The future of aviation - Transport Committee Contents

6  Taxes and charges

Taxation of aviation

Levels of taxation

123. Air travel is not taxed in the same way as other goods and services. This generates some strongly diverging views and analyses, as we heard during our inquiry. Under the 1944 Chicago Convention on International Civil Aviation, tax may not be levied on aviation fuel for international airlines.[146] It would also be difficult for a country to unilaterally impose a tax on aviation fuel because airlines would seek to refuel elsewhere.[147] Air travel tickets are zero-rated for VAT but, since 1994, passengers have paid Air Passenger Duty (APD).

124. The Oxford Economic Forecasting study found that the aviation industry contributed £3.6 billion to the Exchequer in 2004 through APD, income tax, corporation tax and national insurance. The contribution of APD has risen over recent years and, according to the Airport Operators Association, was around £2 billion in 2007.[148]

125. The Aviation Environment Federation and others say that the aviation industry is heavily under-taxed. Whereas motorists pay 54 pence per litre in fuel duty plus around 15 pence per litre in VAT, no tax or duty is payable on aviation fuel. They point to the Government report on Heathrow which said that "Were the UK to charge a fuel duty and VAT on tickets, this could result in revenues of around £10 billion."[149] The Department for Transport says that this is "an initial first order estimate" and seems reluctant to provide any further details.[150] It also believes:

[…] that there is a place for domestic aviation taxation alongside the ETS as aircraft emit other externalities and the industry should also make a fair contribution to the public finances. The Treasury keeps all taxes under review and will monitor the interaction of the two instruments as ETS auctioning rates rise.[151]

126. The British Air Transport Association compares aviation to rail and bus travel where operators pay (net) only low rates of fuel duty and travel is zero-rated for VAT. It also points out that, whereas billions of pounds of taxpayers money are invested in rail and bus travel, airports and airlines receive virtually no subsidy.

127. Taxation is an aspect of aviation that is hotly disputed. The industry argues that it contributes heavily to the Treasury whilst critics say it should pay more. Yet it ought be relatively straightforward to provide a factual account. We asked for this, but did not receive one. It would be helpful if the Government clarified this issue with a statement of the revenues raised, the extent of any tax exemptions and how these compare to the social and environmental costs of aviation. As part of this clarification, the Government needs to explain the basis for its earlier statement that an additional £10 billion might be raised if VAT and fuel duty were applied to aviation.


128. The CAA told us that, to date, APD has had no discernible effect on the growth in passenger numbers. Dr Bush explained that APD usually forms only a small percentage of the overall cost of a holiday or trip so demand for air travel is relatively insensitive to changes in APD.[152] That said, the rate of APD rose substantially in 2008 and increased again in November 2009, with further rises in 2010. Airline representatives told us that they are concerned about additional taxation, particularly in the current difficult economic climate. They are also concerned about distortions that APD may cause—in terms of competition between airlines and also between destinations.

129. Airline representatives were of the view that APD covered all the environmental costs of aviation although they concluded that it was ineffective as an environmental tax. They are seeking a reduction in APD to offset the costs of joining the EU ETS which they favour. However, the Government has made no commitment to this proposal.[153]

130. The aviation industry is in a precarious state and the Government must ensure that it does not damage its long-term viability through excessive increases in taxation. That said, it is only reasonable that aviation should contribute its fair share to the Exchequer.

131. For historic reasons, aviation has avoided general taxes—VAT and fuel duty—which apply to most service industries. Whilst it is true that bus and rail travel are lightly taxed and subsidised, there are clear social and environmental reasons for encouraging these modes, which do not apply to aviation. However, there are no modes of transport without environmental impacts.

132. It is right that the aviation sector should be contributing its fair share to Government revenues. Air Passenger Duty was introduced to raise revenue for the Government. It has been modified to provide 'green signals' but the Government states that it is not an environmental charge. The major environmental cost of aviation—climate change impacts—will be covered by the EU Emissions Trading Scheme charges from 2012. The level of Air Passenger Duty should therefore be set according to the Government's revenue needs, taking careful account of the economic importance of the aviation industry. It also needs to be mindful of the state of the aviation industry in the current economic recession and to take account of competition from other European airports.

Covering environmental costs

133. The 2003 Air Transport White Paper said that the Government would "work to ensure that aviation meets its external costs, including environmental and health costs".[154] The Government updated its estimate of aviation's climate change costs in 2008, concluding that the aviation sector's climate change costs in 2006 were around £1.8 billion.[155] It points out that considerable sensitivity is attached to assumptions regarding the price for carbon and the radiative forcing factor used.[156] Other environmental costs were not updated. These had been previously estimated at £119-£236 million for local air quality and £25 million for noise per annum in 2000.

134. The Government concludes that, in 2006, revenues from aviation, in the form of APD and AVGAS payments, failed to cover around £0.8 billion of aviation's climate change cost. However, with the doubling of APD, announced in February 2007, "aviation would cover its climate change costs with an excess of £0.1 billion."

135. APD was introduced "to broaden the tax base", that is as a revenue raising measure, by the then Chancellor, Rt Hon Kenneth Clarke MP, in 1994.[157] Originally a simple flat-rate tax, it has evolved into four bands according to trip distance, with a higher 'standard' rate chargeable on premium fares within each band. It has taken on a secondary role of a green tax and its purpose is not always clear.[158] In 2007 the Government announced that it intended to replace APD with a 'per plane' duty—to encourage fuel efficiency and reduce CO2 emissions—but this idea was abandoned the following year because its impact was seen as marginal and because of concerns about the economic impacts on air freight and on regional airports.

136. Although APD has been restructured to reflect the distance flown, and therefore—broadly speaking—CO2 emissions, the Government is clear that APD is not an environmental charge:

[…] the Government emphasises that whilst its domestic aviation tax regime is structured so as to send environmental signals, neither APD nor AVGAS should be seen as an environmental charge designed solely to capture the environmental cost of aviation.[159]


Security costs

137. The need for improved security is not disputed. However, our witnesses were generally critical of the impact of security measures on passengers and airlines. The Board of Airline Representatives in the UK (BAR UK) says:

The aviation sector has a lot of regulatory burden placed on it by the security environment….airlines are being expected to absorb very high additional costs without any demonstrable benefits to them, their customers, their staff or, in the case of National ID Cards, security.[160]

The impact on passengers and the industry of additional security arrangements was also made clear to us on our visit to the USA where industry representatives told us of the additional costs, delays and reduced passenger numbers.

138. The combined effect of additional security costs, other airport charges and APD, is a concern of the aviation industry, including general and business aviation, in the current economic climate.[161] We urge the Government to do all it can to develop aviation security procedures that minimise cost and delays for passengers, whilst not sacrificing safety and security.

146   HL Deb, 19 October 2000, cols 1194-6  Back

147   In the UK, aviation gasoline-used by smaller aircraft-is subject to aviation gasoline duty (Avgas). From 1 September 2009 the rate was 0.3457p per litre. However, kerosene-used by aircraft jet engines-is untaxed.  Back

148   Ev 271 Back

149   Department for Transport, Summary of responses to the Government's consultation on the aviation emissions cost assessment (amended version), October 2008, p 14 Back

150   Ev 115 Back

151   Department for Transport, Summary of responses to the Government's consultation on the aviation emissions cost assessment (amended version), October 2008, p 15 Back

152   Qq 42-43 Back

153   Q 320 Back

154   Department for Transport, The Future of Air Transport, Cm 6046, December 2003, p 31 Back

155   Department for Transport, Aviation emissions cost assessment, 2008, p 6  Back

156   Radiative forcing refers to the greater climate change impact of greenhouse gases emitted at altitude.  Back

157   HC Deb, 30 November 1993, col 934 Back

158   Qq 577, 583-584 Back

159   Department for Transport, Aviation Emissions Cost Assessment, 2008, p 9 Back

160   Ev 364 Back

161   Ev 425 Back

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