Clause 17

Finance Bill – in a Public Bill Committee at 10:30 am on 2nd June 2009.

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Rates of air passenger duty

Question proposed, That the clause stand part of the Bill.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

Thank you, Mr. Atkinson. Will it be convenient to discuss schedule 5 at the same time as clause 17?

Photo of Peter Atkinson Peter Atkinson Conservative, Hexham

No, we were going to debate schedule 5 separately. However, if it would assist the Committee, I propose to employ considerable latitude and allow mention of schedule 5 on the basis that we do not have an extended stand part debate on it. Is that acceptable?

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

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.

Photo of James Duddridge James Duddridge Opposition Whip (Commons)

My hon. Friend has made an excellent point and raises a few things that I had not considered but which the Minister and the Department clearly should have considered  in more detail. Will he be pressing for a simple map of the world outlining, pictorially and geographically rather than in words, precisely what is and is not covered?

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

That would certainly be helpful, because it would start to focus minds on some of the difficulties caused by simply drawing up a list of existing countries and pretending that there are no political ramifications in doing so.

Many people are concerned that the Caribbean, which is most dependent on tourism, will be included in the part 3 territories. A family of four will pay £300 in APD from November 2010 for a return flight to the Caribbean, which is a lot of money for a family holiday. Caribbean Governments have reacted furiously to that proposal—I happen to know that because some of their high commissions are located in my constituency and around 10 per cent. of my constituents are of Caribbean origin. Under the bands, Florida would be in part 2, but the whole of the Caribbean would be in part 3. I have read in the Travel Trade Gazette that the Governments of those countries have drawn up lists of UK parliamentary constituencies where their voices can make a big difference. The Jamaican tourism Minister, Ed Bartlett, speaking at a reception here in the Palace of Westminster in April said:

The Caribbean communities in the UK are beginning to understand this will hurt them.”

Moving away from some of the geographical problems to which the schedule will give rise, the Government’s change in policy has consequences, and there is a need to examine in some detail the case for their 180-degree U-turn since they first set out their intention to move to a per-plane tax in January 2008. When they originally launched their consultation in that month, the intention to move to a per-plane tax was absolutely clear. The Government would

“replace air passenger duty with a duty payable per plane rather than per passenger.”

In case of doubt, the consultation document was unambiguous:

“This reform will take place on 1 November 2009, and has the objective of sending a better environmental signal, and ensuring that aviation makes a greater contribution to covering its environmental costs” while ensuring that a fair level of revenue continues to be raised from the sector in order

“to support public services.”

The document describes as a principle the need to provide incentives for the more efficient use of planes by taxing similarly sized aircraft the same, no matter how full the plane. There we have it: in January 2008 they set out a clear intention, with the reasons stated, to move to a per-plane tax rather than a per-passenger tax.

Last year’s Finance Act provided for certain powers to proceed in that direction, and Ministers again committed to a per-plane tax this time a year ago, with only the final scope and mechanism open to change, and yet six months later the change was absolutely total.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

If I remember correctly, and I may not, the original tax was introduced by Lord Lamont in the early 1990s. Will the hon. Gentleman speculate as to why the noble Lord decided then not to go ahead with a plane tax and preferred a passenger tax instead?

Photo of Greg Hands Greg Hands Shadow Minister (Treasury) 10:45 am, 2nd June 2009

I am not entirely sure of the background. I thought that it was introduced in 1996, in which case it would have been under the right hon. and learned Member for Rushcliffe (Mr. Clarke). Either way, I am not sure of the reasons or the arguments used at the time. Maybe the Minister can help us.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I thank the Minister for that important correction. Either way, I am unable to reflect on the precise reasoning used at the time. I am sure that it is available in Hansard, which is online from 1989 onwards, so we could examine the background.

The Government’s U-turn is set out in “Aviation duty: response to consultation”, which was published alongside the pre-Budget report last November. It makes for interesting reading and includes sorry excuses, where they are provided at all. We can agree that the member states’ decision in October to include aviation in the EU emissions trading scheme was a significant development, but the Government acknowledge the ongoing case for a UK tax alongside the EU emissions trading scheme. The response claimed that the U-turn was:

“Consistent with the Government’s objectives to provide additional support to businesses and individuals in the short-term and maintain action on climate change”.

However, it was not consistent with their previous environmental analysis. One might infer from the talk of supporting business that the U-turn was welcome to the industry—one struggles to see how. The industry has reacted furiously to the huge hikes, which are outlined in the clause and the schedule. Hikes of anything up to 113 per cent. are projected over the next 18 months on air passenger duty. That figure obviously relates to Australasia and parts of South America, but these are big, across-the-board increases. British Airways said:

APD was doubled two years ago, making air travel from the UK the most heavily taxed in the world...The Government’s own figures show that British airlines already meet their environmental costs, so there can be no ‘green’ justification for these additional taxes.”

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I would be grateful to know the hon. Gentleman’s thoughts on whether this is more likely to make aviation from Britain uncompetitive. I have heard arguments that some people may choose a short-haul flight to a hub in the Netherlands or France and a longer haul flight from there. Is that likely to have consequences or will a wider EU application avoid that hazard?

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I thank the hon. Gentleman for his intervention and will explore that issue, but, at this point, we simply do not know. If we put air passenger duty up by these three-figure percentage rates, we cannot exclude the possibility that it will become economic to fly to Amsterdam, for example, buy an additional ticket starting there—luggage would have to be checked in there—board a connecting flight to Bangkok, for example, and end up saving money. At the moment, it is difficult to speculate. I think that the Minister feels that she has  speculated on it and wants to intervene. If we put up APD to such a level, that kind of transaction starts to appear economic.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Before the hon. Gentleman gets too carried away with his argument, I want to point out that 70 per cent. of passengers travel from the UK to band A destinations. The figures that he has quoted demonstrate that APD for band A will go up by £1 in November and then by a further £1 the following November; for business class travel it goes up by £2 and then £4. He should bear that in mind before he develops his argument too much, instead of getting carried away with the larger increases for longer haul flights.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

First, the increases that the Minister quotes are only the November 2009 increases and do not include the further increases in November 2010. Secondly, one must look at the long-haul flights. If one were to fly from London to Bangkok, which is the example that I gave, it could well become more economical simply to buy a flight for the London to Amsterdam leg. I believe that the Netherlands has abolished air passenger duty, so there would then be no tax on the ensuing flight from Amsterdam to Bangkok, if it was bought as an entirely separate ticket. That is the point that I am trying to make—it relates not to the 75 per cent. of people who fly to Europe but to the 25 per cent. of people who fly further afield.

Photo of Robert Syms Robert Syms Conservative, Poole

Of course, if the tax increase for flying to Amsterdam or Paris is lower but the long-haul flight increases are higher—in other word, the increases for flights to Australasia—there is then an incentive to hop over the channel to take a long-haul flight, because we are talking about an awful lot of money. Therefore, there is a differential pricing arrangement here, which may have a long-term impact on our airline industry.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

My hon. Friend is absolutely right. That is why I was looking at some of the increases. For example, the 113 per cent. increase on the tax element of an economy flight to Australia, compared to the 10 per cent. rise on the tax element of an economy flight to Amsterdam, could well make the type of ticket shopping that I have described much more prevalent.

I want to return to the reactions given by the industry to some of these changes. I mentioned British Airways and easyJet. If the Minister is right, virtually all of easyJet’s flights would be affected. It operates flights to a couple of places in Egypt, but virtually all of its flights are to part 1 territories. If the Minister is right, one would have thought that, because 75 per cent. of people go to part 1 territories, those airlines should not be too fussed about this change. easyJet would be an obvious company that would not be too bothered, if the Minister is right. However, the opposite is the case. easyJet says this:

“The Chancellor of the Exchequer has missed the opportunity to give air passengers a much-deserved shot in the arm by refusing to ditch his planned £1bn raid on the airline industry over the next two years...In today's Budget he should have waived the planned increases”— in air passenger duty—

“in order to help an industry which will be at the forefront of dragging the economy out of recession”.

So, far from the Minister’s response that those flying to the 75 per cent. of areas that will be unaffected simply will not be that troubled by this change, the example of easyJet says precisely the opposite.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I thank my hon. Friend for giving way. I am a great supporter of easyJet and I use it. However, I think that it is a pretty contentious statement to suggest that somehow the airline industry will be the industry that will be “dragging” this country “out of recession”. It is an important industry, but there are a considerable number of other industries that will also be important.

I want to ask my hon. Friend a question on this issue. Does he share my overriding concern that there will inevitably be perverse incentives as a result of this change? He has touched on some of them that were rather ignored by the Minister. There will be some very perverse incentives, along the lines that he has set out, that are likely to be fairly catastrophic, both in financial terms and, probably more important, in relation to the environmental targets of both this Government and hopefully a future Conservative Administration.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I thank my hon. Friend for that intervention. I will respond to the two specific points that he made. By quoting easyJet, I was not necessarily endorsing its point of view. I was actually answering the point that the Government made earlier; there were a number of interventions and perhaps we lost the thread of the argument a little bit. However, the Government said that their justification for continuing with the status quo on APD was to provide additional support to businesses. I was merely pointing out that a lot of these businesses obviously thought that the opposite was the case.

My hon. Friend is absolutely right, however, on some of the perverse incentives. We have already talked about one of them, which is the possibility of passengers buying two separate tickets to reach a long-haul destination. There is also nothing in this proposal that ends the perverse incentive for airlines to fly empty airliners around. We had thought, and in fact the Government told us, that that was one of the reasons why we wanted to move to a plane tax in the first place. So he is quite right about the perverse incentives that exist.

I will just finish on the airlines with a brief word from the travel agents, who are also important in the current economic environment. The Association of British Travel Agents has also raised concerns about the impact that APD will have on regional passengers who are forced to fly via London and have to pay the tax twice when they travel with two different airlines. Again, that is another perverse incentive and it is significant for the viability of some of our regional airports. If, as the Government say, the industry welcomes their proposals, the industry has done an excellent job in suppressing its enthusiasm for the huge tax rises.

The changes will also have a negative impact on Britain’s competitiveness as a tourist destination if passengers are forced to pay APD on their return journey. I would appreciate clarification on whether APD can be levied on transfer passengers or not. The Royal Aeronautical Society tells me—I have not had a  chance to obtain independent verification of this, but I have no reason to disbelieve it—that some US interests are taking their Government to court for charging APD on some transfers, even though the passengers and their luggage stay air side at all times. I believe that other countries are also questioning such an approach. Will the Minister inform us of the latest developments in those important court cases, and what is the Government’s current position on transfer passengers?

The reaction from environmental groups has been mixed. Many welcomed the headline rises, but, like us, decried the abandoned attempt to find a per-plane methodology. Friends of the Earth responded:

“The rises in APD are welcome, but should be seen in the context of the abandoning of per-plane aviation duty.”

Greenpeace stated:

“Plans to tax flights instead of people would have encouraged the industry to fill their planes instead of flying half-empty airliners around the world. Once again the aviation industry has been given a free pass at a time when its contribution to climate change is rising.”

Furthermore, the National Society for Clean Air noted:

Air Passenger Duty is set to be doubled. However, in light of the significant expansion in UK aviation announced in 2003’s Aviation White Paper these changes are unlikely to have significant impacts on overall emissions from aircraft.”

Charter airlines are another group affected by the measure. The APD tax structure pays no heed to a class called premium economy; it simply lumps it together with business and first class, which is hard to justify to those who simply need a small increase in leg room. We have to understand how premium economy class works on charter flights. Essentially, as I understand it, there is no difference in the seat; premium economy class merely adds a small amount of leg room. The class is particularly popular with families with young children who like to move around on planes, especially on seven-hour charter flights to somewhere like Florida or the Caribbean. It is very difficult to keep children under control or entertained without a little bit of leg room that allows them to move around. Premium economy class seats are therefore very popular with families and, as I understand it, do not cost an awful lot more.

However, those travelling in premium economy class will now have to pay double the APD of the regular economy class passenger. That will be especially true for long-haul charter flights to Florida, for example, when a family of four travels in premium economy class on a charter plane. I am not talking about business passengers flying hurriedly from London to a meeting in New York; I am talking about families on quite reasonable charter package holidays to somewhere like Florida or the Caribbean.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I anticipate getting letters on the issue from two other groups in my constituency. The first is people with disabilities that require them to move more than they might be able to in a restricted space. The other—this may sound vaguely amusing, but it is not meant to be—is tall people who quite often take opportunities such as that under discussion and may feel unfairly treated as a result of the measure.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I am not sure which tax regime applies to those with disabilities, so I would be grateful if the Minister would explain what kind of special rules, if  any, relate to them on flights. The issue of tall people was raised by my hon. Friend the Member for Wellingborough during last year’s Finance Bill debate. He referred to my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski), who was not a member of the Committee, as an example of somebody who would need additional leg room. The hon. Member for Taunton therefore makes a valid point. However, for a family of four travelling premium economy in a chartered plane, this will mean £600 in air passenger duty from November 2010, compared to £160 today. That is more or less a quadrupling, an extra £440 on a family holiday to a state such as Florida.

In the present economic circumstances, the Government have baulked at introducing a per-plane tax on the scale that they originally intended, encompassing freight aircraft and other sectors. They have been forced to try to recoup some of the revenue lost by not introducing the per-plane tax from the existing per-passenger APD structure. That is why the hikes are so steep and potentially punitive for air passengers. The Government also began in the wrong place, not least when selecting a yardstick for emissions when they began their consultation. Conservative Members do not accept that a per-plane tax is unworkable. On that, we are, I believe, of one mind with the Liberal Democrats, so I look forward hearing what the hon. Member for Taunton has to say. I am not sure whether I have surprised him by suggesting that I expect him to say something on this subject, but I very much hope that he will.

There are certainly difficulties in drawing up an all-encompassing system and, to be fair, in launching the consultation the Government were aware of at least a few of them; however, they have backed down through a combination of a lack of will and poor starting points. As my predecessor in this role, my hon. Friend the Member for Putney (Justine Greening), pointed out in last year’s Finance Bill debate, the Government’s lead options going into the consultation were far from ideal.

To save the Minister from later explanations, I point out that the obvious course of taxing an aircraft’s emissions appears to be impermissible under international agreements, such as the Chicago convention. Putting tax on aviation fuel, even indirectly, is against the terms of that convention. We welcome the Government’s attempts to get other countries and international bodies to look again at the international framework. However, under that framework, a per-plane tax, if it is to be within the rules, has to find a proxy for emissions. That is where the difficulties start.

The Government hit upon the manufacturers’ declaration of an aircraft’s maximum take-off weight—MTOW—as its emissions yardstick. My hon. Friend the Member for Putney is something of an expert on the aviation sector—a number of Members who have constituencies around Heathrow airport have inevitably had to learn a lot about emissions, noise and other environmental impacts from aircraft. She warned Ministers last year:

“Emissions depend not just on take-off weight, but also on the speed of flight and the design of the plane.”——[Official Report, Finance Public Bill Committee, 12 June 2008; c. 714.]

That is an obvious but important point. Maximum take-off weight makes no distinction between newer, cleaner aircraft and older, less efficient models, so no incentive to upgrade fleets is provided. Nor do aircraft always operate at their maximum take-off weight—in fact they rarely do. The weight depends on how an aircraft is fitted out and how much fuel it needs for a particular journey.

The consultation mentioned some alternatives, which would account for certain emissions in a flight’s landing and take-off cycle, but the problem with those schemes was clear from the outset. Paragraph 3.7 of the Government’s response briefly lists some of the alternatives that the industry suggested. Many of them appear to be viable and to offer a more direct correlation with CO2emissions, but, unfortunately, the Government provide no analysis of those options. They are left there, hinting at what might have been explored had the Government not begun the process with their flawed fixation on maximum take-off weight.

The consultation also toyed with having airports collect the per-plane tax, which immediately raised the prospect of commercial airlines having to pay administration fees on top. Indeed, a per-plane regime would probably entail a whole new administrative set-up run by the airport operators. Trying to bring non-commercial flights, such as private business trips, within the scope of the tax—a laudable objective, we would all say—while maintaining a one-size-fits-all collection method always made such problems likely. I shall not offer an extensive account of the plans that have now been abandoned. The important point is that from, arguably, trying to go too far, too quickly the Government have now retreated too far and have taken harsh steps to compensate for their abandonment of their very good intent to move to a per-plane taxation system.

One is left with the obvious question: if the Government did not want to extend taxation to other parts of the industry, such as freight operators, at this time, why did they not introduce a per-plane tax for commercial passenger aircraft only, which would only affect flights that already pay APD? The commercial aviation sector favoured the existing operator-HMRC collection model. The move would have solved the administrative problem as well. Most of all, it would have introduced a disincentive to fly empty planes, which everyone regards as sensible and which will still be lacking now that APD is to be reformed and not replaced.

I have read the Treasury’s November response carefully, but I cannot see any compelling reason why the Government could not have considered some of the alternatives to maximum take-off weight in more detail. Now, we all have to pay the costs of the consequences. Instead of taxing non-passenger commercial aircraft and taxing freight and private jets and so on, there will be huge hikes in air passenger duty, which will be felt by ordinary Britons, due to the Government’s backing down and their lack of courage and persistence in looking for a new regime. However, we are where we are following the U-turn.

I should like to go back for a moment to the Government’s original plans. The Government added to their choice of maximum take-off weight as a proxy for emissions another element: distance. The take-off weight was intended, however crudely, to signify how dirty an aircraft was and applying a distance measure  would then approximate emissions over the duration of a flight. They consulted on two options. The first was the actual distance flown in terms of great circle distance or GCD—the shortest distance between point A and point B, after the earth’s curvature is factored in.

I was a student in the last year of O-level maths before studying great circles was removed from the curriculum. I wondered at the time whether I would ever find a use for that knowledge of great circles due to the curvature of the earth. I have finally found it, some 28 years after sitting my maths O-level. I do not want to digress too far, but I was talking to a constituent who is a teacher—

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 11:00 am, 2nd June 2009

The hon. Gentleman is talking about his maths O-level. Is he absolutely sure that it was 28 years ago? I think he is the same age as me and O-levels were less than 28 years ago.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I have to inform the hon. Gentleman that I am somewhat older than him. I think he was born in 1970. I shall not say precisely how old I am, but I sat my maths O-level in 1981. I would have been a Ruth-Lawrence-style child prodigy had I been the same age as the hon. Gentleman and sitting my maths O-level aged 11. The head of maths at the London Oratory school told me that one of the questions in the maths GCSE was to draw a line 7 cm long, which is more of an instruction than a question. I think we should go back to the days when we studied great circles rather than having to draw lines 7 cm long—but that is enough on maths exams.

The first option used great circles. The second used banding as a proxy for distance, based on global geography which, as we know, has been something which the Government have more or less amended and kept with us. The link to the proposals before us today jumps out. The consultation only proposed three bands. However, this is how the response was recorded in the Government’s own document in November:

“There was a great deal of concern that both a banding system or the use of GCD could create a strong incentive for passengers and freight with long-haul destinations to hub outside the UK”.

Returning to the points raised by my hon. Friend the Member for Cities of London and Westminster and by the hon. Member for Taunton about the incentive that passengers will now potentially have to transfer in places such as Amsterdam, that danger was acknowledged by the Government in their original consultation. Put simply, the more costs that are loaded on to distance, the greater the incentive there is for people to jump on a short-haul flight over the channel to complete their journey from there, so that they can profit from a lower tax regime operating in some of our rival aviation hubs. The Government noted the risk of having three bands, only to exacerbate that risk by having a fourth band.

The impact assessment, published alongside the Budget, included this summary of the problem:

“Currently some passengers may take commercial decisions which reduce their APD liability by buying separate (i.e. non-connecting) air tickets, where this is possible. This will remain an option under the APD changes.”

Despite having highlighted that risk of that practice occurring, however, the impact assessment then dismisses the possibility of its occurring on a wider scale. It says:

“in these cases, there can be significant time penalties involved, since passengers not on connecting tickets must retrieve their luggage and re-check in at the European hub. There could also be higher airport charges and other costs. The added time and inconvenience will significantly limit the extent to which people choose to buy separate air tickets to avoid paying a modest increase”—

I stress those words, “a modest increase”—

“in APD on longer distance flights.”

The proposed increases are not a “modest increase” at all. They reduce the competitiveness of airlines operating out of the UK and may well cause a significant loss of business to airlines operating out of cities such as Amsterdam, Frankfurt and Paris. Ironically, the effect would also be, of course, to increase emissions. Not only will we have people avoiding the tax regime, but there will be an increase in emissions due to all of the additional flights required to cover a route that could be covered directly by one plane.

The Government’s document, “Aviation duty: response to consultation”, listed the other problems with banding. It noted:

“Many respondents agreed that banding was a simple system but there was concern that such a system would not reflect the true environmental cost of emissions and environmental impact.”

That is precisely the point that we are making, and it was made in the document in the context of banding for a per-plane tax. It applies all the more strongly to APD, which is levied on passengers.

The Government’s document also brought out the other major flaw, by highlighting the concern that

“a system based on capital cities could be blunt, placing all of the US and all of Russia within one band despite the great distances between their capital cities and the farthest destinations in each of these countries.”

We have already looked at Russia. It has been split into bands—rather imperfectly, if I may say so, but the point about dividing it up remains good none the less. Within the US, of course, the distances are massive, but the US is far easier to define in terms of where in the US one could be based—for example, in any of the 50 states. It is much easier to define than Russia, which is one continuous country. Although Russia is a federation, most of the component parts are very small republics. However, a flight from London to Boston will attract the same APD as one to Honolulu, despite covering less than half the distance. Can it be right that a flight from London to Honolulu, which might be competing with the flights to the Caribbean that I talked about earlier, will be subject to significantly less APD than a flight to Jamaica? I think that the schedule is somewhat flawed in that regard.

I know that the Government maintain that using actual distances would have too many disadvantages, but I fail to see why they make that argument. Anybody who flies often and is a member of a frequent flier club will know that the airline tells them instantly how miles they have flown. I do not know whether that is on a great circle basis or an “as the crow flies” basis, but it seems to be incredibly easy to calculate the distance. The Government claim that that would have too many disadvantages, so perhaps the Minister could explain why they believe that using the actual distance would somehow be too difficult or disadvantageous, despite the fact that great circle distance was widely favoured among the 170 responses they received in the consultation.

However one accounts for distance, the avoidance problem will increase the higher the charges applied. The Government’s U-turn has left them exposed to a revenue shortfall—because they wanted to extend aviation duty beyond the commercial passenger sector, they pencilled in the extra revenue that would raise. Even with the increases before us, the Red Book shows that the Government will be down £70 million on its projection this financial year, and £190 million next year, because of their failed attempt to introduce the reforms they had flagged so widely. That is why the increases in APD are so steep: they have to be steep to offset some of the cost of the U-turn, never mind that it is passengers who will suffer under an already discredited system.

A per-plane tax makes sense, but a per-passenger tax does not. The purpose of the tax, we are told, is to tackle emissions, but it is not the passengers who are making the emissions, but the planes. Even if it were limited to commercial passenger airline flights, a per-plane tax would represent a fundamental improvement on the measures before us. It could still be done, but the present Government have exhausted their ability to manoeuvre.

In conclusion, in the 2007 pre-Budget report, the Chancellor announced a new per-plane duty. In the 2008 pre-Budget report, he withdrew it. At the end of this debate, the Minister will no doubt say that the huge new tax increases of up to 113 per cent. are a model of good sense, but the Opposition beg to differ.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 11:15 am, 2nd June 2009

I congratulate the hon. Gentleman on a characteristically rigorous speech.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I certainly do not wish to speak so briefly on so important an issue. The only issue the hon. Gentleman did not cover was the classification of newly formed volcanic islands for the purposes of the clause. I now regret having been born only in 1970 and not having the advantage of studying great circles in my maths O-level. I was in the penultimate year for O-levels and do not recall having had any questions that required me to draw a straight line of a certain distance, but I would clearly have benefited from more study of great circles. It was an excellent speech, and had the exciting proposals put forward by the right hon. Member for Witney (Mr. Cameron) for free votes in Committees applied today, I would hope that many Labour Members, having heard the speech, would be tempted to vote against the Government.

Getting back to the nub of the matter, it was helpful to have it clarified that it was in the early 1990s, the last time the public finances were in a ruinous state, that a Chancellor of the Exchequer initially introduced this form of taxation.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I follow the hon. Gentleman’s logic, but it is not fair to compare the condition of the public finances in the early 1990s with their current condition. The maximum budget deficit then was around 7 per cent., but I believe that the current figure is north of 13 per cent. It is not quite the same scenario—there is a quantitative difference.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I do not wish to go too far off the beaten track, but I accept the hon. Gentleman’s point. The public finances are in a more ruinous state now than they were in the 1990s, and certainly the budget deficit, as a percentage of GDP, is higher now than it was then. Nevertheless, there was a significant revenue shortfall, and although we were coming out of recession by that period, the Government needed to plug the gap. I remember that at the time the Government were keen to sell the initiative as being environmental, but there was a revenue-raising motivation, as I am sure there is now. I also remember critics of the measure saying that it was a tax on holidays and that, just when one was fed up with every aspect of life under the Government in 1994, they were charging to escape from it. However, we have gone full circle and it is now part of the tax regime, which I welcome.

There is an environmental rationale for taxing air flight. After all, if one has to tax something, the intellectual rationale for taxing air flights is probably stronger than the rationale for taxing work. Work seems to be the sort of activity we should be seeking to incentivise, yet we have a large amount of revenue raised through income tax. If we are to have a component of revenue-raising that seeks to effect a degree of behavioural change, but which also brings in necessary money to the Treasury, a tax on flying seems to have some merit.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

Although I do not disagree broadly with what the hon. Gentleman has to say, does he recognise that there is a question of certainty? One reason why there is an increasing move towards ever higher property taxes—and taxes on work, as he puts it—is that they at least provide a degree of certainty. One of the difficulties of trying to encourage or discourage particular behaviour is, of course, that the tax base dissipates—which is in some cases the very aim of bringing in the tax in the first place.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Indeed, and we have had some interesting discussions about tobacco duty and fuel duty with regard to predictability of elasticity when it comes to revenue raising, as opposed to disincentivising behaviour.

The Conservative spokesman anticipated that the effect on behaviour would be marginal to non-existent. On that basis, I suppose that there would be a degree of certainty, although the environmental benefits would not then accrue. However, the point I was making is that tax has to come from somewhere, and taxes that have an environmental component in the motivation for levying them seem to be sensible. Although total CO2 emissions from aircraft constitute a fairly small percentage in the grand scheme of things, that percentage is increasing. One does not need to have a particularly fantastical imagination to see that that increase will get bigger and bigger and will account for a larger proportion of our country’s CO2 emissions.

There is a much bigger global aspect. At present, the vast majority of the people in the world cannot afford to fly. Although increased prosperity in countries such as China and India is very welcome, it threatens potentially grave environmental consequences. To have an environmental component to taxation, and to make the effort to tax flying, seems to be a sensible measure.

That is our starting point: we are not hostile to the concept. However, I am very pleased that the Conservative party has seen the wisdom of the Liberal Democrats’ proposals to levy such taxes on aircraft, rather than on passengers. Levying a tax on passengers is a rather blunt and crude instrument. For a start, it gives airlines no tax incentive, beyond their commercial incentive, to run planes at full capacity. A further tax incentive to do so would clearly be beneficial to the environment. We even have the situation, which has been reported in the media, where so-called phantom planes fly around to make sure that the airlines have their planes in the right places for all of their flights. There is no incentive, apart from the obvious commercial incentive, to put passengers on those flights. Given the environmental impact of flying, it seems sensible to my party to incentivise airlines to carry passengers. That would be more easily achieved by taxing the flights themselves, rather than the passengers who are travelling on those flights.

The final point I wish to raise—a lot of the ground was comprehensively and skilfully covered by the hon. Member for Hammersmith and Fulham—relates to extra incentives given to introduce new aircraft. That point was touched on by the hon. Gentleman and it is not directly relevant to the clause, so I will only touch on it as well. One of the great benefits of new technology, whether in the making of cars or in the creation of aeroplanes, is that it increases fuel efficiency. The Government’s measure is rather crude, because is does not differentiate between people who travel on fuel-inefficient aircraft and those who travel on newer, more fuel-efficient aircraft.

Airliners have an incentive to reduce costs and there is a big up-front capital cost in buying an aircraft, but there are potential benefits in terms of fuel savings once that aircraft has been purchased. Much more could be done, however, to allow airliners to make claims against the depreciation of new aircraft to incentivise them further to buy such aircraft where possible. That could be skewed towards certain types of flights or aircraft if they are thought to be environmentally beneficial.

Our view is that the motivation behind this form of taxation is broadly laudable. However, the Government’s approach is ill advised: a system based on aircraft rather than on passengers would be better.

Photo of Robert Syms Robert Syms Conservative, Poole

This is the first speech I have made on the Finance Bill; it may not be the last. I declare an interest, as outlined in the Register of Members’ Interests, as a director of a building and property company. I hope that having that on record will be sufficient for the Bill’s proceedings.

I hate to disagree with my Front Bench colleague, but the original proposal, as crafted by the Government, to tax per plane, was barking. The impact that the proposal would have had on the aviation industry meant that it was not very sensible. It is good that the Government changed their minds, because we would have been in a worse situation had they not stuck with APD.

I will give a few examples. Our aviation industry is very successful—the second largest in the world, I think. That requires us to have competitive airlines operating from our airports. Furthermore, the number of jobs generated by successful airports at both the main hubs and the regional airports, which are terribly important  to our economy, means that it is important that the airline industry remains competitive for the sake of a successful economy. We have also seen the successful growth of the freight industry in the UK. East Midlands airport and many other regional airports are examples of the creation of freight transport. The per-plane proposals would have given a major disadvantage to our air freight industry, which would have found itself undermined by its European competitors.

Bournemouth international airport, near my constituency, provides aircraft repairs. A Boeing, for example, can fly in and the engineering services at the airport, which is situated in Hurn, will repair it. Inevitably, planes fly in empty because they are being repaired, but, if there was a tax per plane, they could well be charged £8,000 or £9,000 just to fly into Hurn for repairs. Those are perverse incentives, and the proposal as originally crafted by the Government would not have done the job.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I understand the hon. Gentleman’s point; he is making a well argued case. However, people in my constituency tell me that it is perverse of supermarkets to fly in food from the other side of the world out of season, and that local food should be more widely available instead. Do not all tax regimes have a potential behavioural effect that disadvantages one form of production or activity while advantaging another? Is that always a bad thing?

Photo of Robert Syms Robert Syms Conservative, Poole

The hon. Gentleman makes a good point. Imported fruit from Chile clearly comes in on an aircraft and the effects are perverse. Our responsibility as politicians, however, is not to disadvantage UK businesses against their competitors. We all occasionally go through Charles de Gaulle or Schiphol airport. Our European competitors want to take business away from Britain, and we know the jobs that that business generates. We need a sensible airport policy and we need to nurture our airline industry, which is going through difficult times.

We can strip out all the excuses for APD; the basic rationale is money. That was the rationale of the Conservative Government in 1994, who needed to raise a lot of money quickly, and it is the rationale of the current Government. They are trying to raise a lot of money quickly due to the state of the public finances. I agree with my hon. Friend the Member for Hammersmith and Fulham, there is a danger that the different banding and areas will lead people to use European hubs, which will be a disadvantage, particularly for Heathrow. I hope that the Government are alive to that.

What number of passengers is the money that the Government expect to raise predicated on? Passenger numbers have declined by about 20 per cent. according to the last figures that I saw, so the measure may not raise the money that the Government think it will. I am interested to know how much the Government think that it will raise.

I would like to put certain concerns on the record. The proposal could give passengers an incentive to transfer to rival European hubs and put UK domestic connecting schedules at risk, thereby reducing frequency. We have heard about the rate of increase for long-haul flights, but do not forget that airlines invest a lot of  money when they set up a new destination or route and it sometimes takes a while to get the passenger levels and the business. This measure will hit airlines, and it may be a disincentive for them to develop new long-haul routes. The additional distance bands will discourage high-value long-haul flying from the UK, which could damage the economy without any environmental benefit, because if passengers go elsewhere to fly they will still create environmental damage. There are concerns that the Treasury proposals may be inconsistent with the Stern review and with the Government’s policy of developing Heathrow. I know that there are differences across the Committee over that proposal.

I would like to hear from the Minister about the EU, which will bring in an ETS tax in 2012. Will this passenger duty cease when the EU has an environmental tax? If not, our airlines may find that they are subject to European and domestic taxation, which will be a double disadvantage. Will the Minister flesh that out? The increase in APD could have the perverse effect of delaying fleet replacement plans. As I understand it, British Airways could replace half its fleet over eight years with the money generated by the tax, so it is not small bucks. It is a lot of money.

I never speak for too long having made my point, Mr. Atkinson, so, in conclusion, I had concerns about the Government’s per-plane proposals. There may be a better solution, and my hon. Friend the Member for Fareham will no doubt look at it sensibly when he is a Minister. The Government’s proposals would not have worked, and we have come back to per-passenger duty. It is basically about raising money quickly, and, unfortunately, Governments have to find money somewhere. It is presumably better to take it from people or businesses that travel than from those at the lower end of the tax band.

I am interested in the latest calculations of what the tax would raise. We need to hear more about what happens when the EU starts an ETS and how that will interact and dovetail with APD. As we have heard, APD has been hiked on several occasions. It will be helpful to have a commitment that it will stay at this level for some time, so that businesses, which are very important for our economy, can plan for the future. Will the Government be back for a further bite of the cherry come next year’s Budget in March or this autumn’s pre-Budget report? This is a successful industry, which generates thousands of jobs and is very competitive, so we, as politicians, should be careful not to kill the golden goose.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 11:30 am, 2nd June 2009

We have had a characteristically thorough debate about clause 17 and have also looked at schedule 5, which includes the banding. We have had maths and geography lessons in the debate today, perhaps even geopolitical lessons about the creation of new states.

I will do my best to answer the questions that have been put. As Opposition Members have said, the Government consulted on proposals to replace air passenger duty with a per-plane tax. Both Conservative and Liberal Democrat members tabled amendments to replace APD with a per-plane tax—their position—but they were not selected today.

We listened to respondents in our consultation process. As has been said, we announced in the pre-Budget report 2008 that we would reform the existing system  and replace the two-destination band structure with a four-band structure. We had hoped to proceed with the per-plane tax, but we decided against it for a fair number of reasons. The Government proposed the per-plane tax in a different economic climate to the current one, and the decision not to proceed recognised the need to ensure at least some greater stability in tax policy at a time of economic uncertainty. It was not thought to be the best time to shift from one tax to a completely redesigned one, given the uncertainty in the economy. We were also trying to maintain environmental objectives by extending the distance banding, and we hope that we have managed to avoid at least the disruption and costs associated with the transition to a new tax.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The hon. Member for Hammersmith and Fulham has not even let me get going, but I am happy to let him in.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

The Minister really cannot have it that returning to APD somehow increases certainty in tax policy. It was not just a consultation, it was a clear statement of intent to move to a per-plane duty. Having once made the change and now changing back again, there is no way that anybody could argue that two 180-degree reversals in 18 months is creating stability in the tax system.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

We will not go into 180 degrees and 360 degrees because that is maths again. All I was trying to say was that we wanted to avoid the disruption and costs associated with a transition to a new tax right in the middle of a period of economic uncertainty that did not exist when the original change was announced. In retaining APD, the Government recognise that the system could improve the environmental signals, and hence the change to four bands and the reforms in schedule 5, referred to in clause 17.

The bands will be set at 2,000 mile intervals, and inclusion in each band will be based on the distance of a country’s capital city from London. The hon. Member for Hammersmith and Fulham asked a fair number of questions about some of the detail of that, which I want to deal with. Firstly, he talked about the methodology in schedule 5, and about new states that might come into existence. He asked whether they would end up in the Australasia band. We even got to talking about Scotland as a potential new state. I will not impinge on any of those highly controversial potential parallel futures, but I want to assure him that, as with the current air passenger duty, we have powers in secondary legislation to react to any changes in states or territories. The primary legislation gives us a power to vary by statutory instrument, so the creation of a new country could be absorbed into the system by use of secondary powers to allocate that country to a particular band. We do not have the absurdity that he was hinting at—that everything new ends up in Australasia.

Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I can see the practicalities of designating the capital city as the relevant consideration. In some states, however, where the capital city is much smaller than many of the other cities in that country, is it such a sensible way to make the calculation?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

There is a detailed way of making these calculations by measuring absolute distances to each destination. Alternatively, there is a simpler banding structure, where one uses assumptions. That structure makes the system quicker, easier and less complicated to administer.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I will give way when I have finished this point. That banding structure simply makes the system easier to administer for all concerned, including those airlines that have to calculate and pay the tax. That does not mean to say that anomalies do not arise from a rough-and-ready rather than an absolute approach. We have gone for the rough-and-ready approach. I understand the points that are being made about some of the anomalies with capital cities, particularly Washington in relation to destinations in other US states and in Caribbean countries. However, I suppose that a rough-and-ready calculation is precisely that, and one can always find anomalies.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I genuinely fail to understand how it can be simpler to go for this banding structure than for a structure based on the absolute distances. It is quite clear; these distances do not change. The distance from London to Boston, for example, or from London to Honolulu, is not subject to change. Well, I suppose it could be if a new airport was built, but that is a very obscure example of how it could change.

I just cannot understand what is complicated about using the actual distance. It is what airlines use all the time, for calculating the amount of fuel that they put in aircraft, or for calculating frequent flier programmes. Everything is calculated on an actual distance basis and not on a banding basis. So how can a banding basis be simpler?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I can reassure the hon. Gentleman that this system is administratively simpler for those who have to put it into effect, and calculate and levy the tax on flights. If absolutely every last mile of distance has to be calculated, that leads to a different structure for the tax. That would be a different way of doing it and it would not be rough and ready. I assure him, however, that it would be more complex in its administration.

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I can understand the Minister’s view that a level of certainty is promoted by what the Government are proposing. However, we are living in an internet world—a Googled world—where it is not difficult to get hold of this type of information. It may well have been the case 10 or 15 years ago that it was difficult to work out exactly how far each and every last far-flung city in China, Pakistan or India was from London. Now, however, that is information that literally everybody can get hold of at their fingertips.

So it is nonsense now for the Minister to try to defend this system. As I say, I can see that there is a level of certainty in talking about a single city in one of the 190 or so states within the United Nations. However, the reality is that this information—accurate information,  along the lines that my hon. Friend the Member for Hammersmith and Fulham has explained—is very easy to obtain.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I am not saying that the information is not easy to obtain. I am saying that it is administratively simpler to use it in four bands that are approximate; that is the only assertion that I am making. I am not trying to say that somehow it is impossible for us to work out how many miles an aeroplane travels from this country to any destination in the world. Of course, it is a matter of fact that we can work that information out. However, I am saying that it is administratively simpler to have four basic bands than to test every flight, and I hope that Opposition Members will accept that. It would be a different approach to base the system on actual miles travelled, and it would make the administration much more complex. It would be possible to base the system on actual miles travelled if that was the policy decision that was taken, but it certainly would not be simple.

On the definition of “west of”—

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I was going to move on to the definition of “west of the Urals”. It is based on an existing split that is used by the industry and it follows advice from the industry on the best way to categorise a country that is, geographically speaking, as long and thin as Russia is, if I can put it that way.

The draft legislation that we published before publication of the Finance Bill contained that split. It was announced in the pre-Budget report and it was published prior to the Budget statement. The industry is content with it, and there has been no adverse reaction to it. The system is one that the industry itself uses at the moment. [Interruption.] Well, there has been plenty of time for a worry about the definition of “west of the Urals” in this context to have surfaced. It has not. Everybody understands what it means, even if it might be a bit difficult to look at geographically. Obviously, the hon. Member for Hammersmith and Fulham has a particular interest in eastern European Russian states and appears to have visited quite a few of them. I understand that his geographical assessment of the Urals is accurate, but in this context “west of the Urals” has a meaning that is broadly understood by the aviation industry and it has not raised any practical points that cause us to worry.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury) 11:45 am, 2nd June 2009

The Minister is being very generous in giving way. My question is not so much about the Urals here. My question is why split Russia but not Canada or the US? Russia covers 11 time zones, Canada six and the US seven. Surely it would be possible to do some kind of split in those two countries, given that a flight from London to Honolulu is more than twice the distance of a flight from London to Boston.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Well, clearly the US is a slightly different issue as its main land mass is much shorter than Russia’s. If one includes Honolulu, it gets slightly longer. When we were sorting out the bands the view was taken that the anomalies, although obvious, did not justify a split  in the country down the middle in the same way as we have done for the Russian Federation. If one did it on a line between Boston and Honolulu the split would be somewhere in the middle of the Ocean. It is not a land mass in quite the same way if one looks at some of the states involved. I admit that it is rough and ready. There are anomalies. Hawaii is a rather obvious example, but it happens to be a state of the US. If it were not a state of the US it clearly would not be in its current band in this system.

The hon. Gentleman also asked whether there is a map that demonstrates the banding system on a global basis. There is and I am quite happy to give him a copy. He mentioned Caribbean communities. We are aware of their circumstances and we are listening to their representations. Clearly, it mainly involves the anomaly of Hawaii. One can either shift the bands around and have large numbers of bands to incorporate a whole range of issues, such as countries that are close to the edge of bands or countries that are far away, or one can say, “This is the system and we have to live with it and the way in which it works.”

The hon. Gentleman also mentioned the issue of transfer passengers and said he was aware of some kind of action in the courts about APD applying to them. APD does not apply to transfer passengers, and we are not aware of any activity in the courts relating to that, coming from America or elsewhere. If he has some information to impart that we are not aware of and wants to have a discussion with me outside the Committee, I will be happy to discuss it, but I admit that I was a puzzled by his comment on that.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

That point was raised with me by the Royal Aeronautical Society, which I will refer to the Minister. That is probably the easiest way to resolve the issue.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

I look forward with interest to any correspondence I might get from the Royal Aeronautical Society as a result of that exchange.

We have discussed the shift from per-plane taxes back to APD. During that process we listened carefully to the responses to our announcements in PBR 2008. We were particularly struck by the difficulties of developing a per-plane tax, not least because of its effect on freight and the great practical difficulties in trying to incorporate freight into the system. Although I am not allowed to look at the papers of previous Administrations, I suspect that that was why freight was not included in earlier stages when the tax was originally developed. It is difficult to include freight.

The hon. Member for Poole made an interesting contribution, particularly with regard to per-plane taxes and the difficulties they would have caused for the airports near or in his constituency. We were particularly worried about the regional impact when we had a closer look at that following representations from the freight industry and airlines, particularly regional airlines, and not only in the south of the country, but in other areas where we were worried about the potential effect on employment. It is difficult to develop a policy for an industry that is relatively untaxed, as we know, because of the Chicago convention and the way in which the  airline industry has developed, and actually it is very mobile by definition. Therefore, there always has to be a balance between trying to have a tax system that is legal—because of the issues relating to the Chicago convention, to which the hon. Member for Hammersmith and Fulham was absolutely right to refer—and trying to have one that does not cause perverse incentives or have the unintended effect of driving business offshore.

Photo of Robert Syms Robert Syms Conservative, Poole

Clearly, the best environmental approach is to develop many of the regional airports, and of course freight is important, as I mentioned earlier. If someone who lives in Bristol uses Bristol airport and someone who lives in Bournemouth uses Bournemouth airport, they will not have to drive on the M25 and clog up the roads at Heathrow or Gatwick, and that is a rather good thing. It still is the case that more pollution is generated by road traffic around Heathrow than by the aircraft. One has to have a balanced approach to that, and there is actually a good argument for developing regional airports sensibly, because they have great environmental benefits.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Obviously, I agree that we should definitely look at the development of regional airports as a powerful economic driver in the regions, not only because of local employment and other issues, but because we need to remember that air travel is currently relatively untaxed. That relates not only to emissions, but to noise pollution and other kinds of disruption that merit tax. We must try to get the balance right. The hon. Member for Poole has used the right word: balance, which it is important to consider when developing tax policy in those areas.

Obviously, the European Commission’s decision finally to include aviation in the EU emissions trading scheme from 2012 was welcome. That deals, partially at least, with some of the issues of pollution on a supranational basis, as the only way those issues can be resolved sensibly is by international agreement that allows tax to be levied appropriately without causing some of the perverse incentives that all Members have mentioned in their contributions.

Photo of Robert Syms Robert Syms Conservative, Poole

Clearly, we have APD, which generates a lot of money. Then there is the emissions trading system across Europe, of which there will be a cost. There is a danger that our airlines, vis-Ă -vis the US and some of the other non-European airlines, may be disadvantaged. Is that something that the Treasury is looking at and modelling? One cannot pretend that we are just going to carry on as we were when there is a new pan-European trading tax system.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

Yes, and we will watch that as it develops. It does not come in until 2012. Some 15 per cent. of auction rights, the rest of the trading permits, will be given away at least up until 2020. So we do not have 100 per cent. auctioning, which will limit the amount of money that can be raised by having a limit on emissions at EU level, but it is progress. I anticipate that further progress will be made internationally as well with other, similar trading systems. It is impossible to know, from here in 2009, exactly and precisely how that will develop, but it is certainly an issue that HM Treasury keeps a very close eye on. It will obviously have an effect on future taxation policy and has to be taken into account.

The hon. Member for Taunton, apart from making me feel rather old—I am not going to tell anyone when I was born, much less talk about the sort of mathematics I studied for my O-level and whether it involved great circles or any other such calculations—

Photo of Mark Field Mark Field Conservative, Cities of London and Westminster

I rise, being gallant, to point out that, like the Minister, when I started school we did have 240 pence in the pound.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The hon. Gentleman has obviously looked up when I was born. I remember decimalisation—as I am sure the hon. Member for Taunton does not. I suspect that that is his privilege and my burden, rather than the other way round.

It is clearly true that taxes have to come from somewhere. I thank him for making that observation; it is very wise. As Exchequer Secretary, it is one that I wish larger numbers of people would admit to when they come to see me. It is clear that we should try to tax bads rather than goods, but we should also remember that part of the use of APD is clearly in raising revenue, as well as attaching an environmental cost to flight.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

I am still struggling. I will go back a little bit, as I thought the hon. Lady was going to explore that in more detail. I am struggling with her rejections of a move to a per-plane basis. I think her conclusion was that it would be too difficult with freight. Nevertheless, the point I raised was that we can still introduce a per-plane basis for commercial passenger aircraft. Freight does not necessarily need to be touched. Has she has explored that?

On another point, the hon. Lady seems to be saying that the EU ETS, and pulling aviation into it, has somehow prevented a need to look at a per-plane basis. I am not sure whether I understood that correctly. Will she also tell us something about the relevance of the ETS to the consideration of whether we go to a per-plane or per-passenger basis?

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The relevance of the EU ETS is as a background to that. Aviation, being international, has been untaxed, not only because of the Chicago convention, but because it is quite difficult to levy a tax nationally on something that is international and can move very quickly. Therefore, the answer is to have a series of international agreements to levy taxation on, for example, fuel and a range of things, ideally going into the future. The EU ETS, and aviation’s inclusion in it, is the first example of a supranational structure that will enable us to put at least some of the cost and the environmental cost of their industry’s carbon emissions on to aviation operators. That is its relevance to our debate today.

Photo of Greg Hands Greg Hands Shadow Minister (Treasury)

My first point was that, if there is a problem with freight, which the hon. Lady has talked about, it does not prevent introducing a per-plane system for commercial passenger aircraft on a stand-alone basis.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee 12:00 pm, 2nd June 2009

Given the economic situation that developed between PBR 2008 and 2009, the timing was not correct for the disruption that would be caused by  moving to a completely new tax in that area. We were worried about some of the issues with hubbing, too. The hon. Gentleman has talked about how preserving an air passenger duty would cause some difficulties with hubbing, particularly on long-haul flights, but a per-plane tax would make the situation more difficult. Overall, it is best to stick with the existing system and to implement the reforms in clause 17.

Photo of Robert Syms Robert Syms Conservative, Poole

To answer my hon. Friend’s intervention, a lot of freight is carried in the hold in passenger aircraft—once the bags have been balanced up, the freight is put in—so if aircraft that only carry freight were to be excluded while aircraft that carry passengers were to be taxed, some freight would be taxed and some freight would not. There would therefore be a perverse incentive between, on the one hand, British Airways carrying medical equipment and other bits and pieces across the Atlantic and, on the other hand, a National Express-type aircraft that is dedicated purely to freight or purely to parcels. It is therefore difficult to differentiate.

Photo of Angela Eagle Angela Eagle The Exchequer Secretary, Member, Labour Party National Executive Committee

The hon. Gentleman is correct; passenger planes carry freight, so if we excluded freight-only aircraft, they would have a tax advantage over other forms of freight-carrying. Such complications and practical difficulties were certainly highlighted by the consultation. It is possible either to dismiss that consultation’s findings and plough on regardless, or look at them and think about the changed economic circumstances, and we have decided that, in the current circumstances, to cause disruption by moving to a completely new basis for the tax might not be the right thing to do.

I appreciate that the hon. Member for Hammersmith and Fulham might have decided differently, but in politics it is never easy to make an announcement and then say that now is perhaps not the best time to implement it, because one gets jibes about 180° turns and U-turns. The consultation process was genuine and we modelled a range of other potential ways of levying the per-plane tax. We looked at some of the complications, not least that which the hon. Member for Poole has mentioned on exempting freight; it is not easy to exempt freight in the current circumstances. Our decision is reflected in clause 17 and schedule 5.

Question put,That the clause stand part of the Bill.

The Committee divided: Ayes 16, Noes 8.

Division number 2 Nimrod Review — Statement — Clause 17

Aye: 16 MPs

No: 8 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly agreed to.

Clause 17 ordered to stand part of the Bill.

Schedule 5 agreed to.