ALL eyes are on the chancellor ahead of next week’s Budget. Will he take the opportunity to cut UK taxes to help stimulate economic recovery? There is an opportunity to review not just corporation tax but many of the consumer taxes like air passenger duty (APD). Five years ago the tax that you paid on a business class seat to Shanghai was £80 – as of 1 April 2012, it will reach £184. In the forthcoming Budget, the government plans a further inflationary rise to APD in 2013, following on from the double-inflationary rise that came into effect this year. The level of UK air tax has over the years increased to a level unparalleled anywhere else in the world. The effects of this are fast becoming a barrier to Britain’s global competitiveness.
Currently, only five European countries levy a form of aviation tax. Of those five, Britain’s is by far the highest. In fact, since APD was introduced here in 1994, annual revenue raised by the tax has increased by 250 per cent. This year alone, £2.6bn of holidaymakers’ and business travellers’ money will go to the Treasury as a result. And by 2015, the government has stated it will increase revenue from APD by a further £1.2bn.
We should not be fooled into thinking that this is about the environment. The rises in APD come at a time when the new emissions trading scheme (ETS), an environmental tax on aviation, is being introduced. The government has no plans to offset the revenue raised from the ETS against APD. The reality is that since its introduction, we don’t know if a penny of revenue from APD has ever been spent on the environment.
The travel industry and its travelling public are willing to pay their way, but a 26-fold tax increase since 1994 goes against common-sense and economic logic, and is disproportionate compared to the taxes paid by other transport sectors. The decision to increase the tax at such a rate places the UK at a global competitive disadvantage. For a government that has said the economy is its number one priority this decision appears to defy reason.
The City is one of the world’s premier business destinations and as we operate in a global economy, international connectivity is absolutely fundamental to our retaining that position. However, over the years the increases in APD along with a lack of new aviation capacity have begun to affect the UK’s international connectivity. Foreign businesses are being taxed an estimated £300m each year just to do business on British soil and our own businesses suffer the additional tax burden just to fly overseas. Not surprisingly many businesses, especially from the high growth Bric countries, are choosing to do business elsewhere.
Survey after survey shows that airlines and airports are losing routes to European rivals such as Paris and Amsterdam because of the UK’s exorbitant APD. Schiphol Airport and Frankfurt International Airport each serve six Chinese cities while only three Chinese cities are served from Heathrow, our main international airport. Since 2007, when the government introduced further significant hikes in the tax, Heathrow has fallen from first to fifth place in Europe in terms of destinations served.
Britain is also losing out on billions of pounds of inbound tourism because foreign travellers are opting to avoid the UK’s high flight taxes. As the tax is paid on departure, the fear is that inbound holidaymakers and business travellers may simply by-pass Britain altogether – an issue of real concern in the run-up to the 2012 Olympics. British holidaymakers are also facing higher prices and more limited choices. Tellingly, governments in Denmark, Sweden, Malta and the Netherlands all abandoned their versions of APD after assessing the negative economic impacts on their economies.
An assessment of the impact of APD on the UK economy has never been done by the UK government. The Fair Tax on Flying Alliance, of which ABTA is a member, is calling on the chancellor to urgently commission an independent study of APD’s overall economic impact. Many British businesses strongly believe that an independent economic assessment would confirm that the negative impact of APD on UK GDP significantly outweighs its revenue benefit for the Treasury. Indeed, a British Chambers of Commerce report recently concluded that the Government’s planned APD increases could cost the British economy £100bn by 2030, and cost 25,000 jobs in the next five years alone.
Until recognition is given to the immense value derived to the UK economy from air travel, and a more equitable tax regime is established, APD will continue to inflict economic damage to the industry, the City and the UK economy. We strongly urge the chancellor to use next week’s budget as an opportunity to scrap the planned APD increases, as a prelude to the abolition of this tax in favour of a fairer tax regime.
Mark Tanzer is the chief executive of Abta – The Travel Association. Abta is a member of the Fair Tax on Flying Alliance.