Replacement to Air Passenger Duty (APD): consultation analysis

Executive Summary

This report presents an overview of findings from analysis of responses to the Scottish Government's policy consultation on a Scottish replacement to Air Passenger Duty. The consultation sought views on proposals for a tax to replace Air Passenger Duty ( APD) in Scotland from April 2018. The final number of submissions received was 160, including 76 submitted by group respondents and 84 by individuals.

The Principle of APD Reduction

The majority of respondents used their written submissions to make some comment on the reduction in APD, and most of these respondents expressed an objection to or raised concerns around the potential impact of the reduction in APD. This was primarily around the negative environmental impact of an increase in air travel as a result of the reduction in APD. These respondents also raised concerns around loss of funding to public services, the potential negative impact on other lower carbon transport modes, and the extent to which a reduction in APD will achieve the stated objectives.

Individual respondents accounted for the majority of those objecting to the policy, although more than a quarter of group respondents expressed similar concerns. It was clear that for a substantial number of respondents, objections to the reduction in APD had a significant impact on their response to the main body of the consultation.

Strategic and Policy Objectives

Around half of respondents agreed with the strategic and policy objectives set out in the consultation document. Group respondents were more likely than individuals to agree with the objectives, and individual respondents accounted for a large majority of those opposed.

The majority of those who supported the strategic and policy objectives highlighted the potential economic benefits associated with increasing Scotland's international connectivity. This was in relation to the ability of Scottish airports to maintain existing routes (including making marginal routes more viable), and also securing new direct routes (both domestic and international connections). Potential benefits for tourism in Scotland were also cited by a substantial number of respondents - both in terms of inbound tourism and the benefits associated with outbound tourism. A small number of those expressing support for the overall strategic and policy objectives raised some concerns around specific aspects of the proposed policy, including the extent to which the proposed reduction or abolition of APD would be effective in delivering the objectives.

Objections to the proposed 50% reduction in APD were a significant factor for those who disagreed with the strategic and policy objectives; nearly all of those providing comment in opposition to the objectives raised issues regarding the proposed reduction in APD. The environmental impact of an increase in Scotland's air connectivity was the issue most commonly raised by these respondents. Questions were also raised around whether the proposed reduction or abolition of APD will achieve the stated objectives, including the likely extent of any increase in air connectivity and suggestions that the reduction in APD is unlikely to result in a net increase in tourism for Scotland. The potential negative impact on other transport modes, potential loss of funding available to public services, and concerns regarding the "fairness" of the strategic and policy objectives (and the reduction in APD specifically) were also cited by a substantial number of those who disagreed with the objectives.

Scope and Structure of Duty

A large majority of those providing a view agreed that the current UK APD definitions of 'chargeable passenger' and 'chargeable aircraft', and the per-passenger charging model should be retained for the Scottish APD replacement tax. Those in favour of the current definitions and charging model referred to these being familiar to and well understood by airlines and others, having proven a simple and effective approach for administration and compliance, and the importance of minimising the administrative burden for current UK APD taxpayers. Most of those who disagreed with retention of the current definitions and/or charging model were individual respondents. This included some whose objection was based on a preference for the removal of all APD charges immediately once powers over APD are transferred to the Scottish Parliament. However, a substantial number of those objecting to the per-passenger charging model specifically, suggested that it may be appropriate to consider alternative models. This included some who expressed a preference for taxation of air travel to seek to reduce carbon emissions.

The majority of those providing a view agreed that the current UK APD destination-based banding system should be retained for the Scottish APD replacement tax. Reflecting views on definitions and charging models, most of these respondents referred to the destination-banding system being well understood, simple and effective, and its retention minimising disruption to taxpayers' systems. Most suggested that banding should be based on the distance between capital cities, where this is measured from Edinburgh (and with an increase in the band A distance threshold to allow for this change). However, a small number of those who supported destination banding suggested bands based on a specific set of destinations, rather than distance.

More than a quarter of respondents disagreed with the retention of current destination-based banding, most of these being individual respondents. This included some respondents who indicated a preference for a banding system with a closer link to environmental impacts of flights. A number of specific alternatives were suggested.

The majority of those providing a view agreed that the current UK APD rates system should be retained for the Scottish APD replacement tax. Again, for most respondents this support was based on the rate structure being familiar to and well understood by airlines and others, including suggestions that consistency with the current UK APD structure will be important for future administration of the two taxes. These respondents also saw the rate structure as relevant to passengers' experience (and ability to pay) across flight classes. Most of those in favour of the current rate structure felt that the rate definitions are appropriate to the Scottish market, and few suggested a need for change to the definitions.

A quarter of respondents disagreed with the retention of the current UK APD rates system, and individuals accounted for the large majority of these respondents. The most common reason given for an objection to the current rates system was a preference for a replacement tax which addresses the environmental impact of air travel, and/or takes greater account of passengers' ability to pay.

Respondents' views on how a reduction in APD should be introduced were clearly linked to wider views on the principle of a reduction in APD. Those in favour of the reduction in APD typically focused on how its implementation could best achieve the anticipated benefits to Scotland's connectivity and economic growth - for example through the full 50% reduction being introduced as soon as possible. In contrast, those opposed to the APD reduction focused on how its implementation could best mitigate environmental impacts and ensure that economic benefits are shared - for example though an incremental introduction to allow for further work to assess and plan for the impacts of the reduction in APD.

Exemptions

A large majority of those providing a view agreed that the current UK APD passenger and flight exemptions should be retained for the Scottish APD replacement tax. Those in favour described the current exemptions as having been beneficial for air travel across the UK. Current exemptions for children under the age of 16, and for connecting flights and transit passengers were seen as particularly significant. The importance of minimising complexity for taxpayers and potential confusion for customers was also highlighted.

Around 1 in 5 of those providing a view indicated that they disagreed with the retention of current passenger and/or flight exemptions; individuals accounted for nearly all of these respondents. Most of those objecting to the current exemptions suggested specific reductions in current exemptions and/or broader changes to the approach to the Scottish APD replacement tax. This included several respondents who wished to see a significant reduction in flight exemptions as part of an approach which linked taxation of air travel to environmental impacts.

A large majority of those giving a view agreed that the current UK APD exemption for flights from the Highland & Islands region should be retained for the Scottish APD replacement tax. Most of these respondents made reference to the social and economic benefits of air connectivity, and specifically in relation to the low population density and relative remoteness of the region. A small number of respondents based in the region also provided detailed submissions which made reference to specific benefits, including supporting "marginal" air routes, incentivising airlines to consider new services, and benefits for local economies and communities associated with air travel. These respondents suggested that removing the exemption would have a significant detrimental effect on the region.

Around 1 in 5 respondents indicated that they wished to see the current Highland and Islands exemption modified. Most of these respondents suggested that the "lifeline" status could not be applied to all flights from the region, and wished to see a reduction or removal of the exemption for Highlands & Islands flights. This included a specific focus on flights from Inverness to destinations outwith the Highlands and Islands region (most commonly flights to "ski and sun" destinations).

Connected Flights

The majority of those giving a view agreed that the current UK APD connected flight rules should be retained for the Scottish APD replacement tax. Most of these respondents re-stated the benefits set out in the consultation document, including for example protecting the status of UK hub airports. Some also emphasised the importance of maximising consistency with UK APD to minimise confusion for passengers and ensure administrative simplicity for taxpayers. Around a quarter of respondents indicated that they disagreed with retention of current UK APD connected flight rules. Most of these respondents saw the connected flight rules as inequitable, and cited specific examples where the application of an APD exemption across all parts of a journey was seen as unfair. A substantial proportion of those who did not support retention of current connected flight rules wished to see APD applied to subsequent parts of all connected flights.

A minority of respondents commented on the circumstances where "double taxation" might apply following introduction of a Scottish APD replacement tax. Some of these respondents suggested that this issue would be minimised if the current connected flight rules are retained - although it was also suggested that the extent of any double taxation would also be dependent on decisions taken by the UK Government. However, respondents referred to a range of specific examples where double taxation is currently an issue and/or where the introduction of a Scottish replacement tax could exacerbate the issue. These respondents most commonly referred to passengers purchasing separate tickets for unconnected flights currently being subject to a higher APD charge than those able to purchase a single through ticket. This was raised as a specific issue in the context of the growing role played by low cost operators reliant on point-to-point tickets and where connected flights are not available. In this context, a small number of respondents suggested that an agreement is made with the UK Government on circumstances where the principle of connected flight rules could be applied to unconnected flights.

Administrative Aspects of the Replacement Tax

The consultation sought views on a range of other issues regarding the administration of a Scottish APD replacement tax. Relatively few respondents commented on these aspects of the consultation document, perhaps reflecting the extent to which proposals for the administration of the replacement tax are most relevant to those who will be liable to account for and pay the Scottish APD replacement tax.

The majority of those providing comment agreed with the range of proposals set out in the consultation document relating to the administration of the replacement tax. This included the proposed approach for registration for the replacement tax, tax return and payment arrangements, record keeping, tackling tax avoidance and tax evasion, investigatory and enforcement powers, and dispute resolution. To the extent that these proposals were based on approaches to current UK APD or other devolved taxes, respondents saw benefits in these approaches having proven effective to date and in simplifying compliance for taxpayers currently subject to UK APD.

For those respondents who did not support aspects of the proposed approach to the administration of the Scottish APD replacement tax, this was most commonly linked to an objection to any reduction in APD in Scotland. Few respondents suggested changes to specific proposals set out in the consultation document, and where changes were proposed by respondents these were typically for relatively minor modifications.