Scrapping Air Passenger Duty – Geoff Mawdsley

This article by Geoff Mawdsley appeared in Scottish Policy Now.

Following the work of the Smith Commission, the new Scotland Bill proposes to devolve Air Passenger Duty to Scotland, as well as income tax and aggregates levy. Added together with existing taxes which have been devolved to Holyrood, this will give the Scottish Government direct responsibility over the level of 37 per cent of its expenditure. While Reform Scotland believes that the legislation as it currently stands does not go anywhere near far enough toward giving Holyrood control over a basket of taxes which enables it to raise the money it spends, the devolution of Air Passenger Duty (APD) does present Scotland with an opportunity to scrap the tax.

APD is an excise duty which is applied to all chargeable air passengers travelling from a UK airport. The tax came into effect in 1994. From April 2015 there are two destination bands and three rates of pay, depending on the class of travel.

There are a couple of exemptions that are worth noting. From 1 May 2015, children who are under the age of 12 years on the date of the flight, and in the lowest class of travel, are not chargeable passengers.

In addition, passengers carried on flights departing from airports in the Scottish Highlands and Islands region are not chargeable passengers. However, passengers travelling from other areas of the UK to the Highlands and Islands are classed as chargeable passengers. The APD rates as of 1 April 2015 are detailed in the table below:

The tax raised £251m in Scotland in 2013/14, 0.5% of all tax revenue raised in Scotland.

A study by Edinburgh Airport has suggested that the Scottish Government’s pledge to cut the tax by 50% could generate up to 3,800 jobs by 2020 and bring an economic benefit of £200m per year. The report can be read in full here, though the following extract from chief executive Gordon Dewar’s introduction sums it up.

“The evidence in this report speaks for itself. Our latest findings show that a 50% reduction would provide benefits to Scotland worth £200 million. It would bring considerable benefits to local communities across Scotland by protecting the jobs already dependent on Scotland’s airports and creating 3,800 new jobs by 2020.

In addition, our latest findings show that the effect of not reducing APD by at least 50% would cost Scotland nearly one million passengers per annum and that, by 2020, APD would cost the Scottish economy up to £68 million in lost tourism expenditure every year.

Cutting the cost of air travel is an important step towards helping to improve Scottish businesses’ international reach.

And these numbers are not just well calculated estimates. They are tangible. Ryanair has publicly committed to delivering more than one million new passengers if APD is abolished in Scotland. Those kinds of commitments illustrate the size of a prize which is presently beyond our grasp. Our research now proves beyond doubt that reducing APD would pay for itself, and some.”

In addition to the Edinburgh Airport study, PwC has published UK research which found that significantly reducing or abolishing APD would result in a significant increase to GDP, jobs and would actually increase revenues to the Treasury from other taxes so much that the policy would pay for itself.

Reform Scotland shares the view of the Scottish Chambers of Commerce that even more benefit could be gained by going further and abolishing the tax altogether. Cutting the cost of air travel is an important step towards helping to improve Scottish businesses’ international reach.

It has been estimated that around half of Scottish overseas exports are accounted for by just 60 companies. So, while the Scottish Government’s target to increase the value of Scottish exports is worthwhile, it is also necessary to increase the number of companies exporting, and cutting the cost of air travel will help towards meeting that goal.

The recommendation to scrap APD was one of those included in our report, Improving Scotland’s Business Environment. That report set out 11 policies designed to make Scotland the best place to do business. The other policy recommendations, which can be read in greater detail in the report, were:

  • Devolve business rates to local authorities in order that they can design their own schemes to suit local requirements
  • Scrap fuel duty and vehicle excise duty and replace them with pay-as-you-drive road pricing
  • Make Colleges autonomous charities, free from government control, to give them the same status as universities
  • Transfer the functions of quangos either to local authorities, government departments or independent bodies
  • Devolve more taxes to the Scottish Parliament, including Corporation Tax
  • Reform the planning system, too often an inhibitor of economic growth, to incentivise local authorities
  • A virtual voucher in childcare, with the money following the child to meet the needs of working parents
  • All government contractors should be compliant with the Prompt Payment Code, to end late payments culture
  • A one-stop-shop for government advice to business, with quicker progress on mygov.scot
  • Certified digital identification of angel investors to improve the efficiency of investment in small businesses