Replacement to Air Passenger Duty (APD): consultation analysis

5. Exemptions

5.1. The consultation document included an overview of current UK APD exemptions for passengers and flights. This noted that passengers are exempt from UK APD in a number of circumstances including where they are (i) passengers on a connected flight, (ii) children, (iii) transit passengers making a stop en route for example to refuel, (iv) passengers carrying out certain duties such as flight crew and cabin attendants, or (v) passengers carried under a statutory obligation. In relation to flights, the five main types of flight exempt from UK APD are (i) emergency or public service flights, (ii) short pleasure flights of 60 minutes or less, (iii) where the flight details of destination changes due to circumstances beyond the airline's control, (iv) NATO flights, and (v) flights departing from the Highlands and Islands region.

5.2. This section considers respondents' views on the three consultation questions in relation to passenger and flight exemptions.

Passenger exemptions

Q9a: Do you think that the current UK APD passenger exemptions should be retained under a Scottish replacement tax?

Q9b: If you answered yes, to what extent are the existing definitions appropriate for the Scottish industry?

Q9c: If you answered no, please explain your answer. Is there any evidence to support the introduction of any additional or alternative exemptions?

5.3. Question 9a asked whether the current UK APD passenger exemptions should be retained by the Scottish replacement.

5.4. A total of 87 respondents answered Question 9a (54% of all respondents). A large majority of these respondents agreed that the current UK APD passenger exemptions should be retained; 70 respondents, 80% of those answering the question. A further 17 respondents indicated that they disagreed with this proposal, 20% of those answering the question.

5.5. There was some variation in this profile of views across respondent types. Group respondents were more likely than individuals to agree with the use of current passenger exemptions; more than 9 in 10 group respondents agreed with this, compared to around two thirds of individuals. Individual respondents accounted for nearly all of those opposed to retaining current passenger exemptions.

Table 5.1: Q9a Do you think that the current UK APD passenger exemptions should be retained under a Scottish replacement tax?

	Yes	No	No response	TOTAL
Airlines and airline representatives	9	2	1	12
Airports and airport representatives	5		3	8
Other transport and travel organisations	7		6	13
Business, economic development and tourism organisations	19		6	25
Professional tax and accountancy organisations	1		1	2
Environmental organisations			6	6
Other organisations	2		8	10
Group respondents (Total)	43	2	31	76
Individual	27	15	42	84
TOTAL	70	17	73	160
Percentage of all respondents	44%	11%	46%	100%
Percentage of those answering question	80%	20%	-	100%

5.6. The consultation document invited further written comments at Question 9, asking those who wished to retain current UK APD passenger exemptions whether the current definitions should be applied to Scotland, and those who disagreed which alternative approach should be used. A total of 69 respondents provided written comment, including 52 of the 70 who supported retention of the existing UK APD passenger exemptions, and 16 of the 17 who disagreed.

5.7. For those in favour of retaining current passenger exemptions, these were described as having been beneficial for air travel across the UK to date, and also for Scotland's future air connectivity. This included reference to specific aspects of current exemptions as being of particular importance for Scotland's air connectivity - the exemption for children under the age of 16 and exemptions for connecting flights and transit passengers were seen as particularly significant.

5.8. More broadly, the importance of retaining consistency between the Scottish and UK APD tax regimes was also emphasised by a substantial number of those in favour of retaining current exemptions, including reference to minimising complexity and confusion within the market. A small number of these respondents expressed specific concerns that passengers who are exempt from UK APD on departure from elsewhere in the UK, should not be subject to the Scottish replacement tax due to differences in exemptions or definitions. In this context, several respondents suggested that engagement with airlines would be required well in advance of any proposed changes exemptions, to minimise the costs associated with implementation and to provide time for any required changes to systems.

5.9. A small number of those indicating broad support for retention of UK APD exemptions suggested areas where these should be extended. This included reference to extending the current exemption for children to include those up to the age of 18, to introduce exemptions for charities, exemptions for passengers of pensionable age, and exemptions for passengers travelling on medical grounds (for example between the Scottish Islands and the mainland).

5.10. An other transport and travel respondent broadly supportive of current exemptions also suggested there may be value in considering a progressive phasing out of exemptions for connecting flights and transit passengers, in order to encourage more direct flights to Scotland.

5.11. There appeared to be broad support for current exemption definitions amongst those who supported the retention of UK APD exemptions under the Scottish APD replacement tax. A substantial proportion of these respondents made explicit reference to the suitability of these definitions, and only one of those supporting the current exemptions suggested modification to current definitions. An airline/airline representative respondent wished to see clarification of definitions for non-revenue and standby travellers.

5.12. The great majority of those opposed to the retention of current UK APD passenger exemptions provided further written comment at Question 9c; 2 airlines and 14 individuals.

5.13. Comments from some individual respondents indicated that this was based on a wish to see APD abolished, or an objection to the proposed reduction of APD in Scotland. This latter group included some who wished to see an increase in taxation of air travel, for example via removal of some or all exemptions and/or a wider increase in APD charges.

5.14. Most of those providing written comment on their objection to the current UK APD exemptions suggested alternative approaches. This included a small number of respondents suggesting an extension to current exemptions; the exemption for children to include all classes of travel, and the introduction of an exemption for foreign students studying full-time at a Scottish University. However, most suggested specific areas where they wished to see exemptions reduced and/or broader changes to the approach to the Scottish replacement tax:

• The most common suggested change was limiting or removing exemptions for connecting flights and transit passengers. This included a suggestion from an airline respondent that the connecting passenger exemption in particular dis-incentivises direct flights. In terms of limiting this exemption one respondent suggested that this should only apply to those stopping to refuel, for example such that a flight from the UK to the USA and then an onward journey of more than 200km would attract APD on both legs.
• A small number of respondents suggested that the exemption for children should be limited or removed. This included suggestions for changes to the age threshold of the exemption (those under school age or those aged under 2 who are not occupying a seat) and a suggestion for a reduced tax rate to apply to all children.
• An individual suggested the removal of the exemption for passengers carrying out certain duties, recognising that these passengers make the same contribution to carbon emissions as others not exempt from APD.
• An individual suggested the removal of the exemption for short leisure flights, alongside a revised replacement tax which links the level of charge with the environmental impact of the flight.
• An individual respondent suggested that all exemptions (and tax bands) are removed, with a percentage of the fare levied across all passengers.

Flight exemptions

Q10a: Do you think that the current UK APD flight exemptions should be retained under a Scottish replacement tax? Please answer yes or no.

Q10b: If you answered yes, to what extent are the existing definitions appropriate for the Scottish industry?

Q10c: If you answered no, please explain your answer. Is there any evidence to support the introduction of any additional or alternative exemptions?

5.15. Question 10a asked whether the current UK APD flight exemptions should be retained under the Scottish replacement tax.

5.16. 84 respondents answered Question 10a (53% of all respondents). A large majority of these respondents agreed that the current UK APD flight exemptions should be retained; 67 respondents, 80% of those answering the question. A further 17 respondents indicated that they disagreed with this proposal (20% of those answering the question) with 11 of these respondents also disagreeing with the retention of current passenger exemptions (at Question 9).

5.17. There was some variation in this profile of views across respondent types. Group respondents were more likely than individuals to agree with this proposal; more than 9 in 10 group respondents agreed with the use of current flight exemptions, compared to around two thirds of individuals. Individual respondents accounted for nearly all of those opposed to retaining current flight exemptions.

Table 5.2: Q10a: Do you think that the current UK APD flight exemptions should be retained under a Scottish replacement tax? Please answer yes or no.

	Yes	No	No response	TOTAL
Airlines and airline representatives	11		1	12
Airports and airport representatives	4	1	3	8
Other transport and travel organisations	7		6	13
Business, economic development and tourism organisations	17		8	25
Professional tax and accountancy organisations	1		1	2
Environmental organisations			6	6
Other organisations	1	1	8	10
Group respondents (Total)	41	2	33	76
Individual	26	15	43	84
TOTAL	67	17	76	160
Percentage of all respondents	42%	11%	48%	100%
Percentage of those answering question	80%	20%	-	100%

5.18. The consultation document invited further written comments at Question 10, asking those who wished to retain current flight exemptions whether the current definitions should be applied to the Scottish APD replacement tax, and asking those who disagreed which alternative approach should be used. A total of 64 respondents provided further written comment, including 50 of the 67 respondents who supported retention of the current UK APD flight exemptions, and 14 of the 17 who disagreed.

5.19. For those in favour of retaining current flight exemptions, these were seen as having made a positive contribution to air travel across the UK to date, and as being relevant to Scotland's future air connectivity. This included references to the importance of retaining consistency between the Scottish and UK APD regimes in recognition of the global nature of aviation, and to minimise complexity for taxpayers and potential confusion for customers.

5.20. A small number of airline and airline representative respondents mentioned aspects of the current exemptions as being of particular relevance and which these respondents wished to be retained. This included specific reference to exemptions required under international law such as for military and search/rescue aircraft, and exemptions for routes subsidised by Public Service Obligation flights in recognition that this subsidy is in place to ensure the service is sustainable.

5.21. A small number of those indicating broad support for the retention of UK APD exemptions and associated definitions also suggested areas where these should be extended or amended:

• An airline respondent suggested that an exemption is introduced for charter flights for charities.
• An airline respondent wished to see an amendment to short leisure flight exemptions, such that the 60-minute flight time is measured from "wheels up to wheels down".
• An other transport and travel respondent suggested that the authorised take-off weight for flight exemptions is increased to 13.5 tonnes to include some smaller aircraft.

5.22. The great majority of those opposed to the retention of current UK APD exemptions provided further written comment at Question 10c; 1 airport, 1 other organisation, and 12 individuals. As was evident in relation to passenger exemptions, some individual respondents indicated that this objection was based on a wish to see APD abolished, or an objection to the proposed reduction in APD in Scotland (primarily on the basis of minimising the environmental impact).

5.23. A small number of those objecting to the retention of all current flight exemptions highlighted specific exemptions which were seen as of particular value. This included a business and economic development respondent who wished to see the continuing exemption of helicopters, noting the importance of this exemption for the north-east economy.

5.24. However, most suggested specific areas where they wished to see exemptions reduced and/or broader changes to the approach to the Scottish replacement tax. This included several respondents who wished to see a significant reduction in flight exemptions in recognition that all flights have a similar environmental impact in terms of carbon emissions. Specific amendments suggested by respondents were:

• Removal of the exemption for short pleasure flights was suggested by a small number of group and individual respondents.
• Two individuals suggested the removal of the exemption for NATO flights.
• An individual respondent suggested that all exemptions (and tax bands) are removed, with a percentage of the fare levied across all passengers.
• Amendment to the exemption for flights departing from the Highlands and Islands - views here are considered in further detail later in this section under Questions 11 and 12.
• An individual respondent suggested the removal of the exemption for helicopters on the grounds that they produce comparable emissions to other aircraft which are not exempt from APD.

Q11: What are the benefits to the local economy and residents of the Scottish Highlands and Islands region from the current UK APD exemption for passengers departing from airports in the region?

5.25. The consultation document notes that an exemption for all outbound flights from an airport in the Highlands and Islands region was introduced in 2001, in recognition of residents' reliance on air travel. Question 11 sought respondents' views on the benefits of this exemption for the economy and residents of the region, before Question 12 asked specifically for views on whether and in what form the exemption should be retained.

5.26. A total of 56 respondents provided written comment at Question 11, 35% of all respondents. This group of respondents comprised 23 individuals and 33 group respondents, the latter including a small number of airport, other transport/travel and business/economic development respondents from the Highlands & Islands region.

5.27. The large majority of those giving a view on the impact of APD exemptions for the Highland and Islands region were positive about the exemption. Most of these respondents made reference to the social and economic benefits of air connectivity generally, and also specifically in relation to the nature of the region - for example the extent to which residents and businesses are reliant on what were described as "lifeline" routes. This included several respondents noting that the rationale for the introduction of the exemption in 2001 - low population density and relative remoteness, including the impracticality of surface travel options - remain significant issues for the region.

"The exemption from APD…benefits residents and businesses both through direct impacts on air fares and by enabling greater range and frequency of air services to be offered than if APD were charged." Highlands and Islands Enterprise

5.28. In addition to these more general points around the positive impact of the exemption, a substantial number of respondents made reference to more specific benefits for the region. This included a small number of respondents, primarily group respondents based in the region, providing more detailed submissions which set out the positive impacts in some detail including citation of a range of evidence sources.

5.29. As noted above, the importance of air travel for the Highlands and Islands region was mentioned by a substantial proportion of those making comment, with particular reference to the impracticality of alternative surface travel options. The exemption was also seen as a significant factor in supporting air routes which otherwise may not be sustainable, and in incentivising airlines to consider new services to the region. A small number of respondents noted that most air services in the region are "thin" routes with relative low frequency of service, operated primarily by smaller aircraft often with low passenger loads which impacts on the commercial sustainability of services without public subsidy. An airport respondent also referred to several new services introduced to the Highlands and Islands region in recent years, indicating that feedback from airlines suggests that the APD exemption has been a significant factor in the introduction of new routes. This included services from Inverness highlighted as being highly sensitive to changes to APD; cross-border services due to their being based on a "high volume low-fare" model, and newly introduced international services due to the higher rates of APD that would be levied.

5.30. Most of those making comment at Question 11 made specific reference to the economic importance of air travel and the positive impact of the exemption for local economies within the Highlands and Islands region. This included reference to what were seen as "key sectors" for the local economy such as tourism, energy, life sciences, and food and drink. These respondents suggested that many businesses and employers in the region are highly dependent on air travel to key destinations, with links to Aberdeen and Edinburgh, and to UK and international hubs cited as particularly significant. It was also suggested that lower cost air connectivity has been a significant factor in growth of tourism services in the region, and for many businesses choosing to locate in the area.

5.31. Specific resident benefits mentioned by respondent included supporting access to study, to employment, to critical mainland services, maintaining links with friends and family, and accessing holiday routes. Some also noted that benefits to residents are linked to the economic importance of air travel for the area; attracting more business and tourism activity contributes to local employment opportunities, and to population retention and the continuing sustainability of local communities.

5.32. Respondents referred to the importance of the APD exemption in supporting air connectivity (and its associated benefits) to the Highlands and Islands region, suggested that removing this exemption would have a significant detrimental effect. These respondents referred to increasing travel costs for residents and businesses and to the likely loss of air services to the area - including citation of evidence on current "leakage" of traffic from Inverness airport's catchment. In relation to impact on services, this included an airport and an other transport/travel respondent who emphasised that the regions would be disadvantaged by any changes to APD policy. These respondents suggested that this would result from any removal or reduction of the exemption for the region, or from Scotland-wide changes to APD which reduced the differential in APD afforded to the region.

5.33. In addition to the above points, an other transport and travel respondent suggested that there is a need for more and better evidence on the impact of APD exemptions as a whole - including specifically in relation to the Highlands and Islands.

5.34. A small number of respondents raised concerns around some of the benefits associated with the Highlands and Islands exemption. These respondents acknowledged the importance of the exemption for "lifeline" services. However, some concern was raised around the exemption for flights from Inverness to destinations outwith the Highlands and Islands region. This was most commonly in relation to "ski and sun" destinations such as routes to mainland Europe. However, there was also a suggestion from an airport respondent that subsidising air travel from Inverness to other parts of the UK, while flights from other Scottish airports remain subject to APD, was not equitable:

"Air travel from the Highlands & Islands to locations abroad should not be exempt, as these cannot be considered as 'lifeline' services." Transform Scotland

5.35. A small number of individual respondents who wished to see taxation of air travel which took greater account of environmental impacts, suggested that the environmental impacts from currently exempt Highlands and Islands flights are equivalent to other flights, and as such should be subject to APD. This included reference to concerns that island communities may be more severely affected by climate change than other parts of Scotland.

Q12a: Do you think the current exemption for outbound flights from the Highlands and Islands region should be retained or modified under a Scottish replacement tax?

Q12b: If you answered 'modified', please explain your answer. In what way should it be modified?

5.36. Question 12a asked whether the current UK APD exemption for outbound flights from the Highland & Islands region should be retained by the Scottish replacement.

5.37. 84 respondents answered Question 12a, 53% of all respondents. A large majority of these respondents agreed that the current UK APD exemption for flights from the Highland & Islands region should be retained; 66 respondents, 79% of those answering the question. A further 18 respondents indicated that they wished to see the current exemption modified (21% of those answering the question), 12 of whom also wished to see the removal or modification of other current UK APD flight exemptions (at Question 10).

5.38. There was some variation in this profile of views across respondent types. Group respondents were more likely than individuals to agree with the proposal; nearly 9 in 10 group respondents agreed, compared to a little more than two thirds of individuals. Individual respondents accounted for nearly three quarters of those opposed to retaining the Highland and Islands exemption in its current form.

Table 5.3: Q12a Do you think the current exemption for outbound flights from the Highlands and Islands region should be retained or modified under a Scottish replacement tax?

	Retained	Modified	No response	TOTAL
Airlines and airline representatives	7	1	4	12
Airports and airport representatives	3	2	3	8
Other transport and travel organisations	8		5	13
Business, economic development and tourism organisations	18		7	25
Professional tax and accountancy organisations			2	2
Environmental organisations			6	6
Other organisations	1	2	7	10
Group respondents (Total)	37	5	34	76
Individual	29	13	42	84
TOTAL	66	18	76	160
Percentage of all respondents	41%	11%	48%	100%
Percentage of those answering question	79%	21%	-	100%

5.39. The consultation document invited further written comments at Question 12b, asking those who wished to see a modification of the current Highlands and Islands exemption what changes they think should be introduced. A total of 26 respondents provided further written comment, including 9 of the 66 respondents who supported retention of the current exemption, and 17 of the 18 who wished to see the exemption modified.

5.40. Amongst those in favour of retaining the exemption for outbound flights from the Highlands and Islands region, several of those providing further comment reiterated points discussed at Question 11 on the positive contribution the exemptions have made to the region. Several respondents also referred to the importance of retaining consistency between the Scottish and UK APD regimes in recognition of the global nature of aviation, and to minimise complexity for taxpayers and potential confusion for customers.

5.41. However, most of those providing further comment at Question 12 used the opportunity to suggest some modification to the current exemptions for Highlands & Islands flights. This included a small number of those who had indicated that they wished to see the exemption retained.

5.42. In terms of modifications which would extend the current APD exemption for the region, respondents suggested the following:

• Several respondents suggested that the exemption should be extended to include all inward flights to airports in the region. The potential for this change to act as a stimulus to domestic leisure travel and the region's tourist economy was emphasised by these respondents.
• An other transport and travel respondent expressed concerns that the proposed reduction in APD across Scotland will have an adverse impact on the continuing development of the region's air connectivity. This respondent suggested that "a compensatory and equitable intervention" is introduced for the region, alongside the wider reduction in APD for other parts of Scotland. An intervention in the order of circa 10% of the value of the wider APD reduction was suggested, although the need for further consideration around the size and nature of the intervention was acknowledged. In this regard, the respondent made reference to a range of EU categorisations and other funding mechanisms that may be used as a basis for any such intervention.

5.43. Most of those suggesting specific modifications wished to see a reduction or removal of the exemption for Highlands & Islands flights. These included:

• A small number of respondents suggested that the current exemption for flights from Inverness to destinations outwith the Highlands and Islands region should be removed. This was most commonly in relation to flights to destinations outwith the UK which these respondents suggested could not be considered "lifeline" services. However, there was also a suggestion from an airport respondent that subsidising air travel from Inverness to other parts of the UK, while flights from other Scottish airports remain subject to APD, was not equitable.
• A small number of 'other' organisations questioned the definition of the region subject to exemption, and in particular the inclusion of western parts of Moray. It was suggested that these exempt areas have relatively easy access to Inverness airport, while rural parts of Aberdeenshire for example have more limited access to Aberdeen airport yet remain subject to APD. One of these respondents suggested an exemption for any locations with a surface journey time of more than 2 hours to an urban centre.
• Several individual respondents wished to see the exemption for the Highlands and Islands region reduced or removed entirely. This included some who wished to see an overall increase in taxation of air travel. Others suggested that the region should be subject to a reduced rate of APD, recognising the availability of alternative travel options and that these flights have an environmental impact.