Clause 17
Finance Bill
10:30 am
Greg Hands (Shadow Minister, Treasury; Hammersmith and Fulham, Conservative)
I thank you for that guidance, Mr. Atkinson. That is most acceptable, and I will refer to schedule 5 in the course of my remarks on clause 17.
The Government have given us quite the runaround on air passenger duty. At the beginning of last year, they appeared to agree with the Opposition that taxing on a per-plane basis would be a better option than the existing tax on a per-passenger basis—in the name of penalising flights that run near empty. In fact, they proposed to go further than some were suggesting at the time and extend their new per-plane tax to freight and non-commercial civil flights. Then they got into problems of their own making on questions of definition and administration. Finally, they gave up altogether and decided to stick with the current tax on passengers, which is generally paid, as we know, at the point of ticket purchase.
So the 2008 pre-Budget report ran up the white flag, but with some diversionary reforms that will hit existing passengers quite hard. Here we see a story that is similar and familiar to other aspects of the Budget and Finance Bill: a number of elements that the Government tried to introduce, to increase predictability and durability in the tax system, have been completely blown out of the water.
Currently, two levels of APD are applied, according to the distance flown. Roughly speaking, there is one rate for flying to an EU destination and another rate for flying elsewhere. The pre-Budget report proposed replacing those two rates with four rates, making all flights more expensive, but with big duty increases especially on long-haul flights. Despite protests from the industry, this time the Government have not changed their mind and clause 17 and schedule 5 aim to put the pre-Budget report plans into effect.
It is worth taking a moment to examine the scale of the changes. The existing two-band regime, as I said, becomes a four-band version as laid out in schedule 5, with all rates significantly higher than those at present. The two existing bands are, first, the UK-EU and other qualifying territories such as Switzerland and Turkey, and, secondly, everywhere else. That is the status quo. At present, the first band duty is £10 per passenger for economy and £20 for all other classes; the long-haul band is £40 and £80 respectively. That is fairly straightforward at the moment.
However, the four new bands, which will come into effect from November 2009, start again with a similar band. Part 1 in schedule 5 is very similar to the present short-haul band, but with the rates charged going up by 10 per cent. to £11 and £22. It now includes the Maghreb countries and Russia west of the Ural mountains. The new part 2 territory, as outlined in schedule 5, includes North America, Egypt, the middle east, eastern Russia and Pakistan. Duty rates from November will be £45 for economy and £90 for other classes, which represents a 12.5 per cent. rise.
Part 3 is banded at £50 for economy and £100 for all premium classes. That includes India, China, Japan and much of Latin America and is a 25 per cent. rise. What I shall call part 4, but which is defined legally as all those territories which are not in parts 1 to 3, comprises Australasia and various parts of Latin America, including Argentina, Chile, Bolivia, Peru and some other smaller South American countries and the Falkland Islands. Duty will be £55 and £110 pounds, which represents a huge 37.5 per cent. increase on the status quo.
What is more, the Government are programming big rises again in 2010, far bigger than the rises I have just mentioned which come in this November. Part 1 charges will rise to £12 and £24. In each of these figures, the first is for economy and the second for premium classes. Part 2 will be £60 and £120; part 3 will be £75 and £150 and part 4 will be £85 and £170. These are huge increases. Those in the second wave were a little bit hidden in those figures, but by combining the November 2009 and November 2010 increases, we see the full magnitude of what is proposed. Looking at economy class passengers only, those flying to popular destinations such as France or Spain will face a 20 per cent. tax hike in the next 18 months. Those flying to Florida and all other destinations in the States will face a 50 per cent. hike. Those flying to India will face a huge 88 per cent. increase in the tax element of their ticket and those flying to Australia and New Zealand will face a whopping 113 per cent. tax hike.
We have a few questions on the methodology used in schedule 5A, which sets up the four new bands. First, all territories not named in the schedule are assumed to be in with Australasia and most of South America. As we know, the world has seen significant changes in boundaries since 1989, perhaps bigger than any seen since 1919. We cannot rule out future boundary changes and, indeed, the creation of new states. Yet it would appear that any new state would be thrown automatically into the band that does not include parts 1 to 3, in other words the Australasia band. For example, Kosovo is listed under part 1, but if a new county were to be set up—[Interruption.]
I think I heard the hon. Member for Taunton say “Scotland”. So let us take the uncontroversial example of Scotland, which would be thrown in with Australasia. Someone flying from London to Edinburgh would suddenly be charged not £12 in APD, but £85, which is a sevenfold increase. I note the absence of the hon. Member for Dundee, East. He might be rather interested in this. It would appear that the listings could be amended by statutory instrument. I suspect that they would be. But this appears to be a cumbersome way overall of defining these distances. What started out with an idea of relative simplicity—all territories with capital cities within 2,000 miles of London would be included in part 1—has become needlessly complicated as a result of the Government’s approach.
We briefly touched on Russian geography in our debates on tobacco duty. I should be interested to know how the Government define “west of the Urals”. There are currently no direct flights from the UK to Ekaterinburg, which is a sizeable city in the Urals. Five other EU airlines fly there so it is not impossible that this could be a future destination. Is the city in band 1 or band 2? The Government say that they are splitting Russia—the only country that is split—because
“it is administratively simple to do so”.
I am not so sure. The Russians themselves do not have a ready definition of the location of the Urals—a mountain chain that begins about 400 miles north of the Caspian sea. So precisely how would one define the cities there that could be destinations? I have given the example of Ekaterinburg, which is quite a likely future destination.
So if it is administratively simple to split Russia, which I doubt, why is it not administratively simple to split the United States, for example, where the Government are basically throwing into the same band cities such as Boston on the one hand and Honolulu and Anchorage on the other?
These points might seem trivial, but elsewhere there could be political repercussions, for example by charging flights to Pakistan 25 per cent. less tax than flights to India. That would of course be drawn from the Government’s schedule according to distance from London, but the way it has been simplified into bands could cause political problems. For example, how exactly will a chartered flight to Kashmir be defined? The airline operator would basically have to decide which bits of Kashmir were properly covered in schedule 3 as being part of India and which bits belong to Pakistan and are therefore in part 2. I raise those points because someone has designed the system with little thought for some of the considerations involved.