The Treasury isn’t listening on Air Passenger Duty and is not likely to, reports Ian Taylor
The “one-off adjustment” in Air Passenger Duty (APD) on “non-economy” flights beyond Europe, announced in Chancellor Jeremy Hunt’s Budget on March 6, was a blow to the long-haul premium sector.
It means an 11% rise in APD on premium economy and business class seats to destinations more than 2,000 miles from London, adding £22 to the duty on fares from April 2025. But the Chancellor’s resort to APD to raise revenue was anything but new.
APD will have been levied for 30 years come November and the Treasury’s line in that time has not changed. Successive governments have viewed APD as revenue raising and flying as relatively lightly taxed – and the fact that the airlines act as the tax collectors is a bonus.
The duty was introduced by Conservative Chancellor Kenneth Clarke from November 1994 at £5 on flights in Europe and £10 beyond, with Clarke noting: “I need to raise revenue . . . in way which does least damage to the economy.”
He argued APD was justified because: “Air travel is under-taxed. It benefits not only from a zero rate of VAT, [but also] is entirely free of tax.”
Rates doubled from November 1997 but were changed in 2001 with a ‘reduced rate’ for economy and a higher ‘standard rate’ on premium or business classes, meaning a return to a £5 economy rate and £10 premium rate on European flights and £20 or £40 for flights beyond.
Responding to industry pressure to further reduce or remove APD, the government asserted in 2003 that the “principal purpose” of APD was “to raise revenue from aviation” and in 2005 it suggested analysis of price elasticity and demand indicated air travel “has proven relatively unresponsive to changes in price”.
The failure to increase APD rates more in these years drew criticism from the Treasury Select Committee of MPs which noted: “We consider it entirely inappropriate that between 2000 and 2004, receipts from APD should have fallen 8% while passenger numbers have risen 35%.”
APD remained frozen until December 2006 when Labour Chancellor Gordon Brown announced a sudden doubling of rates (from February 2007) to address a shortfall in government finances. Brown noted aviation fuel remained untaxed and argued the sudden rise in rates “still means air travel is taxed less than cars by a very substantial amount”.
The industry responded furiously and Abta subsequently launched an industry-wide Fair Tax on Flying campaign. But at the time, senior aviation analyst Chris Tarry suggested the increase “will have no impact on short-haul travel and people will not notice the increase for long haul”.
The Environmental Audit Committee of MPs even criticised the Treasury decision, suggesting the increase did “not go nearly far enough”.
It noted: “Over 75% of tickets sold each year are for short-haul economy class flights on which APD was previously halved from April 2001, thus the doubling is only a restoration of the tax rates of five years ago, and in real terms represents a cut.”
The Coalition government which came to office in 2010 undertook a review of APD but retained the existing structure and extended the tax to previously excluded business jets despite vigorous campaigning by the travel industry and airlines for the duty to be scrapped.
Treasury minister David Gauke set out the government view one more in 2013, saying: “APD is a relatively efficient and non-regressive tax. Abolishing it would have a small impact on GDP and cause a net loss of tax receipts.”
Subsequent changes in response to industry campaigning saw APD band rates changed from 2015 – removing an anomaly which placed the Caribbean in a higher band than the US West Coast – and APD on passengers under 16 scrapped from 2016.
Treasury minister Mel Stride reiterated the government view in March 2017, telling MPs: “The purpose of APD is clearly to raise revenue.”
A further revision from April last year halved the rate on domestic services – to remove the ‘double charge’ on return flights – and created two ‘long-haul’ rates for flights up to 5,500 miles (band B) and beyond (band C).
Justifying the changes and retention of the duty, then exchequer secretary Kemi Badenoch (now secretary of state for business) noted short-haul rates “remain frozen in nominal terms for the tenth year in a row [benefiting] more than 75% of all airline passengers”.
She reminded MPs: “Aviation fuel incurs no duty and tickets are VAT-free. APD ensures the aviation sector makes a fair contribution to the public finances.”
No doubt the industry will continue to campaign for APD to be reformed, reduced, hypothecated – i.e. raised for a specific purpose such as funding production of non-fossil aviation fuels – or scrapped. But the Treasury is not listening and is not likely to.
Deloitte chief economist Ian Stewart noted this week: “Public sector debt now stands at the highest levels in 60 years. The pandemic and the energy crisis have left the UK with a fiscal hangover . . . [and] the UK will need to borrow to fund spending in each of the next five years.
“The current fiscal target is hardly onerous, [but] even achieving this will be a stretch. Doing so depends on making large cuts to public spending in areas that account for almost one-third of all spending.
“Cuts of the necessary magnitude may not be politically viable given the demands on public services.”
Put another way, there is simply no possibility the next government will reduce the revenue it collects from APD and good reason to believe it will seek more.