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Air Passenger Duty

Volume 533: debated on Thursday 20 October 2011

Motion made, and Question proposed, That this House do now adjourn.—(Angela Watkinson.)

Thank you very much, Mr Speaker. May I say how extremely grateful I am to have the opportunity to hold this Adjournment debate?

In this place I might be known as the hon. Member for Crawley, but my constituency is perhaps better known for being the home of Gatwick airport, the world’s busiest one runway, two terminal airport. It is also home to a number of significant aviation industry companies, such as Virgin Atlantic Airways, TUI Travel and British Airways. My arguments for not increasing air passenger duty and for simplifying the system are not simply parochial; Great Britain’s historical success has been not only as a politically assured, innovative country, but as a trading nation, and we have a unique set of global links. In addition, approximately 30 million hard-working Britons save each and every year to fly off on well-deserved holidays.

Like the debate we have in the Gatwick area about the future of the airport and whether or not it should expand, the debate on the future of APD is about balancing economic growth and the needs of environmental protection—I care passionately about both. It is right that aviation should contribute to dealing with its environmental impact, but that needs to be put into perspective and weighed against its economic contribution. Aviation accounts for about 5.5% of UK total emissions. To put that in context, road transport emissions account for about 18% and energy production emissions account for about a third of the UK total. In addition, it should be noted that the aviation sector contributes some £53 billion to UK GDP and employs almost 1 million people, in addition to the further 1.5 million employed in our tourism industry, and that about half of this country’s population fly each year.

The history of APD goes back to the early 1990s, when a charge of £5 was introduced for flights to EU countries, with a £10 charge for flights to rest of the world destinations. Under Labour, over the past decade, that was significantly hiked up to a point where British aviation taxation has become by far the highest in Europe—indeed, it is eight and a half times the European average. It is worth noting that only four other European countries charge a form of APD, with a further five European countries—Denmark, Belgium, Norway, Malta and the Netherlands—having abandoned the charging of APD. The Dutch Government abandoned APD as a taxation because it brought in the equivalent of £266 million to their exchequer but cost an estimated equivalent of £950 million to the Dutch economy.

For our own Government’s part, I very much welcome the announcement that my right hon. Friend the Chancellor of the Exchequer made in the last Budget on the freezing of APD. I also very much welcome the taxation of business jet aviation for the first time ever, so long as the collection of that tax does not cost more than it brings in. I very much congratulate the Government on their consultation on the future of APD in order to get the widest possible view on that. That is all in stark contrast to the Labour party, which did not even mention the issue in its pre-election manifesto and does not seem to have a plan B, although we are quite used to Labour not having a plan A on the economy.

This is the second time I have come to listen to what the hon. Gentleman has to say and I had hoped that his speech would be somewhat non-partisan. I remind him and the Minister that the Conservative party said in its manifesto that it would move to a per-plane duty and would not keep the current banding system, which is seen to be wholly unfair. I hope that both the hon. Gentleman and the Minister will address what will be done to remove the unfair anomalies in the system.

I thank the hon. Gentleman for his intervention. He is absolutely right that a per-plane duty was discussed and I understand that there were some legal problems with it. It is important that we as a country should finally get right the future of aviation taxation in the round, not only for the sake of hard-working families who want to enjoy a holiday now and again but, most importantly, for our economy.

Quite apart from what we think in this place about the future of APD, let me quote what a few others have said. Southern rail has added its concerns about a future increase in APD by saying:

“Any tax regime that has the potential to impact negatively on Gatwick Airport’s growth plans also has the potential to impact on Southern’s growth plans. We work closely with the airport and in recent months we have seen growth in airport passenger numbers and growth in its public transport market share. We would not want this momentum to be lost or hampered as this will impact on the medium term growth aspirations of our business”.

The airport has said:

“Gatwick is a family airport. Our passengers pay £400 million in APD every year, which goes straight into the Treasury’s coffers. It is difficult to understand why hardworking families, whose household bills are rising every month, should pay so much extra just to go on holiday. For many of them, it’s a luxury they save all year to afford.”

The Gatwick Diamond Business Association, which represents all the economy and not just the aviation sector in the sub-region, has said:

“The tax regime is having a negative impact on the UK’s ability to connect with emerging markets.”

In his speech in Manchester just a couple of weeks ago, my right hon. Friend the Prime Minister pointed out how one of the keys to UK economic growth is the need to connect better with the growing markets in Asia and South America. The Gatwick Diamond Business Association went on to say:

“Increasing tourism from the Far East is important too and in total the hospitality sector is the fifth largest in the UK. This could grow by 10% over the next five years alone…provided they are given the ability to derive their fair share of the forecasted growth in global travel.”

Another local firm in the Gatwick diamond area, CGGVeritas, has taken about 1,500 flights to meet its global customers in the past year and estimates that it has paid up to £50,000 of its budget just on the APD portion of those air tickets.

Virgin Atlantic, headquartered in my constituency, takes the view that aviation has a critical role to play in UK tourism and the wider economic recovery through encouraging visitors to these shores ahead of the Olympic and Paralympic games, but this economic potential is being stifled by ever increasing levels of air passenger duty, which are already the highest in Europe.

I congratulate the hon. Gentleman on securing this debate not once, but twice, not least because it gives me the opportunity to welcome the Economic Secretary to the Treasury to her new role—a well-deserved promotion. Does the hon. Gentleman agree that part of the problem with this issue, with which I am very sympathetic, is the fact that there is a gap between the Treasury and the Department for Transport in that the Treasury leads but the Department for Transport is required to produce plans for airports and aviation?

I am grateful for that intervention. The holy grail of government is joined-up government, with all Departments and the Treasury working together. My right hon. Friend the Minister for the Cabinet Office and Paymaster General is doing a great job in trying to achieve that.

The World Economic Forum’s international tourism competitiveness report ranked the UK 134th out of 138 nations for air taxes, and we are beaten only in the amount we charge by the west African countries of Senegal, Ivory Coast, Mali and Chad. The chief executive of British Airways said:

“Aviation in the UK is the most undervalued and overtaxed industry in Britain. We want to play our full part in assisting Britain’s economic recovery, but we are held back by levels of tax on flying which are higher than anywhere else in the world”.

and added that the increases would cost BA an extra £100 million and put more pressure on ticket prices. At the recent launch of a new Air Asia X route from Kuala Lumpar to London Gatwick, its chief executive stated that it is commercially more difficult to operate from the UK than from France. He pointed out that 10% to 12% of its passengers flying from Paris to Kuala Lumpar are British nationals. That gives a sense of the shift that passengers are already starting to make.

We in Northern Ireland have an interest in airport duty. Does the hon. Gentleman agree that there is an irony that we, as island nations that have to use air transport to make those important international connections, are taxed so highly in comparison with many other regions? There is also a challenge in trying to join up what happens not just with Her Majesty’s Revenue and Customs and other Departments, but, particularly in terms of the growth of our economy, with the Department for Business, Innovation and Skills.

The hon. Lady makes a very good point. I have been pleased to see that in the context of Ireland, between the north and the south, there has been some improvement. Her point about our being island nations and relying on trade—and therefore in this day and age on aviation—is extremely well made.

The chief executive of the Association of British Travel Agents has said:

“It is vital that the Government understands the damaging impact that APD is having on the tourism industry in the UK. We already pay the highest levels of aviation tax in the world, and if the Government goes ahead with its double-inflationary increase and levies”—

as will happen on 1 January with the European emissions trading scheme tax—

“on top of this…we will see another eye-watering increase in the tax burden on the industry and on holidaymakers”.

The CBI has also rightly highlighted the fact that aviation is a critical pillar of the UK economy. Crawley-based companies such as TUI Travel, which is perhaps better known in the domestic market as First Choice and Thomson Holidays, are world leaders in developing biofuels to mitigate their environmental impact. Indeed, I am delighted that just a couple of weeks ago, they started regular biofuelled flights. Virgin Atlantic, another local company, has invested in the very latest new aircraft with the highest environmental standards.

In addition to those quotes from the industry, I should like to outline some figures that clearly demonstrate how the UK’s aviation tax burden is significantly in excess of those of our nearest competitors. As I have said, we already charge by far the highest in Europe. To fly from the UK to a European destination, we charge £12 in APD, whereas Germany charges £7 and France charges just a single euro to travel within the EU. To travel from the UK to New York, we charge £60 in APD, whereas the Germans charge £22 and the French charge just €5. To travel from the UK to Sydney, Australia, we charge an APD rate of £85 at the moment, whereas Germany charges £39 and France charges just €5. I do not think that anyone can accuse the Germans of not being astute in economic or environmental policy.

If APD were to increase from next April, there would be a huge percentage increase in just six years. For example, a family of four travelling on holiday to Florida in economy class in 2006 paid £80 in APD, whereas they would currently pay £240. If the increase goes ahead, they would pay £260 in 2012, representing an increase of 225%. A business party of four travelling to Shanghai in premium economy in 2006 were charged £160 APD; currently they are charged £600 and in 2012, if the increase goes ahead, the charge will be £656, representing a percentage increase of 310%. My final example is that of a retired couple travelling to Australia to visit family, again in economy class. In 2006, they would have been charged £40 in APD, currently they would be charged £170 and in 2012, if the increase goes ahead, they would be charged £186, representing the biggest percentage increase of 365%.

Simplifying APD would benefit not only citizens of the UK but Her Majesty’s subjects in the overseas territories. For example, the Government of the British Virgin Islands are rightly concerned that, as currently structured, APD is charged at a higher level to travel there than to fly to the west coast of the United States because the system is based on where the capital of a country is. It should not be forgotten that there are five British overseas territories in the Caribbean, as well as the many other Commonwealth countries around the world.

Before I conclude I wish to refute one suggestion mooted recently, which is that London and south-east originating flights should pay an enhanced amount of APD compared with the rest of Great Britain. I am very much opposed to that proposal because it would be unfair, unnecessary, economically misguided and environmentally dubious. It is unfair because, as I have said, we already pay one of the highest duties in the world. Millions of people living in the south-east and London should not have to pay extra just to fly from their local airports. It is unnecessary because the proposed growth of regional airports between now and 2050 is significant.

The proposal is economically misguided because while proponents of the policy say that it would rebalance the UK economy by moving key business routes to regional airports, it misunderstands the fundamental economics of long-haul business routes and ignores the fact that London’s airports serve the whole British economy. Indeed, London is a global-class city and, with the south-east, a world-class region, connecting with and competing against the likes of southern California, the east coast cities of Japan and China, the greater Frankfurt area and the Ile de France among others. Finally, the proposal is environmentally dubious because it perversely risks increased carbon emissions if south-east passengers drive hundreds of miles to regional airports for cheaper flights. More indirect flights—for example, London Heathrow to Manchester; Manchester to New York—would result in more movements and more take-offs and landings.

In conclusion, I believe that if APD is increased further and not simplified we risk damaging growth by increasing the tax burden on families and by giving our European competitors an unfair advantage in a global market. Additionally, it could create an unintended, negative environmental impact when we are already more than off-setting our aviation carbon emissions, and that is before we join the European trading scheme in the new year. Indeed, the TaxPayers Alliance, using the Department for Transport’s own figures, has highlighted the fact that, following the APD increase in 2007, aviation more than covers the cost of its environmental impact by at least £100 million. It also points to research by the Economic and Social Research Institute which found that doubling APD back in 2007 might have actually increased emissions because it reduces the relative price difference between near and far holidays.

In welcoming the Minister to her position and congratulating her, I appeal to her and the Treasury to think again, for the sake of our economy and our hard-working families, about increasing the APD burden further still.

I congratulate my hon. Friend the Member for Crawley (Henry Smith) on securing this debate and thank him for his response to the air passenger duty consultation earlier this year.

I will address the content of my hon. Friend’s speech and some of the specific points raised by hon. Members in a moment. First, let me say as the new Minister responsible for APD that not only did it fall on my desk with a thump in my first week, but the main challenge is to get the policy right for the long-term benefit of passengers, the industry, the economy and those who have responded to the consultation. I very much agree with my hon. Friend about the importance of the aviation sector. That goes without saying for all of us here in the debate. It employs substantial numbers of people—my hon. Friend’s constituents and others—directly or indirectly in the UK and is among the most productive sectors of the economy. I recognise that aviation is also an enabler and a catalyst for many businesses in the UK. The hon. Members for Belfast East (Naomi Long) and for Luton South (Gavin Shuker) pointed out the vital need for joined-up government so that we can get taxation and regulation functioning sensibly together and contributing to growth in the economy.

Let us be very clear: we all want UK aviation, and sectors such as the travel industry that rely on aviation, to succeed. That was the starting point for the APD consultation launched at Budget. It is why my predecessor, my hon. Friend the Member for Putney (Justine Greening), spent a lot of time over the past year talking and listening to airports, airlines and various organisations, including those overseas, to understand their concerns, and I hope to do the same. I note that she will be spending more time on transport issues than she might have anticipated only a few days ago. It is because we understand the pressures facing consumers, as my hon. Friend the Member for Crawley has outlined very capably, that the Chancellor froze APD in the Budget in March.

Despite that, some people have called for a cut in APD. We must be frank about the situation in which we find ourselves, as my hon. Friend has said. When we came to office last year, we inherited a fiscal deficit of historic proportions, and action has been necessary to try to steady the ship, if you will forgive another transport pun, Mr Deputy Speaker. If we are to put the economy back on the path to sustainable growth, it is imperative that we tackle the deficit and that we take contributions from all parts of society. Unfortunately, I cannot promise the House that APD will be cut in the near future. I know that many hon. Members are concerned about other aspects of APD, including the changes that the previous Government made to the structure of APD in 2009. My hon. Friend has referred to some of those changes and their impact on our Commonwealth partners.

Many stakeholders have complained about the previous Government’s changes to the banding structure of APD. Some have pointed to the anomalies created by that structure, including my hon. Friend, and we have received a number of representations from those who feel that flights to Caribbean destinations are unfairly penalised. Following in my predecessor’s footsteps, I will hold a series of meetings with stakeholders on that subject.

I congratulate the Minister on her appointment, although she has been handed a bit of a poisoned chalice.

My constituents who travel regularly to the Caribbean are concerned about the anomaly. Before the election, the hon. Member for Putney (Justine Greening), who was then shadow Economic Secretary, often posed in photographs with Ministers from the Caribbean and gave assurances about those anomalies. We understand that many other assurances will not be kept, including on the move to per-plane duty. Will the Minister at least give us the comfort that the Caribbean anomaly, if I can put it that way, will be addressed, whatever the Government propose?

I can certainly give the hon. Gentleman an assurance that I shall carry on meeting representatives from the Caribbean and, indeed, from Australia and New Zealand very shortly, to discuss those concerns. I am afraid, however, for reasons I shall come on to, that it is rather difficult at this precise moment to give him further assurances, because the Government are due to respond to the consultation. I shall shortly deal with the detail of that, and with his points about per-plane duty.

The good news is that the consultation enabled Ministers to go into all those issues in more detail. The hon. Gentleman will know that in the Budget, the Chancellor announced that, for the first time, as my hon. Friend the Member for Crawley described, APD would be extended to passengers flying aboard business jets, which is another important feature that we have made clear. That addresses a clear unfairness in the system, and the consultation invited views on how that should be addressed.

I cannot promise the hon. Member for Hammersmith (Mr Slaughter) or anyone else that we will meet everyone’s wishes, but we will try to deliver an APD system that is fairer, simpler and more efficient, and the Chancellor will set out those details in due course. On the hon. Gentleman’s point about per-plane duty, to make the position clear, the UK’s international obligations in that area include air service agreements with more than 150 countries, including the 1944 Chicago convention. We will not introduce per-plane duty at present because of concerns about legality and feasibility. We will, however, work with international partners to continue building consensus.

I want to make just a small observation. Before the election, the Conservatives campaigned on moving to a per-plane duty. Given the complexity that the Minister mentioned, can she shed some light on why they said that they would do so?

The glory of coming into government is that one realises that all sorts of things are worse than one imagined, and that is a case in point. As I have said, the legality and feasibility of that approach have been clarified quite extensively.

I will touch briefly on the question of the devolution of APD. As hon. Members will know, the Chancellor announced that from 1 November 2011 the rate of APD for direct, long-haul passengers departing from Northern Ireland will be cut to the short-haul rate, which I hope we all agree is good for constituents in Belfast East and elsewhere in Northern Ireland. That measure was in response to the unique challenge facing Northern Ireland and is designed to ensure that local airports remain competitive. However, in order to provide a permanent solution to the issue, the Government have launched a process for the devolution of APD to the Northern Ireland Assembly. We are working in close consultation with the Executive to take that forward. I would also like to offer my thanks, and those of my predecessor, to members of the Northern Ireland Affairs Committee for the diligent and helpful input they provided on the issue.

Let me also say a few words about APD and the regions, which hon. Members may be interested in. We received around 500 responses to the APD consultation, many of which related specifically to the question of regional APD rates. It is certainly fair to say that there is no consensus on the matter. Some regional airports have asked us to consider lower APD rates for the regions, but several airlines and hon. Members have asked us to consider the opposite. I note the views of my hon. Friend the Member for Crawley in this regard. On that question, and on the broader reform of APD, the Government aim to publish a full response to the consultation later this autumn. We will of course take into account the views expressed in this debate.

There is one other issue that has been raised which I must address quickly: the environmental impact of aviation. We must recognise the scale of the challenge that confronts us. Since 1990, CO2 emissions from UK aviation have more than doubled. In 2010 they accounted for around 6% of total UK CO2 emissions. As other sectors decarbonise over the coming decades, aviation emissions are likely to make up an increasingly large proportion of total UK emissions. The Government’s approach to this problem is a pragmatic one. The international nature of aviation requires an international response, which is why we support the inclusion of aviation in the EU emissions trading system from 2012. At the same time, the Department for Transport, in true joined-up fashion, is considering the best way to tackle local environmental impacts as part of its aviation policy review.

I know that some have called for the abolition of APD once aviation enters the ETS, but I must point out, as others have done, that APD is fundamentally a revenue-raising duty and currently raises around £2.5 billion a year. The forecast revenues that will result from aviation joining the ETS are only around £0.1 billion a year, reflecting the fact that under the relevant EU directive most of the allowances for the system will be given to airlines for free. In looking forward, however, the Government will assess the revenue requirements from aviation taxes, including those from the ETS, in the round.

In conclusion, I hope that we can continue to have constructive debates in a way that helps deliver a tax system for air transport that is fair and sustainable for the long term and puts us on a positive footing in the world. I thank my hon. Friend the Member for Crawley again for bringing this matter to the attention of the House.

Question put and agreed to.

House adjourned.