Analysis: Will cut in APD make much difference?

Analysis: Will cut in APD make much difference?

The Chancellor sprang a surprise with a Budget cut in APD on the longest flights. It delighted the Caribbean, but the UK’s tax on flying remains high. Ian Taylor reports

The Budget on March 19 was significant for travel and, for once, not in a negative way. Chancellor George Osborne finally responded to industry lobbying by announcing a switch to a single Air Passenger Duty (APD) rate on medium and long‑haul flights.

So the dreadful treatment of the Caribbean, taxed at a higher rate than California and Hawaii, will end from April 2015.

It is a clear retreat by Osborne, who was reported to have personally vetoed a move to simplify the current four-band system in 2011, and will be welcomed around the world.

Destinations from India to New Zealand and the Caribbean to Chile will see APD applied to UK flights at the same rate as to the US.

Four bands for a year

However, four APD bands will remain for another year and rates for all but short-haul flights will still rise next week: to £69 on an economy flight to Egypt or the US (Band B), £85 to the Caribbean (Band C) and £97 to Singapore and beyond (Band D) – with rates in other classes double these amounts.

The move to just two rates in a year’s time will see £71 APD applied to all medium and long-haul economy fares (the ‘reduced rate’) and £142 in other cabin classes (the ‘standard rate’). Rates will continue to rise annually with inflation.

Trade reaction

The Caribbean Tourism Organisation expressed delight, chairman Beverly Nicholson-Doty saying: “This is a complete victory for the Caribbean. We want to thank everyone who has supported our lobby.”

Abta head of public affairs Stephen D’Alfonso argued: “The decision vindicates the hard work, commitment and persistence shown by diverse organisations united in lobbying for a change.

“A £200 million tax cut for the sector is nothing to scoff at in the middle of the government’s deficit-reduction programme.”

However, D’Alfonso said: “Passengers will continue to face the highest taxes on air travel anywhere. Those flying domestically are still hit twice. Long-haul passengers will continue to pay more than £70 in tax. It would be wrong to interpret this as the end of the road for APD campaigning.”

Paul Wait, chief executive of the Guild of Travel Management Companies, agreed, saying: “We hope this will be the first in a series of reforms to APD.”

Virgin Atlantic said: “A two-band APD rate is a welcome simplification. We hope the government will go further.”

British Airways’ parent IAG took a tougher line, saying: “This is window dressing.”

Tax remains high

The reality is the re-banding will affect only 8% of UK air passengers, since 92% pay APD at Band A or B rates now.

But the Budget Report did appear to acknowledge APD has a negative impact, something the Treasury has previously denied, when it suggested the aim of switching to two bands was “to help British businesses strengthen links with high-growth markets and go further to make the UK an attractive option for business visitors and tourists”.

Anomalies remain, of course. Fares to Egypt will carry £71 in APD while those to Tunisia will be £13-£14.

More important, Band B APD will remain high and rates will rise in line with the retail prices index (RPI). This was 2.7% in February when the consumer price index (CPI), which the government takes as the official rate of inflation, was 1.7%.

So APD on fares to the Caribbean will fall next April, but only from £83 to £71 in economy – hardly a decisive difference. Nonetheless, it is a fillip to the sector and a climbdown by the Treasury – which will see annual APD revenue fall by more than £200 million a year.

The question is, where will the industry’s Fair Tax on Flying coalition go from here?


Editor’s comment

Lucy HuxleyLast week the chancellor George Osborne was goaded by opposition MPs during his Budget speech to pull a financial rabbit out of the hat.

With no money to give away, a pre-election bunny never materialised, but his announcement of APD reform was a victory for travel as significant as it was unexpected.

OK, so the tax remains and most travellers won’t benefit from new banding from 2015, but only the most optimistic tub‑thumpers saw him forgoing revenue in times of austerity.

After all the years of lobbying, to hear Osborne agree with the industry when he referred to the current APD system as “crazy” was vindication.

He also said: “It hits exports, puts off tourists and creates a great sense of injustice among our Caribbean and South Asian communities here in Britain.”

So the principle of the damaging social and economic impact of APD has been established and accepted at the highest level in government. The door is now surely open to go further.

Sourced from Travel Weekly

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