by Duncan Simpson, research director at the TaxPayers’ Alliance
Wednesday’s Budget was certainly a mixed bag for taxpayers. While we welcome the shake up of alcohol duties and business rates, it was also clear that the chancellor’s purse strings are not going to close for some time. But ahead of COP26 - which starts tomorrow - there was one element of the fiscal plans that stirred up controversy: the changes to air passenger duty (APD).
From April 2023, the rate on all flights between airports in England, Scotland, Wales and Northern Ireland will be reduced from £13 to £6.50. On the other side of the coin, a new “ultra-long-haul” rate will be introduced for flights in excess of 5,500 miles.
Naturally, opposition parties and environmental groups have expressed their outrage at the new lower domestic rate, citing concerns of an extra 410,000 air journeys per year. However, what they fail to take into account is the fact that APD is not formally an environmental tax.
It was introduced in 1994 by then chancellor Ken Clarke to correct a perceived under-taxation of the aviation sector. And there’s validity to this: air fares are VAT-exempt and kerosene (aviation fuel) is exempt from tax (unlike petrol and diesel for road vehicles) by virtue of membership of the International Civil Aviation Organization (ICAO). It’s also the case that short-haul flights - both domestic and to the European Economic Area (EEA) -are already covered by the Emissions Trading Scheme, which replaced the EU scheme at the start of the year.
Overall the announcement is great news for domestic flyers and something we called for in HM Treasury’s consultation on aviation tax reform. There are huge opportunities to improve and boost commercial activity within the United Kingdom. As the chancellor outlined in an interview on the BBC Radio 4 Today programme:
“[A lower domestic rate] supports the Union, it supports regional airports which are big employers but also, if you take a step back, aviation in general only accounts for about 7 or 8 per cent of our overall carbon emissions and of that, I think domestic aviation is less than 5 per cent so it is a tiny proportion."
Where we differ with the chancellor is on the new ultra-long-haul rate. The problem with APD in general is that the link between passenger numbers and carbon emissions are weak. For example, the duty isn’t concerned with the fuel efficiency of the aircraft - like we typically see with cars and vans.
Negative externalities, such as pollution or carbon emissions, are a fundamental part of economics, but air passenger duty does little to offset them. At the next Budget, the chancellor should abolish APD, replacing it with an “air flight duty” based on emissions, not passengers, and limited to non-EEA flights not covered by the Emissions Trading Scheme. This would be a better deal for taxpayers and encourage airlines to use more efficient aircraft.