Air Passenger Duty

Drew Hendry Excerpts

Tuesday 10th July 2018 Westminster Hall

[Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP)]

It is a pleasure to serve under your chairmanship, Sir David. I congratulate the hon. Member for Belfast East (Gavin Robinson) on securing the debate, which is very important for the reasons he outlined. I also congratulate the Minister for being in his place this morning—I know how challenging that is at the moment, so well done.

It is very unusual to be in a debate with colleagues from the Democratic Unionist party and find that we agree furiously. In fact, it is a unique experience for me—I could recite many long disagreements—but today, the protracted issue, as the hon. Member for Belfast East rightly said, is the lack of action on APD and the economic barrier that it has put down. He further described it as an arbitrary charge that affects the economy, tourism and connectivity. Northern Ireland and Scotland, and particularly the highlands, which I represent, have something in common: air transport is not a luxury. We do not use it purely for holidays—it is part of the public transport mix and very important to us. The hon. Gentleman listed the number of airports affected, but that can be extended throughout the north of England and around the nations of the UK. Scotland is directly affected.

[John Howell]

Within five months, I will have travelled to the US, Aberdeen, Israel, which I came back from yesterday, Lisbon and Nigeria. That is not unusual and is part of what being an MP is about. I am not unusual in the scheme of things in the UK, because that is what my business colleagues are doing. The hon. Gentleman is absolutely right to make that point.

[Drew Hendry]

Other right hon. and hon. Members will have to make up their minds whether the hon. Gentleman is unusual, but I leave that with them.

As the hon. Member for Belfast East pointed out, the tax does not work as an environmental incentive. It is simply an economic disincentive. The money goes into the general tax pool every year and does not go to tackle the environmental issues other than in the way that any other tax might. There is no direct funnelling of that money into environmental initiatives—otherwise there would be significant differences. As he said, all studies show that a reduction in APD would produce a net benefit to the economy.

The hon. Member for Strangford (Jim Shannon) said that PwC stated that if APD is scrapped, the Treasury will gain. He made the telling point that a Treasury report found that the UK is ranked 135 out of 136 countries in terms the cost to the traveller. That is damning of the cost of air travel through APD. He further pointed out that Ireland scrapped APD in 2014—an independent country making a decision for itself—and tourism shot up by 47%.

The hon. Member for Belfast East introduced a side issue, which I also thoroughly agree on, of cutting VAT rates for tourism. Combined with tackling APD, that would be of huge benefit to areas throughout the nations of the UK where tourism and visitor numbers are extremely important to the local economy. We support that strongly and we would commit to it if the power was with us. On the hon. Gentleman’s closing remarks, I cannot send a Valentine to the Tories because it certainly would not be sincere, but the comment about it being a humorous way to highlight a serious problem is valid.

[Mr Gregory Campbell]

Smaller airports suffer disproportionately from APD, such as airports in Scotland and my own airport in Londonderry, where we are trying to get route development money. Does the hon. Gentleman agree that that double disadvantage—the difficulty of attracting new routes and APD—needs to be countered and that action should be taken to help?

[Drew Hendry]

I will come on to some specific issues in Scotland, because the picture is different, particularly in the highlands and islands, but the hon. Gentleman’s point is very well made for the rest of the Scotland, where there are direct APD effects.

The hon. Member for Strangford pointed out that it is the highest tax of its kind in the EU. It is worth repeating that the cost in Germany is half. The scandalous figure is that, for long haul, it is the highest tax in the world, which affects tourism. The revelation that the hon. Gentleman sneaks off to use Dublin airport will probably reverberate around his local community.

APD is a competitive disadvantage. ABTA calls it a “tax grab”. The hon. Member for Strangford pointed out that Northern Ireland is losing out on connectivity opportunities. Again, it has that in common with other parts of the nations of the UK. His feeling was that the UK Government should just get on and reduce or scrap APD. We are always grateful for some motherly advice in Parliament—there is nothing more true than penny wise and pound foolish. The UK Government could benefit from a net increase in income from other taxes. The hon. Gentleman pointed out the impact of 61,000 jobs—that is a significant benefit that raises the question of why APD has been allowed to continue to so long. Why has it not been addressed?

Air passenger duty is one of the most expensive taxes of its kind in the world, as we have heard. It hampers Scotland’s ability to secure new direct international routes and maintain existing ones. It is simply a regressive tax. Combined with the other unfair tax on our tourism sector—VAT—we face among the highest taxations in the world. An independent report found that reducing air departure tax, as it is called in Scotland, by 50% will boost Scotland’s air connectivity and economic competitiveness.

Encouraging the establishment of new routes, which would enhance business connectivity and inbound tourism, would help to generate sustainable growth. That is why the Scottish Government remain committed to a 50% reduction in ADT by the end of the Scottish Parliament in 2021. We want to get on and deliver it.

We want to abolish ADT entirely when resources allow, but that cannot be delivered until the UK Government and the Scottish Government can ensure that exemptions afforded to the highlands and islands remain. The Scottish Government understand the importance of the exemption. Therefore, the introduction of ADT in Scotland will be deferred until the issue of the highlands and islands exemption is resolved. As a highlands MP, I know only too well that air connectivity is critical for the highlands and islands, and I welcome the Scottish Government’s determination to deliver the best possible outcome for the area. I could not possibly countenance the withdrawal of support for the highlands and islands which, for the reasons I pointed out, would lead to substantial difficulties for people who rely on air transport as part of the public transport mix.

Highlands and islands airports have been exempt from air passenger duty since 2000 because of the area’s low population density and peripherality. The current APD exemption helps support the viability of commercial air services in the highlands and islands. Without it, we would face reduced flights and the withdrawal of important services to the region. Alternative surface journeys by road, rail or sea are long, particularly for those coming from the islands, whose journeys often include overnight stays or overnight ferry travel.

Recognising the social and economic importance of flights to the region, the Scottish Government have worked to reduce the cost of air travel, but residents of the highlands and islands still pay more than people who live in other regions of the UK. The Scottish Government have worked closely with Transport Scotland, VisitScotland, Highlands and Islands Enterprise and, crucially, Highlands and Islands Airports Ltd to develop the network at Inverness airport and improve international air connectivity to the region. That has brought new routes, including a British Airways route to Heathrow and a KLM service to Amsterdam, and improved the frequency of existing routes. Similar work has led to the expansion of the air network serving smaller regional airports in the highlands and islands.

The introduction of those new flights has enabled our business and tourism sectors to flourish, but more could be done. We are all too well aware that those connections remain some of the most fragile across these isles. Since being elected in 2015—I served in the last Parliament as Transport spokesperson for the Scottish National party, and I am now its Business, Energy and Industrial Strategy spokesperson—I have consistently made the point that they are crucial to Scotland and to the highlands and islands. That is why the case for the exemption remains, and why the UK Government must provide assurances about route protections and public service obligations in respect of the third runway at Heathrow.

The Minister knows that the Scottish Government cannot implement ADT unless a solution is found to the problem with the exemption. Will the UK Government look at why APD was handed over in a state that put that exemption at risk? The Scottish Government were effectively given responsibility for APD without the power to implement it. What assessment have the UK Government made of the state of APD? What is the Department doing to resolve the issue with the highlands and islands exemption while supporting the Scottish economy? The Minister will be aware that the Scottish Government have convened a new highlands and islands working group, which includes organisations with expert knowledge of the highlands and islands economy. Its first meeting was on 15 June. What support have the UK Government offered that working group?

The Scottish Government want to continue to work with the UK Government to find a solution. While the UK Government continue to set APD rates, they should take the impact on the Scottish economy seriously. As we heard, that impact is also felt by the economies of Northern Ireland and of the other nations of the UK. Since APD was transferred in the state it was, will the Minister review it for the rest of the nations of the UK?

--- Later in debate ---

[Anneliese Dodds]

I beg the hon. Gentleman’s pardon. I am very sorry about that. He will perhaps be even more perplexed when I mention that, rather than pound pinching, my family talked about looking after the pennies and the pounds looking after themselves. Perhaps that reveals a psychological difference between lowland and Ulster Scots. Of course, we need to look after the pennies and the pounds—that is the whole point. We need to trace exactly the impact of APD.

Studies suggest that the evidence about APD’s impact on passenger numbers is mixed. As many Members said, such a duty is unusual in the international context, but the number of passengers using UK airports has increased by 15%—a substantial increase—in the past five years. Of course, APD needs to be considered in the context of there being no tax on aviation fuel and no VAT on domestic or international flights. There are also different levels of APD for different kinds of flights, and exemptions for children were introduced in 2015 and extended in March 2016.

I will focus on four issues: the long-term viability of APD, regional competitiveness, the unequal impact of APD on different groups of Britons, and environmental issues. From a revenue point of view, there are clearly significant concerns about APD’s long-term viability. The Government have moved to provide industry with earlier notice of APD changes. The rates for next year were announced last autumn. That is surely positive for industry but, as I mentioned, we have had no indication of the Government’s view of the long-term trajectory of the tax, particularly in the context of the race to the bottom occasioned by internal competition in the UK. The tenor of this debate demonstrates that the starting gun has been fired on that race—it has begun, and we need to know the Government’s response.

We must view increases or reductions in APD in the context of taxation generally across income levels. It is notable that, given the increasing popularity and accessibility of air travel, many more people pay APD. As my hon. Friend the Member for North Tyneside (Mary Glindon) said, many more people enjoy hard-earned holidays abroad, and there are also people who need to travel abroad for family or work reasons.

Equally, APD is far less significant for household incomes than VAT, another transaction-based tax, which Members touched on. We would be in a different situation if the potentially regressive impacts of consumption taxes as a whole were cancelled out by progressive income taxes, for example, but of course the Government reduced the top rate of income tax. The latest Office for National Statistics figures suggest that overall, unusually in Britain’s history—at least in recent times—people in the least well-off decile pay a greater proportion of their income in tax than those in the most well-off decile. That is a peculiar situation.

Another concern we must note is about APD’s impact on regional competitiveness, which has been a focus of the debate and was perhaps its motivation. As we have discussed, APD levels were devolved to the Scottish Government in the Scotland Act 2016 and initial suggestions were that it would be halved and then potentially removed altogether.

We have discussed at length changes mooted in Northern Ireland, where there has been a call for evidence. We got useful detail about the operation of that from the hon. Member for Belfast East. As I understand it, the Government stated in February 2015 that they would also consider the case for devolving APD to the Welsh Assembly. We have therefore seen much change in relation to this duty.

All those changes naturally raise questions for airports contiguous to other airports not subject to the same APD levels, whether they are contiguous to Scotland or to the Republic of Ireland. We heard interesting thoughts on that from the right hon. Member for Belfast North (Nigel Dodds) and the hon. Members for Upper Bann (David Simpson) and for East Londonderry (Mr Campbell). Of course, the hon. Member for Strangford (Jim Shannon) —I have got it right this time—gave us a typically passionate and inclusive speech and a glimmer of his holiday plans. I hope they are more sedate and relaxing than those of the hon. Member for Henley (John Howell), whose itinerary of recent movements sent my head into a bit of a spin.

We also heard from my hon. Friend the Member for North Tyneside, who pointed out research suggesting that the duty has a significant impact on people living in her area. She is always a doughty supporter of their interests.

The Treasury published a discussion paper on options to support English regional airports in July 2015, but it is difficult to find out what concrete steps have occurred since then. Furthermore, the Government have said they will look at the matter once legislation concerning state aid changes is produced. An indication from the Minister of the Government’s thinking on that would be helpful; it is particularly important, given the points made by the hon. Member for Inverness, Nairn, Badenoch and Strathspey (Drew Hendry) about the situation for the highlands and islands.

There is often confusion in this place, though certainly not on the hon. Gentleman’s part, about the impact of EU state aid provisions in general. Of course, they prevent the provision of arbitrary support, but, as he suggested, low levels of population could be a feasible basis for such an exemption.

[Drew Hendry]

The hon. Lady makes the point well. This is an exemption based on population density and the regional difficulties in the highlands and islands. Indeed, it should be possible—I hope it is—for the Scottish and UK Governments to work together to solve that problem.

[The Exchequer Secretary to the Treasury (Robert Jenrick)]

We are.

--- Later in debate ---

[Anneliese Dodds]

I am grateful to the hon. Gentleman for those comments. I acknowledge that there is not necessarily the awareness to ensure that it does have such an impact. Some of the matters he just raised have led to calls for a redesign of the duty, which some believe could lead to a greater environmental impact. One suggestion, which was examined in 1998, was whether it would be better to levy the duty on planes rather than passengers to reduce under-occupancy and lessen emissions. However, the then Government suggested that a restructuring of APD would be more appropriate and the four bands were introduced. Of course, since then we have gone down to two bands.

It is interesting to note that the highly interventionist right hon. Member for Wokingham (John Redwood)—he is not often described as that—argued that, on reducing under-occupancy through such a measure,

“there is a green case to be made there.”—[Official Report, 23 April 2007; Vol. 459, c. 729.]

However, the practicalities of doing so are highly complex, which may be why that did not develop at that time. In particular, it is difficult to exempt transit and transfer passengers from the calculation, which led Alistair Darling away from initial moves in that direction.

The taxation of aircraft fuel has been mentioned as an alternative, but that is prevented by the network of bilateral air service agreements under the principles of the Chicago convention. It would be helpful to hear whether the Minister has been involved in attempts afoot internationally to alter that agreement to provide more flexibility.

[Drew Hendry]

I am grateful to the hon. Lady for giving way yet again. She is talking about alternatives for taxation. Does she agree that had APD been used directly for environmental measures, it would have had a huge impact? For example, it could have been involved in the creation of alternative biofuels and other incentives and operations to reduce dramatically the environmental impact, yet it has not been spent in that way at all.

[Anneliese Dodds]

I am grateful to the hon. Gentleman for that interesting point. Hypothecation of tax is relatively unusual in the UK. My party believes—he will expect me to say this—that there needs to be much more investment in those technologies. That would be positive for our country, whether funds are hypothecated from a particular area or found through other mechanisms.

One other aspect of the international context—this was mentioned to me by a Minister—is the ICAOs agreement on the carbon offsetting and reduction scheme for international aviation, which was introduced in October 2016. Members have referred to the EU’s emissions trading scheme in that context, but we have not yet heard from the Government about whether we will remain part of the ETS beyond 2020. If we follow existing patterns for APD, Parliament will set the rate for 2021 next autumn. It would be helpful to get a clearer idea about how the Government view international schemes such as that of the ICAO interacting with multilateral mechanisms such as the ETS. The general lack of clarity on environmental matters amplifies the fact that the UK Government seem to lack any long-term vision about what constitutes green taxation in the first place, let alone how it should develop in future. This is a bit of a cheesy point, but I contrast that with the shadow Treasury team, which includes a shadow Minister who is focused exactly on such matters, and on the link between environmental and Treasury issues.

In conclusion, I am afraid that I lack the poetic sensibilities and contacts of the hon. Member for Belfast East, but I congratulate him again on securing this debate. I look forward to hearing from the Minister about the five issues I raised: whether there will be a 360° review of APD; whether there is a long-term plan for it; what the Government’s view is about the substitutability of short-term flights, and whether that should be taken into account; whether the Government are participating in international attempts to reform the Chicago convention; and what their view is of the interaction between the ICAO scheme and the ETS, and what the future will hold for carbon trading for the UK beyond 2020—that point is very germane to this debate.