Despite anguished pleas from the business travel industry, the UK government refuses to scrap Air Passenger Duty (APD). Stanley Slaughter asks if it is time for a different approach
At the corporate travel forum organised by Management Solutions (UK) and ACTE in London last month, Ian Skuse made a ringing plea which would have struck a chord with many present. “It was time for the industry to take their gloves off over some of these taxes,” said Piper Smith Watton’s head of the aviation, travel and leisure team. The two taxes in his sights were VAT and the APD.
This was a bold call to arms but the nagging doubt is whether it would do any good. APD has been with us for nearly 18 years since the Conservative chancellor Kenneth Clarke introduced it in November 1994. Clarke said at the time that: “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”.
This apparent desire for fairness also came dressed up in green clothes: if air travel cost a little more, then perhaps people would fly less and so help save the planet, or so the argument went at the time.
Clarke’s tally was £5 for most European flights and £10 for other destinations. A year later he had doubled this.
Soon gone also was also any pretence that this was a green tax. The number of people flying began to increase rapidly as the no-frills carriers made their mark and with it the revenue to the exchequer. Within a few years of its introduction, APD became a valuable contributor to the nation’s finances. Currently the sum handed over to the Treasury is around £2.5bn as year which is set to rise to about £3.8bn by 2015, according to government projections.
Needless to say, rates have also steadily risen. After an 8% rise in April this year, the current rates are £13 for an economy flight of fewer than 2,000 miles (£26 for other classes); £65 for economy flight from 2,001-4,000 miles (£130); £81 for economy between 4,001-6,000 miles (£162); and £92 for economy over 6000 miles (£184). These are astonishing rises during a time when the economy has slipped back into recession.
Once that line had been crossed from green tax (and therefore vaguely acceptable tax) to excellent little earner status, the chances of it being abolished dropped dramatically. No chancellor whatever his political stripe is going to turn his back on billions of assured revenue each year. It is not what chancellors do and particularly not in this time of austerity.
So the industry is faced with two options: somehow persuade whoever is chancellor that the tax is doing more damage than it is worth or, better still, suggest a viable alternative source of revenue to replace APD. Much wind and energy has been employed on the former option. Even now the All Party Parliamentary Group on Aviation is considering written evidence from the industry on the government’s aviation “policy” (these MPs must be the only ones who believe the government has actually got one), including APD. Their words for wisdom are due to be revealed shortly.
The evidence should not be difficult to come by, at least as far as business travel is concerned. There is mounting evidence that travellers are avoiding the UK for a combination of reasons which include regular chaos at Heathrow, lack of destinations from the airport and the cost of flying out of the UK (once, of course, you have managed to get in).
So are there any viable alternatives to APD? It may be necessary to accept that any government will see flying as something of a cash cow and will tax it as much as it can. So the industry needs to come up with a solution which is fair and not even more onerous.
The obvious area to look at would be taxing aircraft rather than people – which would also return to the original concept of APD as a “green” levy. APD currently hits all airlines equally in that regardless of their efficiency, load factors, CO2 emissions for each aircraft, it taxes the people who fly. So each airline ticket includes not just the fare and other items like fuel surcharges but also APD. The carrier then gives this money to the British treasury. In the case of IAG, owner of BA and Iberia, this adds up to around £450m a year.
If the airline was taxed according to set criteria, perhaps including the above and maybe some other factors, the tax it incurred could be reflected in its fares. In this case, the worse (and least efficient) airlines would have more tax to pass on and so would become more expensive to use, while the good ones would be less expensive. There would be an incentive for airlines to improve to keep their fares competitive while passengers may be faced with interesting choices. Plus, of course, the treasury could still collect its billions.
A more constructive approach may be better than tilting at windmills. But the industry will need to move fast. APD is due to go up again next April and that is not to mention the spectre of the EU’s emissions trading scheme (ETS).