Air Departure Tax (Update)

Part of the debate – in the Scottish Parliament on 5th October 2017.

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Photo of Derek Mackay Derek Mackay Scottish National Party

Thank you, Presiding Officer.

The Scottish Government has made a strong case over many years for powers over air passenger taxation to be devolved to the Scottish Parliament. We have set out a clear aim to reduce the burden of air passenger taxation by 50 per cent and to abolish the tax altogether when resources permit. That commitment will help both to boost international connectivity and to generate sustainable growth—priorities that are even more pressing as a result of the European Union referendum.

In 2014, the Smith commission recommended devolution of powers over air passenger duty to the Scottish Parliament. The Scotland Act 2016 made provision for that devolution. Following extensive engagement with stakeholders, we introduced the Air Departure Tax (Scotland) Bill to Parliament; the act gained royal assent in July 2017. Under terms agreed between the Scottish and United Kingdom Governments in the fiscal framework, APD is due to be fully devolved in April 2018 and Revenue Scotland has work well in hand to begin collection.

If the UK Government were handing over the tax in a fit state, Parliament would now be considering regulations setting out tax bands and rate amounts. However, that is not the case. During stage 1 consideration of the bill, I alerted the Parliament to an important matter that had arisen concerning our plans to replicate the current APD exemption for passengers who fly from Highlands and Islands airports. The Highlands and Islands exemption has applied under APD since 2001. The exemption is a feature of air passenger duty and should be a feature of air departure tax, supporting not just residents but businesses and tourism in the area.

As members know, the Government and the Parliament cannot act in a way that is contrary to EU law. After very careful consideration, we have concluded that in order for the Highlands and Islands exemption to be compliant with EU law and state-aid regulations, it must now be notified for approval to the European Commission. As the UK is the member state, only the UK Government can do that.

It is not a technical argument. Aviation is critical to the Highlands and Islands, helping to support a diverse range of businesses and enabling residents from the more remote regions to access essential services that cannot be provided in their areas. Without it, there is a real risk that the Highlands and Islands will suffer economic detriment.

Since informing Parliament of the position in April, I have had a series of discussions and exchanges of correspondence with UK Treasury ministers, most recently with the Financial Secretary to the Treasury on 25 September. Throughout the conversations and correspondence, I have been clear that although we remain committed to working with the UK Government to secure an acceptable resolution, it is for the UK Government to resolve the issue and, as the EU member state, only the UK can take forward any notification.

The response, thus far, from the UK Government has been disappointing. The Financial Secretary to the Treasury made it clear in July that the UK Government has serious concerns about making an approach to the Commission; in correspondence, he stated that before the UK Government will agree to do so, the Scottish Government will need to accept full liability for all risks, including the potential for knock-on effects on Highlands and Islands business. As I will explain, those risks would include liability for the historical operation of the tax; acceptance of the financial consequences back to 2001 if the Commission does not approve the exemption; and the cost of avoiding detriment to the Highlands and Islands during the length of time that notification would take.

I am clear that, with its transferring responsibility for the tax, the obligation was on the UK Government to ensure that it could be operated fully. The conditions that the UK Government has sought to impose are clearly not acceptable, and it is patently unfair that, having got us into this mess, the UK Government is willing to fix it only if the Scottish Government agrees to pay the costs of any mistakes made. Let me be clear: this Government will not put at risk the economy of the Highlands and Islands, and it is not for this Government to bear the cost of actions that the UK has taken, if they are found not to be compliant.

This Government therefore finds itself placed in a deeply unsatisfactory position. We could choose not to introduce the exemption for Highlands and Islands flights, ensuring that ADT remains within EU state-aid rules and avoiding the need for notification. However, that would bring an unacceptable cost to the fragile economies of the Highlands and Islands. We could also seek an alternative approach that would deliver the same outcome as the exemption, and I and my officials have left no stone unturned in investigating ways of delivering the same or better outcomes for the Highlands and Islands without a notification process. However, although there are solutions within state aid that would support the residents of islands and sparsely populated areas, we have no legal viable exemption that would support businesses and tourists and provide the good connectivity that is vital to the city of Inverness on the same terms that are currently available. The UK Government also suggested that it would consider alternatives, but it has yet to present any options that we have not already considered or which meet the requirements of the Highlands and Islands and would not also require notification to the Commission.

The only option identified by the Scottish Government that does not require notification to the Commission and which could be in place for April 2018, securing the benefits of the exemption for the Highlands and Islands, would be through the use of rates and bands and in a way not exclusive to the Highlands and Islands. That would involve setting all bands at a zero rate to cover direct and connected flights from Highlands and Islands airports. Doing that would involve the Scottish Government forgoing substantial revenues not to deliver any additional benefit but simply to deliver the tax to the same standard for the Highlands and Islands as currently operates. To match the exemption for all Highlands and Islands flights, including connecting flights, would require the Scottish Government to forgo revenues of more than £320 million, and to do so simply for band A flights would mean forgoing revenues of around half of that.

Although under the terms of the fiscal framework this Government would, of course, bear the cost of any policy changes made by this Parliament, such as reducing rates to deliver economic growth, it should not cost this Government financially simply to deliver the tax as it currently is. That is the principle of no detriment that was set out by the Smith commission and which underpins the fiscal framework accompanying the devolution of powers. That principle is central to the operation of the block grant adjustment. However, the block grant adjustment mechanism for ADT does not take account of this potential flaw in the Highlands and Islands exemption. Currently, the block grant adjustment will see Scotland’s block grant reduced by an amount forecast on the delivery of the tax as it currently operates. As a result of the position we have now been placed in, I have not yet been able to set the exemptions, reliefs and rates that I propose for ADT in the coming year.

The UK Government has suggested that, instead of going ahead with notification or facing removing the exemption, we could defer implementation of the tax for an unspecified time period. A change to the timetable is certainly feasible—the UK Government must switch off the tax before ADT can be introduced in Scotland—and it might be unavoidable if a solution is not found. However, that is not our preference.

I have therefore written to the UK Government again today to set out my position. I remain supportive of notifying the Commission, but not of the Scottish Government taking on the risk of the UK Government’s operation of the policy. I am very aware that the European Commission will need time to consider any case that is made, so it is already unlikely that we could get a decision from the Commission in time for ADT to begin in April 2018.

Instead, I have suggested that the UK Government agree to amend the block grant adjustment to enable the Scottish Government to deliver support for the Highlands and Islands in a way that ensures neither the Highlands and Islands nor Scotland’s public finances suffer as a result of this apparent defect in air passenger duty.

That amendment could be made while notification is pursued, on the understanding that the UK Government accepts the risks inherent in such a notification, or on a permanent basis if the UK Government remains unwilling to make such a notification. It is the only solution that either Government has tabled that would enable ADT to be implemented on time and in a way that protects the economy and the communities of the Highlands and Islands and the devolution of powers under the Scotland Act 2016, and which is consistent with the no-detriment principle of the Smith commission.

To determine our approach, we require clarity from the UK Government by the time of the UK budget at the very latest. We urge all stakeholders and interested parties to encourage the UK Government to reach a sensible solution.

Given the severity of this issue, the potential impact on the economy of the Highlands and Islands and the risks to the devolution of powers as agreed by this Parliament, I felt that it was incumbent on the Government to air these issues in Parliament and to be clear to the region and to industry where we stand on the introduction of ADT. I hope that all members will support the action that we are taking. I know that some members do not support our general position on reducing ADT, but this is a different issue—it is about our ability to deliver the tax as it stands today.

A delay is not my preferred option—I could agree that only as a last resort—but ADT cannot be put into operation while significant uncertainty hangs over the Highlands and Islands. I therefore urge the UK Government to step up to the plate, recognise its responsibilities and support our proposal, which would enable ADT to go forward as planned without causing harm to Highlands and Islands communities.