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UK Treasury Hints At Climbdown Over Aviation Tax

by Jason Gorringe,, London

09 June 2008

The UK Treasury has signalled that it may be preparing to make another embarrassing U-turn on tax policy this year after strong protests from the aviation industry, and an implied legal challenge from the US government, to its plans to introduce a new aviation duty later this year.

According to the Financial Times, the Treasury has said that it is listening to concerns over the new levy, and that the aviation's industry's concerns would be reflected in the final proposals when they are presented following a consultation.

However, one airline industry insider told the paper that the issue is "the last in a series of tax changes that has gone pear shaped", while a senior MP in the ruling Labour Party described the government's handling of the issue as "another Treasury mess".

The current UK aviation duty system imposes a flat charge of GBP10 on the tickets of short-haul passengers flying out of the UK, and GBP40 on the tickets of long haul passengers.

Under the reforms, set to be introduced in the autumn of 2009, the UK government wants to replace this with a charge based on the size of planes and the distance they are scheduled to fly, reportedly at as high a rate as GBP100 per passenger.

The UK government is justifying the changes on the basis that it will discourage airlines from flying with half-empty planes and therefore help to reduce carbon emissions. However, the aviation industry is seeing the plans as a thinly-veiled attempt to raise revenue which will have no impact on the behaviour of the passengers or the industry.

The new system will also impact upon airlines flying directly from the UK to the US far more than those operating via European hubs - significantly benefiting continental European airlines and airports, to the detriment of British and American carriers.

What's more, a letter from the US embassy in London to the Treasury, leaked recently to the Daily Telegraph, has suggested that the new system will in any case be illegal.

"There is no linkage between the funds collected from airlines and the mitigation of any environmental impact of airline emissions or any other environmental problem," the six-page letter stated.

"Moreover, the Treasury's proposal does not demonstrate that the new duty would influence airlines to adjust their fleets or their booking practices to achieve higher load factors…Nor are any data provided to justify the levy based on an assessment of damage from aircraft emissions," it added.

The letter also predicted that the proposals were likely to have a serious impact on the UK as a key aviation hub, but it was the US embassy's warning that the proposals have raised "serious legal concerns" within Washington that could force the Treasury to revisit its plans.

The US government believes that the new aviation duty could breach the recently-signed Open Skies agreement between the EU and the US, as well as the 1944 Chicago Convention on International Civil Aviation - a view already expressed by the International Air Transport Association (IATA).

“The proposed Aviation Duty is nothing more than a blunt revenue instrument. It has no credibility as a driver of improved environmental performance. And the revenue will not be used to support environmental objectives,” wrote Giovanni Bisignani, IATA’s Director General and CEO, in a letter to Chancellor Alistair Darling.

“It is incompatible with UK obligations under international law. It will not improve environmental performance. It ignores that air transport already completely covers its environmental costs. It will lead to serious discriminatory economic impacts and market distortions. It will result in double taxation and reduce the UK’s competitive stance," he further observed.

Air Passenger Duty was doubled in 2007 and now collects GBP2bn (USD3.9bn) annually. From 1st November 2009, the proposed Aviation Duty would replace this with a GBP2.5bn yearly collection.

By 2011/12 this would grow to GBP3.5bn. Additionally, the UK plans to join the local EU emissions trading scheme from 2012 which is likely to impose an additional cost burden.

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