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Air Passenger Duty: strengths and limitations

 

Air Passenger Duty celebrated its 20th birthday this week and yet the devolution debate has renewed calls for it to be scrapped. The Scottish National Party is promising to do just that, while some regional airports and business groups are calling for the rate to be lowered at airports outside the South East to make them more competitive. So now seems like a good time to ask: APD, what is it good for?

Is APD an unfair tax?

The industry-sponsored ‘Fairer Tax on Flying’ campaign tells us that APD is the highest passenger tax in the world, suggesting that UK air passengers pay an unfair amount of tax to fly. But is that really true?

Aviation as a whole enjoys significant tax exemptions, including paying no VAT or fuel duty. For an industry with a very significant environmental impact – only car travel comes close as a transport mode in emissions per km – this is an anomaly. If UK aviation paid VAT and fuel duty at the same rate as motorists then around £10 billion[1] could be raised for public finances. APD by comparison raises £3 billion annually. Existing air service agreements between the UK and other countries mean that fuel duty cannot be raised on international air travel, while VAT is currently zero rated for international aviation across Europe, and so APD makes up some of the shortfall in tax revenue.

A petition signed by 140 groups across 10 EU countries is set to be given to the European Parliament this month which calls for an end to international aviation being zero rated for VAT. This suggests that pressure is mounting across Europe to ensure that aviation is fairly taxed.

Is APD an environmental tax?

APD was not primarily introduced as an environmental tax but to make up some of the already mentioned shortfalls for the Exchequer.

It does to some extent follow the polluter pays principle in that those taking longer journeys and in seats taking up more space pay higher rates. However, it does not fully reflect the environmental impact aviation is associated with, locally, in terms of noise and air pollution, or globally, in terms of rapidly growing greenhouse gas emissions.

Emissions from UK aviation were supposed to be included in the EU Emissions Trading Scheme, and so the cost of flying was supposed to increase broadly in line with the cost of keeping CO2 to within a sustainable limit. However, any flights beyond the EU are now excluded, and no alternative policies have yet been introduced.

When modelling how future UK passenger demand could be restrained to the level compatible with climate targets if a new runway was built, the Airports Commission assumed that the cost of emitting a tonne of CO2 increased from £3 today to £600. This would add £43 on to a shorthaul flight compared to £13 for the basic rate of APD.

Is APD ‘pricing families out of the skies’?

Opponents of APD commonly claim that the duty adds a significant amount to the cost of a family holiday. With the average cost of a family holiday to Europe costing £2000, APD would make up under 3% of a holiday’s cost. We are yet to see evidence that indicates the 52% of the UK population who don’t take a flight each year view APD as the main financial hurdle. For those who could be classed as frequent flyers and predominately among the higher earners in the country – half of the people taking four or more flights are in the highest quintile for household income – it is only ‘fair’ that they do not benefit from the aviation industry being under taxed.

Finally, the days of cheap air fares may be short-lived. Recent analysis by the University of Southampton emphasised that efforts by the industry to cut emissions, through technology, improving operations or even introducing alternative fuels, will be insufficient to balance out the rising global demand for aviation. They concluded that for the aviation industry to meet its own climate goals, ultimately the trend in declining passenger ticket prices would have to reverse and the cost of flying increase.

So what is APD good for? In the absence of fuel duty and VAT on international aviation, or a more progressive tax where those who fly and emit more CO2 pay a correspondingly higher price, APD will have to do.


NOTES

References for any figures used above are available on request.

[1] A 2013 report by CE Delft estimated the revenue that could be raised if aviation across Europe paid VAT (£7 billion across Europe) and fuel duty (£32 billion if introduced at the same level as the average fuel duty for petrol and diesel across Europe). This would raise a total of £39 billion across Europe. As according to Eurocontrol, UK aviation makes up around a quarter of EU passengers, in approximate terms £10 billion would raised in the UK.  A study in 2005 suggested that £10 billion could be raised in the UK, supported by modelling by the UK treasury.