Jet Taxes – A Double Whammy?

It is forecast that the tax take is set to double following the proposed introduction of aviation duty per plane (“AD”) to replace aircraft passenger duty (“APD”). This combined with the changes to duty on aviation fuel will mean that there will be a significant extra hit on the private aviation sector. All in the industry will know about these changes but many may be unclear as to how they will work.

Aviation Duty

The government published a consultation paper on replacement of APD by AD to come into effect on 1 November 2009. The official time for responding to that paper expired in April. However, indications are that the government had very limited responses and it may still be worthwhile airing your voice, particularly since the tax has not been finalised and as we have seen, the government have been open to persuasion and changes of mind on recent reforms to capital gains tax and income tax. There are threatened legal challenges, most notably from the US government who claim that AD breaches international law as there is no link between the funds collected and the mitigation of environmental damage caused by the emissions.

As is often the case, the devil is in the detail. Although the principle of the proposed AD is known, the detail of it generally is not so well known.

The government’s rationale for the tax is under the cloak of seeking to minimise climate change and the move towards a global low carbon economy. Nevertheless, inevitably there will be an increase on tax on aircraft generally and a new tax on smaller aircraft. The government’s position is that it would be fairer from an environmental perspective to tax the aircraft rather than to tax the number of passengers. It should be noted that no actual rates of tax have so far been proposed, only the principles of calculation. The government considered three main possibilities for the basis of the tax, namely the maximum take off weight (“MTOW”), NOx emissions during landing and take off and CO2 emissions during landing and take off. Their preference is to use MTOW as this is easy to establish, with every aircraft having its MTOW certified and it is a standard measure. They also claim that there is a reasonable correlation between MTOW, CO2 and NOx emissions per aircraft.

The validity of this last point is possibly subject to greater debate, particularly with the introduction of more fuel efficient aircraft and a greater differential in fuels and emissions between these newer aircraft and older types. The other option of a tax based on emissions is rejected because of the alleged lack of robust data.

Therefore, AD is likely to be based on a combination of the MTOW and distance travelled per flight. It is proposed that the duty will be applied only to aircraft with a MTOW of 5.7 tonnes and above. At present APD is only charged in respect of passengers on aircraft over 10 tonnes and/or equipped to carry more than 20 passengers. APD is based on the destination of the passenger distinguishing between journeys to European Economic Area (EEA) and non-EEA destinations. The level of AD will depend on the first destination of the aircraft. There is therefore a potential market distortion because of passengers travelling through a hub to avoid AD although this is probably of limited significance. The government has expressed its preference for three bands of distance to apply. These bands will be journeys within the EEA, journeys to destinations more than 3,000 miles from London and journeys to destinations less than 3,000 miles from London (to non-EEA destinations).

Aviation Duty collection

Administration of AD is also important with its costs implications. The government considered either requiring the aircraft operator to collect the tax, or the airports. Unfortunately for airport operators, the government is inclined to put this burden on them because, from its perspective, there is a problem in trying to control and regulate large numbers of non-UK registered aircraft using the UK. Also, as the airports are already collecting information on MTOW, it would be better from the government’s perspective for the airports to collect AD. As a minor concession the government is proposing that the airports can retain the interest on the air duty they collect until it has to be paid over to the Revenue. Unlicensed airfields would fall out of the net, as it is felt that these are generally too small for aircraft over 5.7 tonnes MTOW.

APD is currently payable on private aircraft only if the passengers pay. There are complex rules for business travellers.

Aviation Duty – General intentions

The government wishes to increase the scope of aviation taxation, in particular, to bring in a duty on freight aircraft without passengers, commercial services, air services using planes with under 20 passengers and private aircraft.

Due to the impact of emissions from freight aircraft the government would like AD to apply to these flights as well even though they are currently outside the scope of APD. This, however, could result in delivery companies flying to other European airports and transporting goods to the UK by road. Due to the potential economic damage this may cause, the government has invited comments on this proposal.

Under the proposals, helicopters will be excluded from the charge to AD as few have a MTOW of over 5.7 tonnes. They will however fall within the charge to fuel duty irrespective of use and regardless of whether they use Avgas or Avtur. There will be exemptions for flights conducted for foreign diplomatic relations or representation and for domestic and foreign military flights. The government has also stated that they will consider further exemptions such as flights from the highlands and islands, emergency and public services and similar if sufficient evidence to support such exemptions is provided.

Aviation Fuel

The government is, however, restricted in its ability to increase taxation on fuel because of the Chicago Convention. Currently a reduced rate of duty applies to private pleasure flying in the UK but from 1st November 2008, all fuel used for such flights will be charged at the full rate of duty.

Briefly:-

Avgas will therefore continue to be taxed irrespective of use whilst Avtur will be taxed for private pleasure flying although not for business flying. There are some problems in this definition of private use.
All aircraft under 5.7 tonnes will be subject to duty on all fuel purchased when fuelling in the UK regardless of whether flying for private or commercial purposes.
A rebate will continue to be given for fuel duty on international flights as is the case at present.

Summary of changes:

AD will be based on the MTOW.
The rate is based on the MTOW x £(a rate per tonne) x the distance factor.
Increases in fuel duty particularly for private pleasure flying.

For an easy assessment of how AD and the new fuel duty will work please see the table below.

MTOW (tonnes)	Current taxation	Proposed taxation
Upto 5.7	If less than 20 passengers - not subject to APD	Will be subject to fuel duty irrespective of using Avgas or Avtur
	Subject to fuel duty - Avgas taxed at rebated rate and Avtur is fully rebated. Reduced rate for private flying	1/11/08 - Avgas will be taxed irrespective of use. Avtur taxed if for private pleasure flying not for business flying
		1/11/09 - All fuel subject to duty irrespective of use. Rebate for international flights will continue
Over 5.7 but less than 10	If less than 20 passengers - not subject to APD	1/11/09 - Will be subject to AD irrespective of passengers
	If over 20 passengers - subject to APD
	Subject to fuel duty - Avgas taxed at rebated rate and Avtur is fully rebated. Reduced rate for private flying	1/11/08 - Avgas will be taxed irrespective of use. Avtur taxed if for private pleasure flying not for business flying
Over 10	Subject to APD	1/11/09 - Will be subject to AD irrespective of passengers
	Subject to fuel duty - Avgas taxed at rebated rate and Avtur is fully rebated. Reduced rate for private flying	1/11/08 - Avgas will be taxed irrespective of use. Avtur taxed if for private pleasure flying not for business flying
Freight flights - any weight	Outside the scope of APD	1/11/09 - Will be subject to AD

The additional taxation burden will come as a further blow to aircraft operators which are already struggling due to the soaring fuel prices. However, the Treasury appear to be considering the criticisms voiced and there are suggestions that a retreat may be possible.

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