As the old saying goes, the only two certainties in life are death and taxes. For business travellers, we can take a few more things for granted; delayed flights, excess baggage costs and Air Passenger Duty (APD). For many years, APD has been seen by people within the aviation and wider travel industry as a straightforward swindle on air travellers; a tax that has very little justification in terms of benefits for airlines or end-users. Many will agree that it simply increases the cost of business travel, makes it more difficult for UK companies to conduct business abroad and ultimately makes the British economy less competitive in the global market.
However, for every story there are at least two sides. A spokesman from Her Majesty’s Treasury will no doubt give an alternative view of APD and why it is necessary. In light of another recent appeal by Willie Walsh, CEO of the International Airlines Group, for the government to consign APD to the dustbin of history, we take a brief look at both sides of the argument to determine whether an end to APD is either desirable or realistic.
The case against Air Passenger Duty
The case raised against APD by Willie Walsh and other industry spokespeople is impassioned, clear and well thought out. According to this perspective, APD is simply illogical. While the UK spends millions of pounds each year attracting business travellers to the country, it then undoes the good work by charging them anything up to £142 in tax in order to return home. Not only does this “rip off” discourage foreign business travellers to visit the UK, but it also punishes British businesses. Walsh estimates that the effects of APD costs the UK up to 0.5% of its GDP and loses the aviation industry up to 60,000 jobs. Critics also add that APD disproportionately affects long haul travellers (bands B-D) travelling 2000 to 6000 miles. This this disincentivises business travel to emerging markets such as Brazil, India and China, which are becoming ever more important to the UK economy.
The case in favour of Air Passenger Duty
How does the Treasury respond to the criticisms of APD? The strongest comeback is that APD is fair and necessary because it is banded based on the number of miles travelled. So, short haul flights of up to 2000 miles pay either £13 (lower rate) or £26 (higher rate) APD per traveller. This covers all European destinations and flights to the eastern seaboard business centres of the USA, together encompassing the majority of British business travel.
It is only when travelling more than 2000 miles that APD hikes up to £71 (lower rate) and £142 (higher rate). According to Treasury figures, APD raised £215 million in 2015 and is projected to raise £225 million in 2016, rising to £250 million per year by 2019. The government argues that this additional money is being pumped into the UK aviation industry to improve infrastructure and encourage more business travel. For instance, some of the money may go towards the long debated (and delayed) third runway extension at Heathrow.
Furthermore, according to the Treasury, critics of APD ignore the fact that there is still no VAT or fuel duty charged on flying; the costs of APD therefore being far less than if other taxes were charged. Where business travellers are concerned, APD charges are more than covered by the cut in corporation tax to 20%, a tax cut estimated to save businesses £9.5 billion each year by the end of 2016.
So what is the outlook for APD?
To some extent it seems that the government has listened to the criticisms of APD. From the beginning of this year, bands B, C and D had been merged into one flat rate. In real terms, this means if you are travelling between 2,000 and 4,000 miles you will pay more APD (an increase from £138 to £142 higher rate), but if you travel more than 4,000 miles you will see a noticeable reduction in APD (£142 down from £194 higher rate for flights over 6,000 miles). So travellers to and from China will be less penalised by the duty than they were previously. Short haul flights will be unaffected.
In light of this, it is very unlikely that APD will be abolished in 2016, although the pressure is likely to continue. Depending on how the economy goes this year, George Osborne will keep the abolition of APD as a wildcard concession he has the option to bring out if circumstances demand it.