generated in Wales”, suggesting that if APD were to be devolved to Wales, there would be a reduction in the block grant of £6 million,13 with potential adjustments for inflation in future years.14
6. The 2008 Independent Commission on Funding and Finance for Wales (The Holtham Commission) recommended the fixed real deduction (FRD) model as the best model for APD, and other small taxes, to be integrated into the Welsh budget, should they be devolved.15 The report explained the FRD model:
The grant is reduced by an agreed sum which is then indexed to inflation; i.e. the present value of tax receipts is equated to a real annuity which is deducted from the grant.16
7. However, the Welsh Fiscal Framework, agreed between the UK and Welsh Governments in December 2016, decided that the best method for uprating the amount of deduction to the block grant for those other taxes that have since been devolved to Wales, would be through the “comparable model”.17 This model takes account not only of the change in UK tax receipts, year on year, and the share of the population of Wales, but also adjusts to reflect the fact that generally Wales receives less per head for a given tax than the rest of the UK.18
8. Were APD to be devolved, the respective governments would need to agree whether to apply the same arrangements (the comparable model) for uprating block grant adjustments for APD, as for existing devolved taxes, or whether another model (such as the fixed real deduction model) might be more appropriate. This would need to be set out in a revised version of the Welsh Fiscal Framework.
9. In a letter to the Chairman of Cardiff Airport in 2016, the then First Minister of Wales, Rt Hon Carwyn Jones AM, argued that APD should be devolved to Wales because it continued to place what he saw as unjustifiable constraints on Wales’s ability to promote itself abroad and hindered growth in its aviation sector and wider economy.19 Mr Jones also argued that the UK Government’s “blank refusal to devolve APD to Wales” when it had done so in Northern Ireland and Scotland “shows a discriminatory disdain for the interests of Wales”.20
10. The Welsh Government has stated previously that if APD were devolved to Wales it would either be reduced or abolished completely.21 However, when taking oral evidence from Rebecca Evans AM, Minister for Finance and Trefnydd, we sensed that the Welsh Government’s position on the abolition or reduction in APD had subtly changed. When asked to confirm whether the Welsh Government would reduce APD if it were devolved to Wales, Ms Evans stated that there would need to be “environmental impact assessments and so on” before the Welsh Government could confirm whether the duty would be abolished or reduced. She explained that a consultation would need to take place before the Welsh Government could decide on how they “use that power”.22
11. Furthermore, in February 2019 the current First Minister, Rt Hon Mark Drakeford AM, in a letter to Roger Lewis of Cardiff Airport, stated that although the Welsh Government’s position on APD “remains unchanged”, the Welsh Government “would need to consider the extent of APD devolution and the circumstances at the time of any decision by the UK Government on devolution”.23 He explained that devolution of APD would “secure optimal growth for both the airport and Wales”, stating that this would ultimately mean “giving serious consideration to at least reducing APD rates”.24
12. In light of the continuing calls by the Welsh Government for the UK Government to devolve APD to Wales, and with the UK Government’s position unchanged, we decided to take oral evidence to examine the arguments for and against devolution of the tax. Over four sessions we heard from several stakeholders including tax experts, the Chairs of commissions into devolution to Wales, airlines, representatives of Welsh businesses, airports and both the UK and Welsh Governments.
13. We also visited Cardiff Airport to meet its board of directors and informally discuss the airport’s future plans. Cardiff Airport is central to the discussions around devolution of APD because according to the 2012 Commission on Devolution to Wales report, it is the only airport in Wales from which APD is chargeable on passenger flights,25 although we are aware that APD has become chargeable for some flights using Hawarden Airport in North Wales.26 Cardiff Airport has been owned by the Welsh Government since 2013, after several years of decline in passenger numbers.27 The Airport was previously under the ownership of the Welsh property and development firm, TBI plc.28
14. Throughout the inquiry, we have sought carefully to weigh up the arguments for and against devolution. This report will therefore start by looking at the main arguments we heard for the devolution of APD. It will then consider the main arguments we heard against devolution. Inevitably, given the Welsh Government’s previous statements about abolishing or lowering APD, many of the arguments are as much about the opportunities offered by devolution and reduction of the tax, as they are about the principles of devolution. We will finally present an overall conclusion and a recommendation to the UK Government.
15. We heard arguments of principle in favour of Air Passenger Duty (APD). We were told in particular that other smaller taxes of a similar nature to APD had been devolved to Wales after being recommended by commissions looking at devolution. We were also told that given the willingness of the UK Government to devolve APD to Scotland and partially to Northern Ireland, it should also be devolved to Wales.
16. It was put to us that the case for devolution of APD to Wales had already been made by two respected commissions following a careful examination of the evidence.29 Both the 2008 Independent Commission on Funding and Finance for Wales (The Holtham Commission) and the 2012 Commission on Devolution in Wales (The Silk Commission) argued that APD was one of the smaller taxes suitable for devolution.
Box 1: Holtham Commission
Box 2: Silk Commission
17. We took oral evidence from Sir Paul Silk and Gerald Holtham, the Chairs of the two commissions, and asked them whether they stood by the conclusions of their respective reports. Sir Paul Silk said, “I am more convinced that [devolution] is a good idea than I was at the time. You might have noted a certain amount of equivocation in our report about whether APD should be devolved. I think I would be less equivocal about it now”.48 Gerald Holtham also upheld the conclusion made by the Holtham report arguing one of the reasons it said, “’yes - this is a reasonable candidate’ [for devolution], is that it does not raise any issues of collection, evasion or anything else”.49
18. APD was devolved to Northern Ireland for direct long-haul flights through the 2012 UK Finance Act,50 whilst the Scotland Act 2016 made provision for the full devolution of APD to Scotland.51 The Welsh Government argued that “there is no justification for Wales being treated differently to Scotland [and] Northern Ireland”.52 Gerald Holtham told us that his Commission “took the view that, all things being equal, you should keep devolution as symmetrical and simple as possible”.53 Sir Paul Silk also argued that “there is a principle about devolution, the principle being that if a tax is devolved in Scotland and Northern Ireland, then the argument has to be made for the tax not to be devolved in Wales”.54 One of the main arguments made by the Welsh Government for the devolution of APD concerned equality for all devolved nations. The Welsh Government Minister, Rebecca Evans AM, referred to Scotland and Northern Ireland, arguing:
Scotland have had the power devolved to them. They have the Highlands and Islands issues in Scotland, which does not apply to us, so we wouldn’t have those particular challenges, and of course Northern Ireland have had APD partially devolved to them for long-haul flights. There is certainly a question of equity here as well, in terms of the powers available to us.55
19. However, the Exchequer Secretary to the Treasury, Robert Jenrick MP, told us:
It is not unusual within the devolution settlement that we have arrived at for there to be asymmetries, and for different nations to have different powers and taxes devolved to them. Where I think Wales is different [ … ] is that we can all understand that Northern Ireland is part of the island of Ireland, so there might be a stronger economic and practical argument there for that to be treated as a single aviation market and for Northern Ireland to have the ability to make changes to APD should they wish to.56
In the case of Scotland, he argued:
Scotland and its airports are significant distances away from the nearest English airports and Wales is another step in itself, in the sense that Cardiff is only 60 miles from Bristol.57
20. We also heard that there were arguments for the devolution of APD on account of the policy leverage it would give the Welsh Government. We were told in particular about the opportunities that would be offered were APD lowered or scrapped in Wales.
21. We heard that if Air Passenger Duty were to be devolved, and subsequently abolished or reduced, it would unlock the potential of Cardiff Airport, potentially attracting new airlines and increasing passenger numbers to Wales. Debra Barber, the Chief Executive of Cardiff Airport, told us that several airlines had approached Cardiff Airport stating “that if APD was lower, they would expand into the UK and into our airport”.58 She said:
We have had Willie Walsh, Chair and CEO of the International Airlines Group, talking about LEVEL, the new low-cost, long-haul airline. He specifically said that, were APD to be abolished or lowered, Cardiff would certainly be one of the target airports that LEVEL would look to expand into.59
In its written evidence, Cardiff Airport argued that attracting new airlines would increase passenger numbers, as more routes would be available for passengers to choose from.60 Ms Barber told us that if APD were devolved and reduced, it was estimated that passenger numbers at Cardiff Airport would initially increase by between 100,000 and 400,000 a year, “with a maximum of about 600,000 extra passengers by 2025”.61
22. Representatives of airlines including Ryanair and Flybe agreed with this conclusion, stressing how successful Cardiff Airport would be should the devolution of APD lead to its abolition in Wales. Kate Sherry, Director of Route Development at Ryanair, argued:
[…] as a pan-European airline, in our world the UK airports compete for capacity with other airports across Europe. Therefore, no APD in Cardiff would make the airport much more competitive when it comes to securing capacity. If we look at the profile of the airport, at the moment it is predominantly low fares or low-cost carriers, so APD represents a larger proportion of the fares. It would make the airport considerably more successful - particularly in these times when there is a lot of uncertainty […]62
She highlighted that for every 1 million passengers received by low-cost airlines, “there are 750 new airport jobs created plus the associated support jobs in a region”.63 She added that the devolution of APD to Wales would “have a positive effect, both on Cardiff Airport and the region, and it would allow the Airport to make up some of the ground that it has lost over the years to other airports, particularly Bristol”.64 Susie Reckitt, Director of Strategy at Flybe, explained that a reduction or removal in APD could “significantly” benefit Cardiff Airport which is “a bit more cost sensitive than some of the larger airports”, because it is used by several low-cost airlines.65
23. We were told that supporting Cardiff Airport through a reduction in APD would enable it to complement larger and busier airports like Bristol, which is making plans for expansion because it is nearly at capacity. Kate Sherry from Ryanair argued that if Cardiff Airport were able to expand and compete with Bristol Airport, it would “probably lead to lower prices and more choice for all passengers within both catchment areas [Bristol and Cardiff], rather than the current situation”.66 Dave Lees, the Chief Executive of Bristol Airport, took issue with this point. He explained to us that in 2018, Bristol Airport handled just over 8.6 million passengers,67 (in contrast to Cardiff Airport which handles approximately 1.5 million passengers a year).68 Mr Lees explained that Bristol Airport “currently has a capacity cap imposed by the local authority, of 10 million passengers”.69 This suggests that in a few years’ time, Bristol could be at capacity. However, Mr Lees told us that Bristol Airport “have stated [their] intent to grow the Airport in a progressive manner over a period of time”.70 He also referred to the planning application lodged with the local authority to expand the airport, which if approved would take the Airport to a capacity cap of 12 million passengers.71
24. Gerald Holtham also stated that Cardiff Airport was “an underutilised resource,” arguing that “transferring some of that traffic [from Bristol to Cardiff] makes sense”.72 Furthermore, Ben Cottam, Head of External Affairs at the Federation of Small Businesses (FSB) emphasised that by looking at “international traffic, there is something that Cardiff can do that is complementary to Bristol and the region rather than displacing”.73 Sir Paul Silk explained that “Cardiff Airport has a longer runway than Bristol and has fewer restrictions on the number of flights that it has, so the possibility of long-haul flights coming into Cardiff, without doing a disservice to Bristol, was the basis for our recommendation [in the Silk report]”.74
25. The Welsh Government also argued that devolution of APD to Wales, and its subsequent abolition or reduction, could enable “services from Cardiff Airport [to] relieve some of the immediate pressures on Heathrow - and other UK airports in time”.75 It emphasised that if Cardiff Airport were able to take some of the pressure off other English Airports, it would result in “fewer delays at airports and on the surrounding transport network”.76 It stated that airports outside of the South East of England “can play an important role in helping accommodate the forecast growth in demand for aviation across the UK”.77
26. We also heard that there could be some environmental benefits from passengers making the shorter journey to Cardiff Airport. Debra Barber from Cardiff Airport claimed that car journeys would be significantly reduced for those passengers who usually travel from South Wales to Bristol Airport, because a reduction in APD would mean that Cardiff Airport would be able to potentially attract more airlines and routes.78 She maintained that this would decrease the amount of emissions produced by those taking longer car journeys to Bristol Airport, as they would be able to take much shorter journeys to Cardiff Airport. Ms Barber also argued that there is a “significant amount” of leakage from South Wales to London for long-haul flights, “so the opportunities to stop the long journeys up the M4 are significant, if we can attract more long-haul flights to Cardiff”.79
27. We were told that, whilst most of the benefits would be seen in South Wales, a reduction in APD could indirectly benefit North and Mid Wales by boosting the Welsh ‘brand’ and sending a signal that Wales, as a whole, was open for business. Ashley Rogers from the North Wales Economic Ambition Board told us that if APD were to be devolved to Wales, it could indirectly benefit North Wales in terms of “brand and image”.80 He said:
There is an indirect benefit for the brand of Wales. It is good to have the kind of open for business attitude that it would give Wales for trade and investment.81
28. Several other witnesses also considered how North Wales could potentially see indirect benefits. Ben Cottam from the Federation of Small Businesses (FSB) Wales told us that “the impact of APD on businesses [in Wales] is more about the constraints on airlines to create routes that generate opportunity for businesses to trade either within the UK and overseas in Europe and further afield”.82 He explained that devolution of APD, and the subsequent abolition or reduction in it, would benefit all of Wales as it could boost connectivity to Wales thereby increasing trading opportunities including with North America.83 He explained that even a boost in short-haul connectivity to Wales could help Wales in trying to develop in areas such as “life science and even creative industry, which could benefit from greater links”.84
29. The Welsh Government argued that the benefits from the devolution of APD would be brought to the whole of Wales. Rebecca Evans AM, Minister for Finance and Trefnydd, told us that the Welsh Government would be “very keen to ensure that any benefits brought to Wales through a potential reduction in APD would benefit the whole of Wales”.85 Simon Jones, Director for Economic Infrastructure at the Welsh Government’s Department for the Economy and Transport, explained that “APD devolution would be part of a suite of measures that [Ken Skates AM, Minister for Economy and Transport] would want to be thinking about using to develop the economy of Wales”.86 He explained that “there are different measures that are appropriate in different locations.87 He also argued that North Wales could experience “significant benefits” with the introduction of HS2, most of which would not be seen in South Wales.88
30. We also heard arguments against the devolution of Air Passenger Duty (APD) to Wales. Some of the main concerns expressed to us included the impact it could have on English airports close to the border of Wales, the environmental impact and the suggestion that Cardiff Airport already has a competitive advantage being under the ownership of the Welsh Government.
31. There are several English airports relatively close to the border that serve passengers from across Wales. These airports remain concerned about the impact devolution of APD could have on their passenger numbers and businesses, particularly if the Welsh Government were to scrap or reduce the tax.
32. Bristol Airport is the main English airport serving passengers from South Wales. It stated that around 20% of its passengers have an origin or destination in Wales and argued that devolution of APD to Wales could have a “detrimental effect” on its operations:89
[ … ] Full or partial devolution of Air Passenger Duty (APD) to Wales and a subsequent reduction or zero-rating of the tax would have a detrimental effect not only on our business, but also on passengers and businesses in the shared catchment area that both Bristol Airport and Cardiff Airport serve.90
33. In 2014, Bristol Airport commissioned York Aviation, a specialist aviation consultancy, to provide an assessment of the potential impact devolution of APD to Wales could have on Bristol Airport and the economy of the South West of England. The report argued that devolution would threaten Bristol Airport’s business development ambitions, its route development prospects and the South West economy.91 Dave Lees, the Chief Executive of Bristol Airport told us that devolution of APD to Wales would have a “material impact” on Bristol Airport in terms of passenger numbers. He explained that the York Aviation report concluded that if APD were devolved to Wales, Bristol Airport could see a “substantial decrease in passenger numbers of 1 million passengers per annum”.92
34. We heard, however, that another report had come to different conclusions. In 2017, the Welsh Government commissioned another aviation and travel consultancy, Northpoint Aviation, to assess the impact of devolution of APD to Wales. The aim of the report was to “examine the potential market, competition and economic implications of devolving Air Passenger Duty (APD) to the National Assembly for Wales; and in particular to compare the outcomes of different APD regimes on Cardiff and Bristol Airports and on the economies of South Wales and the South West of England”.93 The report stated that the York Aviation report made the assertion that Bristol and Cardiff airports “serve the same aviation market because their catchments overlap substantially”.94 The Northpoint report concluded that “there are two distinct catchments which are clearly discernible at least in the case of domestic and international short haul traffic, which currently makes up the bulk of the current passenger traffic at both airports”.95 It therefore stated that it “does not expect Bristol to lose any route or any material frequency from its current network” and “hence it seems reasonable to conclude that the ‘clawback’ of traffic that would be generated by changed to the rate of APD in Wales would have only marginal impacts on services from Bristol”.96 However, Mr Lees told us that “even the Northpoint report highlighted that the figure [of the number of passengers lost from Bristol Airport] was 600,00097 which is a substantial number of passengers”.98
35. The main airports serving passengers in North Wales are Manchester and Liverpool airports. According to Manchester Airports Group, 1 million passengers from North Wales used Manchester Airport in 2017.99 Both airports considered that devolution of APD to Wales could have a negative impact on them. Manchester Airports Group states:
[ … ] Whilst it could be argued that the devolution of APD could aid the development of Cardiff Airport, it could have a major impact on the ability of those serving the north of the country (predominantly Manchester Airport) to attract new routes of strategic importance to the North Wales economy.100
Graeme Elliott, Corporate Affairs Director at Manchester Airport, told us that whilst there would be “little impact on services that operate” from Manchester Airport and that devolution of APD would not “draw passengers away” from the Airport, devolution of APD had the potential to impact on “the development of new routes” because Cardiff Airport could gain more connections.101 He acknowledged that if APD were to be devolved to Wales there would be some gain in connectivity, but he stressed that “the important thing is connectivity for Wales, not necessarily in Wales”.102 Manchester Airports Group also argued that instead of devolving APD “a better investment to boost the economy of North Wales would be greater surface access to its primary gateways, with the predominant one being Manchester Airport”.103
36. One of the main airports serving Mid Wales is Birmingham Airport. In its written evidence, Birmingham Airport argued that if APD were devolved to Wales, and subsequently abolished, it would see a reduction in passenger numbers of approximately 64,000 per annum.104 It argued that many passengers in the West Midlands who currently use Birmingham Airport would start using Cardiff Airport instead and this would create “an unnecessary market distortion”.105
37. Cardiff Airport is situated in the Vale of Glamorgan, South Wales. If APD were to be devolved to Wales, and subsequently reduced or abolished, Cardiff Airport would be the only major airport to benefit, with Manchester Airport highlighting that in 2017, “more than 900,000 passengers from North Wales used Manchester”.106 While people living in South Wales could experience lower airfares, those in North Wales would continue to pay APD because their nearest airports are in England.
38. Duncan Simpson from the Tax Payers’ Alliance (TPA) argued that the benefits of the devolution of APD would not be felt across the whole of Wales, because people in Mid and North Wales use English airports and would therefore see no benefits if APD were devolved. He argued that instead of focusing on the devolution of APD to Wales, the UK Government should focus on addressing APD “much more holistically”.107 He said that a UK-wide approach, where APD was lowered or abolished across all parts of the UK, should be taken in order to make it fair.108 The TPA argued against the devolution of APD to Wales stating that the UK Government should aim to reduce the tax for the UK as a whole, in the interests of fairness.109
39. Ashley Rogers from the North Wales Economic Ambition Board (NWEAB) also argued that a UK-wide approach was needed to address the issue of APD, but if that was not possible then the NWEAB would support the devolution of APD to Wales. Despite highlighting that North Wales could benefit indirectly from the devolution and reduction of APD, through the image and branding of Wales as being open for business, he did state that “the benefits to North Wales are pretty much zero”.110 He emphasised that 91% of people in North Wales used Manchester and Liverpool Airports and that few people from North Wales use Cardiff Airport, “so there is no direct benefit for us”.111
40. Duncan Simpson from the TaxPayers’ Alliance argued that Cardiff Airport “is already benefiting from a pretty distinct competitive advantage in a few areas,” listing the ownership of Cardiff Airport by the Welsh Government as one advantage and the “numerous cash injections” the airport has seen, as another.112 He argued that bringing APD down would be an even bigger advantage to the Airport.113 A similar point was made by the Exchequer Secretary, Robert Jenrick MP, who acknowledged that under state ownership Cardiff Airport “is being invested in very heavily as well”.114
41. Whilst several witnesses argued that APD was the most expensive aviation tax in Europe, a panel of tax experts explained to us that the aviation industry is relatively under-taxed. David Phillips from the Institute of Fiscal Studies told us that while APD is higher than other taxes of a similar type internationally, “other countries could be under-taxing air travel”.115 He explained:
It should be recognised that in many ways air travel is under-taxed. Airline fuel is not subject to tax like fuel for road transport, for instance, and airline tickets are not subject to VAT domestically or internationally.116
Mr Phillips said that the UK “is actually unusual in not subjecting [air travel] to VAT.”117 Furthermore, Robert Jenrick MP, Exchequer Secretary to the Treasury also reiterated that “there is no duty on commercial aviation fuel and there is no VAT on airline tickets”.118 He argued “were you not to pursue APD, not only would we lose £3.4 billion to the Exchequer but this would also be a sector of the economy that was not paying a very significant contribution”.119
42. We heard that the devolution and subsequent reduction or scrapping of APD could increase air traffic to Cardiff Airport, which in turn could increase carbon emissions. Although APD was not introduced as an environmental tax,120 environmental organisations such as the Aviation Environment Federation (AEF) have argued that APD is “already a very modest tax on a sector that gets off lightly”.121 In a 2016 report on its concerns about devolution of APD to Scotland, AEF argued:
[ … ]in the absence of other measures, APD goes some way towards making up the shortfall for an undertaxed industry, with zero VAT or fuel duty being charged on an airline ticket”.122
AEF added that “aviation CO₂ is set to exceed the maximum level compatible with climate legislation” in the UK. It emphasised that this is even more problematic considering the commitments made by the UK Government through the signing of the 2015 Paris Agreement123 to cut emissions.124
43. The Welsh Government acknowledged that air travel had implications for environmental policy but argued that:
As environmental protection and management of natural resources are devolved issues, the Welsh Government believes it should have the ability to make decisions about how best to deliver economic growth and secure environmental objectives.125
Rebecca Evans AM and Simon Jones also highlighted that should APD be devolved to Wales, “the necessary environmental impact assessments” would be carried out before any decision would be made about how to use the tax.126
44. The Scottish Government has recently abandoned plans to scrap or reduce APD after declaring a “climate emergency”.127 Just like the Welsh Government, the Scottish Government had originally planned to abolish or reduce APD once it had been devolved to them. However, Derek Mackay MSP, Scotland’s Finance Secretary said that this was “no longer compatible” with Scotland’s climate change targets.128 The Scottish Government has said:
Following the updated advice from the UK Committee on Climate Change - and new 2045 target for net zero emissions proposed as a result - we have taken the difficult decision that reducing ADT [APD] is no longer compatible with Scotland’s new emissions reduction targets.129
45. Wales currently receives an annual block grant which is determined by the Barnett Formula. The Welsh Government acknowledged that if APD were devolved to Wales, the Welsh Government’s funding “would be correspondingly reduced through a block grant adjustment”,130 which if the Welsh Government decide to abolish or reduce APD, would leave a shortfall in Wales’s finances. Gerald Holtham raised this issue, explaining that “in the first year there is no difficulty [in making a reduction to the block grant] [ … ] but after that you cannot link the reduction in the block grant to the revenues received in the devolved territory because if you do that you would have not devolved the tax”.131 He explained:
The adjustment of the block grant cannot be correlated with the actual revenues that are received in the devolved territory. That enables the devolved territory to have a policy instrument. They can raise or lower the tax and they will get more or less revenue and it will not be cancelled by the block grant. It also exposes them to risk: if the revenue goes up or down for reasons that they cannot control, they will have to take the lumps.132
46. This was a “potential drawback” also acknowledged by the Welsh Government which stated, “in terms of costs to the Welsh Government, we recognise that tax devolution does not come in addition to current funding levels”. It continued:133
This [block grant adjustment] is likely to be initially equivalent to the amount of APD revenue generated in Wales [ … ] in addition, there are likely to be some administration costs for the Welsh Government from operating a devolved system of APD in Wales.134
In oral evidence Rebecca Evans AM told us that the adjustments made to the Welsh block grant “would reflect APD, which the latest estimates by HMRC for 2017–18 show was in the region of £6 million”.135 Therefore if APD were abolished in Wales, Wales could lose £6 million in income in real terms each year from the block grant.
47. When we asked the Welsh Government how they would they would make up the shortfall in funding if APD were abolished or reduced, Rebecca Evans AM responded:
The amount of money that is achieved through APD is in the region of £6 million a year, I think, so it is a relatively small amount of money. However, the impact it could have in terms of increasing throughput through our own airport here in Cardiff could obviously be outweighed by that.136
48. Our examination of the arguments made for and against the devolution of APD has raised a number of issues, some about devolution, some about APD itself. We have not taken a view on whether APD should be scrapped or reduced in Wales, and there are a number of finely balanced factors, including environmental concerns and the boost it could give to Cardiff Airport. It would be for the Welsh Government to decide how to use this tax, if it were devolved to Wales.
49. However, if the UK Government has been prepared to devolve the other taxes recommended by the Silk Commission, including the partial devolution of income tax which involves a significant amount of money, it should be able to trust the Welsh Government with APD, which involves only a fraction of this amount. Furthermore, the willingness of the UK Government to devolve APD partially to Northern Ireland and fully to Scotland, also raises a question of equity in the devolution process.
50. We understand the arguments made by Bristol Airport, but as it is already a strong performer with far more passengers than Cardiff Airport, we are not persuaded that its successful business would suffer significant and lasting damage, even if APD were abolished entirely.
51. After considering the evidence for and against the devolution of APD to Wales, we concluded that APD should be devolved to the National Assembly for Wales. We recommend that the UK Government set out proposals to devolve APD to the Welsh Assembly, with APD being fully devolved by 2021.
52. We nonetheless acknowledge some will have concerns about the impact that the abolition or reduction of APD could have on the environment. We note the Scottish Government has recently announced that it will abandon plans to scrap or reduce APD in Scotland due to environmental concerns. We note the Welsh Government’s commitment to conduct an environmental impact assessment if APD is devolved, before deciding what changes it would make to the duty, and we stress the importance of doing so.
David T. C. Davies, in the Chair
Susan Elan Jones
Draft Report (Devolution of Air Passenger Duty to Wales), proposed by the Chair, brought up and read.
Ordered, That the draft Report be read a second time, paragraph by paragraph.
Paragraphs 1 to 52 read and agreed to.
Summary agreed to.
Resolved, That the Report be the Fifth Report of the Committee to the House.
Ordered, That the Chair make the Report to the House.
Ordered, That embargoed copies of the Report be made available (Standing Order No. 134).
[Adjourned till Tuesday 11 June at 2pm]
See the Committee website for a list of witnesses that gave evidence to this inquiry and transcripts of the oral evidence sessions.
A full list of written evidence submitted to this inquiry is available on the Transport Committee website.