Treasury hints at retreat on aviation tax plan

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The Treasury has signalled its willingness to offer concessions on reforms to aviation tax that have been lambasted by business and long-haul airlines and drawn implicit threats of legal action from the US.

Substantive changes to the proposal to replace air passenger duty with a tax per aircraft would mark a further unravelling of Alistair Darling’s pre-Budget report of last autumn. The chancellor has already been forced to stage partial retreats on capital gains tax and the levy on non-domiciled foreign residents in the UK.

“We’re the last in a series of tax changes that has gone pear shaped,” an airlines industry insider told the Financial Times. A senior Labour MP said: “This is another Treasury mess.”

The proposed reforms, due to come into force in November next year, would significantly affect airline passengers and operators, as well as raise more than £500m ($985m) extra a year for the strained Treasury coffers.

Delivery companies such as FedEx and DHL would have to pay the new tax on freight-only flights, in contrast to their exemption from the existing air passenger duty, unless they decide to use other European airports instead and bring the goods into the UK by truck.

Millions of passengers transferring between aircraft in the UK would also be brought within the scope of aviation duty for the first time. The proposed design of the new duty – charging for each flight, rather than charging passengers according to their final destination – means UK passengers could save significant amounts of tax by using non-UK hubs, such as breaking long-haul flights from Britain in Amsterdam.

The US embassy has formally notified the government of its “significant policy and legal” concerns, warning that the proposals appear to breach the 1944 Chicago convention and last year’s “open skies” transatlantic agreement.

Business is warning that the changes will cause significant damage to the UK aviation sector, to airport hubs such as Heathrow and to regional airports. The CBI employers’ group said the duty was “misconceived” and “likely to be ineffective” as a green tax.

The Treasury signalled on Friday night that it would respond to the outcry over the impact on transit business in this autumn’s PBR.

“We are aware of people’s views around this and, like all consultations, will take those into account in designing the final form of the tax,” an official said.

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