UK: Air Passenger Duty – Continuing Controversy

On 6 December 2011 the UK Government confirmed that Air Passenger Duty (APD) rates will increase by some 8% from April 2012 and that the scope of the APD regime will be extended to include the bulk of business aviation from April 2013 onwards. Northern Ireland has also been singled out for reduced APD rates, principally on the basis of the economic impact that a continued loss of passengers to Dublin Airport could have on Northern Ireland's economy and more specifically US investment.

The travel industry's reaction to the Government's recent announcements has been scathing, not least because, following an extensive period of Government consultation, no changes have been made to the way in which APD is levied on commercial flights, with the problematic distance banding and the arguably disproportionate application of 'standard' (i.e. business/first class) APD rates to those travelling in premium economy being retained.

Background

APD was introduced by the UK Government in 1994, both for supposed environmental reasons and because the government viewed air travel as under-taxed compared with other sectors of the UK economy, particularly given the zero VAT rating applied to commercial air travel and the tax free uplift of fuel on all international and most domestic flights.

In its December 2011 response to the consultation on APD reform the Government confirmed that APD is "primarily a revenue-raising duty which makes an important contribution to the public finances, whilst also giving rise to secondary environmental benefits". Many commentators continue to question the supposed environmental benefits, not least because APD is payable by operators of qualifying aircraft on a per passenger basis where such aircraft depart airports in the UK and therefore takes no account of the efficient use of or emissions from such aircraft, nor is APD revenue ring-fenced for environmental applications. Furthermore, with aviation now part of the EU ETS, some feel that the justification of APD on environmental grounds is wholly inappropriate and that APD rates should be significantly reduced or scrapped altogether to reflect the additional revenue generated by the Government in the auctioning of EU ETS allowances.

In 1994 APD rates were set at £5 (lowest class of travel) and £10 (other classes of travel) for European destinations and £20/£40 respectively for other destinations. Since then multiple revisions to APD rates have taken place, as well as the introduction of controversial distance bandings (see below). The Chancellor's Autumn Statement of 29 November 2011 confirmed that APD rates will increase as of April 2012. The increase of some 8% will see the APD levied in respect of an economy passenger flying from London to Paris increase from £12 to £13. APD levied in respect of a premium economy passenger travelling from London to Sydney will increase from £170 to £184. These changes constitute increases of 260% and 460% respectively as against the original 1994 rates levied for the same journeys. In practice most operators recover the cost of APD from passengers, thereby making the UK one of the world's most expensive places to fly from. Strong arguments have been put forward regarding the detrimental effect APD is having on inbound tourism and foreign investment, but based on the Government's response to the consultation on APD reform, it seems that such arguments are effectively being ignored.

The FTO challenge

A key challenge to APD was made in the 2007 case of R (on the application of the Federation of Tour Operators and others) v Her Majesty's Treasury. The Federation of Tour Operators (FTO), whose members had been prejudiced by the retrospective increase in APD with effect from 1 February 2007, challenged the legality of APD before the English High Court, principally on the basis that APD infringes Art.15 of the Chicago Convention 1944 because it falls within the prohibition of "fees, dues or other charges" which are levied "in respect solely of the right of transit over or entry into or exit from its territory of any aircraft of a contracting State or persons or property thereon." Various other points were raised, principally on the basis of rights under Art.1 of the European Convention on Human Rights and Art.49 of the European Treaty (now Art.56 of the TFEU).

The High Court held that APD did not infringe Art.15, both because Art.15 did not cover taxes and because APD was not levied 'solely' in respect of the right of transit/entry/ exit (principally because it was also payable in respect of domestic flights). The High Court's reasoning was arguably flawed. Firstly, due respect was not given to the various authentic Chicago Convention texts. The final paragraphs of the Chicago Convention (as amended) provide that the texts in all four languages (English, French, Spanish and Russian) are of equal authenticity. The Spanish and Russian texts expressly refer to 'taxes', yet the Judge thought it proper to give 'some primacy' to the English text, which is more ambiguous.

The Judge's emphasis on and analysis of the word 'solely' within the context of Art.15 was also problematic. Firstly, the proposition that APD levied on a passenger departing the UK on an international flight is not levied 'solely' in respect of the passenger's exit from the UK is arguably unrealistic. Furthermore, the Chicago Convention deals with international carriage by air and it is questionable whether the legislators intended for its provisions to be capable of being circumvented by simply applying the same tax to domestic carriage.

The case was (unsuccessfully) appealed, but disappointingly only the human rights point was challenged, and the various arguments dealing with Art.15 of the Chicago Convention were not properly addressed. The legality of APD under the Chicago Convention is arguably open to further challenge, and it is not impossible that a court could come to a different view in a future case, particularly concerning a flight tax.

APD unchanged

Notwithstanding industry criticism of the existing banding structure, in its response to the consultation on APD reform, the Government confirmed that the four band structure based on the distance from London to the capital city of the destination country will remain unchanged. As widely publicised, the present system contains a number of geographical anomalies, such as passengers flying from London to Hawaii paying a lower rate of APD than passengers on much shorter flights from London to Caribbean destinations. Many stakeholders believe that a two band structure would be more effective. In its response the Government has argued that no banding structure will be entirely free of anomalies and said that on balance it has decided to retain the current banding.

The APD treatment of premium economy seating within the same class of travel as first and business ('standard rate') is widely argued to have an impact on the ability of carriers to market and sell these products and there is concern that such treatment may ultimately lead to their removal, to the detriment of consumer choice. The Government has confirmed that no change will be made to the class of travel distinction under the APD regime, arguing that premium economy products vary significantly between airlines and that any attempt to define premium economy would increase the complexity of the APD regime and therefore the administrative burden for both the travel industry and HMRC.

Northern Ireland – a special case?

The Government announced in September 2011 that as of 1 November 2011 APD rates for direct long-haul routes departing from airports in Northern Ireland would be levied at the prevailing band 'A' rate (currently £12 at the reduced rate and £24 at the standard rate). The Government is also taking steps to devolve aspects of APD to the Northern Ireland Assembly. The move was principally triggered by a warning from Continental Airlines that it was considering discontinuing its Belfast-Newark service, being the only direct transatlantic service to/from Northern Ireland. In order to make the route competitive with transatlantic departures from Dublin Airport (where Air Ticket Tax (ATT) is levied at a flat rate of €3 per passenger), Continental had been absorbing the APD rather than passing this on to passengers in the usual manner. However, Continental made it clear that this position was unsustainable and that failing the introduction of an urgent solution there was a significant risk that the route would need to be withdrawn.

Large numbers of air passengers were choosing to travel from the Belfast region to Dublin (less than 90 minutes from Belfast) in order to benefit from the lower ATT as compared with the APD levied on departures from Belfast. By way of example, prior to the introduction of the new measures the APD levied in respect of a family of four travelling in economy class from Belfast to the USA (Band 'B') was £240. The ATT levied in respect of the family of four on the same flight departing Dublin is only €12. It is likely that ATT will be disbanded altogether in the near future as part of a package of measures designed to encourage tourism, which would further increase the disparity between the cost of air travel departing from airports in Northern Ireland and the neighbouring Republic of Ireland.

Numerous stakeholders have argued that the closure of Continental's route would have a significant impact on the ability of Northern Ireland to effectively compete with the Republic of Ireland for US investment. In justifying the special APD rates for departures from Northern Ireland, the Government has argued that Northern Ireland is geographically isolated from the rest of the UK and is especially dependent on strong air transport links, particularly given the absence of viable alternatives to air travel for connection to the mainland. It seems clear that because Northern Ireland shares a land border with a Member State which levies duty at a materially lower rate, stakeholders in the commercial air transport industry are placed at a significant disadvantage. However, rather than singling out Northern Ireland as a special case, it might be argued that this situation simply constitutes further support for the concerns that have been continually expressed since the introduction of APD in 1994, namely that APD impacts the ability of those in the UK to travel by air, discourages inward tourism and investment and places the UK at a direct disadvantage as against other EU Member States who levy materially lower levels of duty on air travel or no duty at all.

Application of APD to business jets

In line with its intention to bring smaller aircraft and business jets within the scope of APD, the Government has confirmed that the Finance Act 1994 will be amended so that as of 1 April 2013 the de minimis weight limit below which aircraft are not subject to APD will be reduced from 10 tonnes to 5.7 tonnes. It is estimated that this will bring some 50,000 additional flights per year within the scope of the APD regime.

The suggestion in the 2011 Budget that APD would be applied to business jets at a flat rate irrespective of distance travelled has been dropped, with the Government now having confirmed that the same distance banding structure and rates of APD that apply to passengers on board commercial flights will apply to business jets. The Act will also define a combination of weight and seating capacity for business jets (certified authorised weight over 20 tonnes and fewer than 19 seats) considered to be providing a 'premium service', with such flights paying a 'premium' APD rate of double the prevailing standard business/first class rate of APD.

The definition of 'agreement for carriage' under the Act will be amended to take into account the fact that private jet passengers are not always flown in accordance with formal arrangements in the same way as commercial passengers. Changes will also be made to the definition of 'passenger' because under the current regime exemptions apply to passengers who are not carried for reward. In practice many passengers in private jets are carried for no reward or fare, particularly in the context of business travel, and under the current wording such carriage would therefore fall outside the scope of the APD regime.

The implementation date of April 2013 is itself a source of considerable controversy as this is seen by some as favouritism in support of those who are more able to pay APD, leaving passengers on commercial flights disadvantaged. The Government argues that the changes will bring a substantial number of new parties within the scope of the APD regime and that additional time is needed to develop rules which are specifically tailored to business aviation. However, given the increase of some 8% in APD rates for commercial passengers from April 2012, the delay in implementing the APD for business jets might be seen as unfair.

Opponents argue that business aviation plays a key role promoting economic growth in tough times and that the extension of APD to incorporate the majority of business aviation will be counterproductive in broader economic terms. The argument that VAT is not levied on flights from the UK, as voiced by the Government in defence of the application of APD to commercial aviation, is not necessarily true in the context of business aviation. One might also argue that the level of service provided to passengers travelling long-haul in first class is largely similar to the experience of passengers travelling onboard a business jets falling within the new category of 'premium services'. Charging the latter passenger double the rate of APD applied to the former might therefore be seen as unjustifiable.

Conclusion

It is disappointing that, notwithstanding the invaluable input from key stakeholders in the air transport industry during the recent consultation on APD reform, the Government has chosen to leave the bulk of the APD regime unamended, save for the increased rates, future application of APD to business jets and the exemptions for Northern Ireland. The continued use of distance banding which is largely unrelated to actual flight distance is inequitable, particularly in view of the geographical anomalies created by such a system, as is the class of travel structure which sees premium economy and first class travel taxed at the same rate, notwithstanding the fact that the two products are in no way comparable. With other countries such as the Netherlands and Denmark disbanding their respective 'ticket taxes', principally in recognition of the damage this was doing to the growth of the air transport sector, it is questionable whether the continued taxation of air travel at one of the highest rates in the world is a sustainable or sensible position for the UK to adopt. Furthermore, notwithstanding the decision in the FTO case, the legality of APD remains questionable and therefore seems ripe for further challenge.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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