When Chancellor Gordon Brown announced the doubling of Air Passenger Duty in a pre-Budget statement on December 6 it is unlikely he foresaw the resulting furore.
British Airways reacted to the Chancellor’s environmental justification by pointing out its annual APD bill would be enough to offset carbon dioxide emissions from its worldwide operations four times over, while Ryanair placed a series of newspaper advertisements denouncing ‘Greedy Gordon’.
However, what most upset the trade was the imposition of the rise from February 1 – a lead-in of just eight weeks.
“Roughly four million holidays had already been booked for departure after that date,” said Federation of Tour Operators director-general Andy Cooper.
APD is levied per passenger, but it is a tax on carriers and they and the tour operators were liable for the unpaid amount.
The FTO puts the operators’ bill at up to £50 million. The airlines were entitled to recover unpaid APD from passengers – and many have done so, although BA picked up the bill itself.
Hardest hit
Tour operators could not follow suit because of the Package Travel Regulations, which compel them to absorb additional tax or duty worth up to 2% of a booking.
Some have passed part of the increase on to clients in accordance with the rules, but the rise has left the trade hugely out of pocket.
In addition, the increase overly penalised the premium economy sector. On aircraft with more than one class of seat, the charge per passenger outside economy is double the lowest rate. So APD on premium economy fares is the same as in business class.
Cooper said: “Premium economy seats tend to be good value and sell early, so they were hit disproportionately.
“We outlined these points to the Government, which claimed it had thought carefully about the increase and taken them into account. It would not consider a delay, but said it would give consideration to the question of seat class.”
Last month, Brown announced he would consider a revision of the rates only so long as any change was revenue neutral.
“We had hoped for more,” said Cooper.
The FTO has requested the disclosure of documents relating to the Treasury’s deliberations under the Freedom of Information Act, but this could take years. So, joined by TUI UK and Kuoni, it has begun legal proceedings seeking a judicial review of APD.
In the dock
It has done so on two grounds: first, that the increase had a disproportionate effect on operators, and was thus a breach of their human rights; second, that the Government was breaking Article 15 of the Chicago Convention of 1944, which stipulates that no charges or duties may be imposed unilaterally to or from a destination other than for a specified purpose.
The FTO points out the Treasury cannot say how APD revenue will be spent. “We have to demonstrate Article 15 has been incorporated into English law,” said Cooper.
“This has not been done expressly, by an Act of Parliament, but we believe it has been done by the back door because in 2004 the European Commission introduced an Air Navigation Directive incorporating Article 15 into European law.”
Can of worms
Government lawyers have suggested the article does not apply in English law, and that it does not apply to taxes. They also say the Treasury took the view of tour operators into account.
Cooper acknowledges there is no reference to tax in English-language versions of the Convention, but says the word appears in texts in other languages.
The Government has until May 4 to respond and a hearing is likely in July.
Cooper concedes: “We run a risk, but it is the view of our legal counsel that we have a better than 50% chance in a UK court and a 75% or better chance in the European Court of Justice. We believe the £50 million could be recoverable in the course of litigation.”
That outcome may depend on achieving a settlement out of court. Going the full course risks unforeseen consequences as well as a headache if APD is ruled illegal.
Cooper argues: “It is unlikely all taxes collected since 1994 will have to be refunded to customers.”
However, it is the Chicago Convention that currently rules out tax on aviation fuel. As environmentalists repeatedly point out, the fuel for air travel is the only form of oil on which no tax is paid.
If the FTO fails and a court asserts the Government’s right to impose APD, the doors to further taxation on flights might open rather than close.
Air Passenger Duty: the facts
- 1944: Chicago Convention sets rules for civilian air travel. Article 15 states: “No fees, dues or other charges shall be imposed by any [signatory] state in respect solely of entry into or exit from its territory”
- Nov 1993: Government announces introduction of APD from September 1994. Industry lobbying wins delay
- Nov 1994: APD introduced
- April 2001: APD rates varied by class of travel
- Dec 2006: Chancellor announces APD to double
- Feb 2007: APD now £10 on economy short-haul seats and £40 long-haul premium economy and business class charged £20 short-haul and £80 long-haul