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Time to say 'goodbye' to Air Passenger Duty (APD)?

In light of the Chancellor's budget last month and his decision to ignore pleas to address Air Passenger Duty (APD), plus Scotland potentially cutting the tax by 50% in 2018, we take a look at why a rethink of APD could be crucial for maintaining our status as the 'go-to' hub for European and international businesses.

Air Passenger Duty

First introduced in 1994, APD is the Government's environmental tax for passengers leaving UK airports. In the early days, travellers were only charged £5 for short-haul flights and £10 for anywhere else. Since then there have been a number changes to charges and geographical bands.

Today APD is divided into two bands, one based on class of travel and the other on distance: from 1 April 2016, band A's (0-2,000 miles) standard rate is £26, while band B's (over 2,001 miles) standard rate is £146. Those under 16 years old are exempt from the tax. The tax raises about £3bn in revenue every year*.

The APD effect

When MP Kenneth Clarke first proposed the introduction of a new levy on all air passengers using UK airports in 1993, the impact on fare prices, tourism and businesses was seen as being minimal. Fast-forward 20 years, and a rise in tax of around 539% per flight†, and research conducted by PriceWaterhouseCoopers (PwC) in 2013 concluded that APD was having a negative effect on UK businesses and tourism.

Simply abolishing the tax and giving businesses access to cheaper airfares could enable companies to spend more time with key overseas customers, which, in turn, could lead to business expansion, an increase in productivity and more jobs. All of which could lead to a positive net gain for the Government – suggesting that ending APD could pay for itself§.

A fair and competitive market

The UK has one of the highest aviation taxes in the world, while aviation alone contributes £52bn of the UK's GDP and generates £8bn in Treasury revenues**. However, if APD isn't scrapped or at least follows Scotland's lead, the effect on businesses could take its toll. A very real reality could see business travellers heading to Edinburgh or Glasgow to benefit from APD-free fares.

As spokesperson Tim Alderslade from the Airport Operators Association has said: "The UK is rightly proud of the competitive nature of its aviation market and this should not be undermined at any cost. The Chancellor is on record as saying that he will not allow airports in the rest of the UK to be disadvantaged by Scotland being able to levy a substantially reduced level of APD. As HMRC has already concluded, all this would do is distort competition and result in passengers and airlines relocating to airports north of the border."

The future of APD

Although the Chancellor's budget didn't address or resolve some of the issues raised by the travel industry, small steps were made last year when all long-haul flights were moved into band B, saving passengers and businesses more than £200m annually – helping to promote greater UK connectivity††.

It's a long way off but the future of APD looks set to continue as it is until 2018, when Scotland aims to cut tax by 50%. Until then, industry leaders and MPs can only continue to highlight the benefits to UK and international businesses that reducing or removing APD would have.

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Sources: *Skyscanner, March 2016; †A fair tax on flying, March 2016; §The economic impact of Air Passenger Duty, PWC, February 2013; **AOA, February 2015; ††; Air Passenger Duty, ABTA, March 2016.

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