Publication - Minutes

ADT Highlands and Islands Working Group papers: June 2018

Published: 2 July 2018
Directorate: Financial Management Directorate
Topic: Public sector, Transport

Minutes and papers from the first meeting of the Air Departure Tax (ADT) Highlands and Islands Working Group, which took place on 15 June 2018.

Attendees and apologies

Robin Clarke, Highlands and Islands Enterprise
Neil MacRae, Hitrans
Stewart Nicol, Inverness Chamber of Commerce
David Richardson, Federation of Small Businesses (FSB), H&I Region
Emmanuel Moine, FSB member; General Manager of The Glen Mhor Hotel, Inverness; Chair of the Inverness Hotels Association
Willie Cameron, FSB member; Cobbs Bakery, Drumnadrochit; National Council of Rural Advisers
Fraser Grieve, Scottish Council for Development and Industry, Inverness
Philomena De Lima, University of the Highlands and Islands
Fiona Thompson, Scottish Rural Action
Roy Bogle, Loganair
Inglis Lyon, Highlands and Islands Airports Ltd
Richard Gerring, Highland Council
Moya Ingram, Argyll and Bute
Gavin Barr, Orkney
James McLellan, SG Tax Division
Sacha Rawlence, SG Tax Division
Zoe Hollywood, SG State Aid Unit
Ian Anderson, SG State Aid Unit
Gary Cox, Transport Scotland
Trudy Morris (by phone), Caithness Chamber of Commerce
Sarah Skerratt (by phone), Scotland’s Rural University College
Tim Cade (by phone), Airlines UK
Michael Craigie (by phone), Shetland and Zettrans

Items and actions

Find meeting papers at the bottom of the page.

1. Welcome and introduction

James McLellan (JM) welcomed all attendees to the first meeting of the Highlands and Islands (H&I) Working Group, and thanked Highlands and Islands Enterprise for hosting the meeting.

2. Background to the policy

A summary was provided of the devolution of Air Passenger Duty to Scotland through the Scotland Act 2016, the passage of the Air Departure Tax (ADT) Bill, the State Aid issue that emerged in Spring 2017, the Cabinet Secretary’s update to the Scottish Parliament and the ongoing work with the UK Government (UKG). The Scottish Government’s (SG) aim is to protect the H&I economy and the exemption, and not to compromise devolved powers. SG should have free use of devolved powers, but cannot exercise them until the exemption issue is resolved. There should be no detriment when powers are devolved, and if ADT were introduced without a solution then H&I passengers would pay tax for the first time.

SG continues to work with the UKG to seek a solution. Any solution has to deliver the best possible outcome to the H&I, be legally compliant, and ensure no detriment to the SG or the H&I. Both governments have agreed to defer the introduction of ADT in Scotland beyond April 2019 to enable industry planning, and for seeking solutions with stakeholders.

JM welcomed the diversity of expert views in the room, and invited attendees to work with the SG in developing a joint understanding of the evidence and in helping to explore solutions to support the engagement with the UKG.

A wide range of views were expressed by members. Issues discussed included:

clarification about the current APD rates: the current UK APD rates remain in force for FY 2019-20, including the exemption
timescales for meetings of the Working Group and for the wider solution: it was agreed that the Group would meet quarterly, although there would be value in convening smaller groups in between. The aim was for the Group to conclude its work by early 2019
anticipation of increasing fares, impact on lifeline services to island communities, and on people’s ability to travel to and from HI communities in the event that a solution could not be found. It was emphasised that one of the core purposes of convening the Group was to gain a clearer collective understanding of the importance of the exemption to the region and routes
clarity re timing of the 50% cut: the SGs commitment to a 50% cut by the end of this parliament, and to abolish when resources allow, remains. Minsters have not specified how this cut would be spread over years

Actions:

SG to follow up with Group members who cited anticipated impacts, to gather any existing evidence on these.

3. Terms of reference

A draft ToR was tabled for agreement, and the purpose and remit of the Group were discussed. Schedule and timelines: three meetings had been provisionally tabled, this first being to set out aims and background knowledge; the second would explore evidence gathering with the good points made already; the third meeting would explore solutions.

Future meetings might be broken up into smaller group discussions, for evidence gathering. A budget has not been allocated for research, but if there were a case for a short-term project to supplement existing sources, this could be considered.

The intention is for meetings to be held quarterly, and the next meeting will likely be in September. Confirmed that all members are content that the agenda, papers and minutes will be published; once published, these can be freely shared. Some of the discussion may be politically or commercially sensitive, and such details will be considered to be confidential to the Group and will not be shared outside Group meetings. Certain evidence may be discussed within subgroups to protect confidential information.

The ToR were agreed.

4. State aid

The SG State Aid team presented an overview of the State Aid rules in the context of ADT, and the Azores criteria on the devolution of taxes. Issues discussed included:

clarity around the need to notify the European Commission (EC) of the H&I exemption if introduced under ADT and the risk involved. The Scottish Parliament cannot legislate in contravention of EU law. Many members wish to retain the exemption
the aviation market: the EC has judged that air travel is Europe-wide with multiple operators, so regardless of the destination air travel as a whole is considered to be a trade that can be distorted. The Air Discount Scheme (ADS) has provision for residents under the General Block Exemption Regulation (GBER)
regulations that allow us to offer support: Article 107 TFEU for a like-for-like exemption, sets a very high bar for evidence demonstrating the economic needs of a region without causing trade distortion; would be intensely scrutinised by EC, potentially taking 18-24 months and would require a standstill obligation. SGEI applies only in cases of market failure, and requires competitive tendering as in the current PSO flights. The ‘de minimis’ allowances for aid to given companies (EUR200k over three years) are too low for our purposes
questions arose regarding existing support to the region and what could be learned from this, including HMRC’s Rural Fuel Duty Relief Scheme; other existing discounts that do not extend to Inverness; outcome of German case; design of the ADS and any scope for expanding

Actions:

SG to follow up on the Rural Fuel Duty Relief Scheme, eligibility for and scope of the ADS, and the outcome of the German case.

5. Next steps and planning

JM thanked all attendees for their participation and confirmed that minutes will be circulated for comment, and dates suggested for the next meeting – possibly drawing on smaller groups for expert knowledge or commercially-sensitive matters.

For meeting two, the evidence to be gathered will vary depending on the intended use. This will range from helping the Cabinet Secretary to understand the importance of the H&I exemption to region, supporting our engagement with the UKG, to potentially discussing with the UKG their decision whether to proceed with a notification. Members were asked to share existing work they had been involved in or were aware of.

For meeting three on options, this will include discussion around the existing exemption and alternatives – whether there are ways we could deliver similar outcomes without the need to notify the EC.

Risks to ADT: we can devolve the tax, and SG can reduce the rates (50% commitment). The EC would be concerned by the 50% if it were delivered in such a way that, in their view, was selective or distorted competition. If ADT were set up like APD, we would be free to cut it by 50%. Whether the H&I exemption is at risk: the ADT Act has been passed but is not in force, the H&I exemption is not in the Act because of these issues – and the Cabinet Secretary will not take on the tax unless the H&I exemption or an acceptable alternative is in force. Any notification made to the EC would need to be supported by a tremendously strong case bearing in mind the risk of shining a light on the current exemption.

Actions:

SG to send out minutes for agreement and publication
where individual members have raised examples of local impacts or other exemptions, they are asked to send us supporting information they are already aware of so that evidence can be brought to the next meeting for discussion. SG will follow up with other members of the group to discuss their organisations’ views of the impact of the exemption, which will help to scope out the associated need for evidence.
SG to circulate outline guidance on the evidence it would be helpful to develop
SG to a summary of the options that have been considered
SG to consider asking smaller groups with common concerns to meet during August to develop evidence, and then call a meeting of the whole group to present and discuss evidence; late September or early October