PwC’s Stephen Curragh: air passenger duty

Stephen Curragh argues that the cutting and devolution of air passenger duty should open the way for more tax varying powers.

There may have been relief in the air when the Secretary of State announced a cut in Northern Ireland’s long haul air passenger duty (APD), but the relief may only be temporary unless the broader issue of tax devolution to the Assembly is comprehensively addressed.

The announcement from Owen Paterson came as trans-Atlantic carrier, Continental Airlines, seemed poised to axe its daily service from Belfast to New York (Newark), thanks to the impact of APD on the viability of the route.

APD may not be either a particularly well known or well understood tax, but it should be. Thanks to the differential rates of European APD, a French family of four flying economy within Europe pays the equivalent of £8 in tax for the return journey, while a UK family pays £96. An Irish couple flying from Dublin to New York pays the equivalent of £7 in APD; the same couple would pay £120 if they flew from Belfast and paid the full rate of APD.

And that was Continental’s dilemma. To avoid a mass exodus of potential passengers to Dublin airport and its €3 APD, the carrier had been absorbing the cost, but there was a limit to how long that could continue. So, Owen Paterson’s confirmation that Westminster would reduce APD for direct long haul routes from 1 November probably came in the nick of time. Effectively he has persuaded Chancellor George Osborne that the current rate should fall to the lower short haul bracket — £12 per passenger in economy and £24 for business and first class passengers, instead of the current £60 and £120 respectively.

The announcement is frankly not a surprise. Northern Ireland has already had an opportunity to respond to a Treasury consultation paper on APD, with PwC, DFP and others arguing for the power to vary APD to be devolved to the NI Assembly. Within hours of the Secretary of State’s announcement, the Association of British Travel Agents said the decision to cut the levy and devolve its control to Stormont would create a “real challenge” to the Chancellor in responding to similar demands from other regions. This is no surprise either, because since consultation on APD closed in June, there have been calls for the Scottish Executive to be given the power to set and vary the rate of APD for airports in Scotland not already exempt.

So, while the decision to reduce long haul APD will probably save the Continental New York route, it should be seen as the start of a process of further tax devolution and not simply the end of a campaign to reduce APD. The Secretary of State’s announcement doesn’t say how the reduction is to be paid for. Will it come off the block grant or has the Chancellor agreed to devolve the power to set and vary APD and cut the long haul rate to kick start the process? Either way, it is reasonable to assume that the Executive will – directly or indirectly – have to meet the cost.

But there is nothing fundamentally wrong with that. The Scottish Executive wants the power to set and vary the rate of APD for airports not already exempt and it is vital that Northern Ireland gets the same power to safeguard tourism (which employs 40,000 people, 30,000 of whom are employed outside the Belfast Metropolitan area). Northern Ireland business and tourism relies on air transportation and the achievement of tourism growth targets will be threatened by APD in the region. In addition, air travel remains the most common means of entry into Northern Ireland, with almost three quarters (74 per cent) of overnight visitors and 34 per cent of day trippers arriving by air. Some 68 per cent of visitors from North America and 75 per cent from the rest of the world entered Northern Ireland directly in 2009.

Tourism potential

In 2012, Belfast will recall the centenary of the sinking of the Titanic on her maiden voyage to New York. The £97 million Titanic exhibition centre expects half a million visitors in 2012 alone. Add a new visitor centre at the Giant’s Causeway World Heritage Site, a peace bridge across the River Foyle in a rejuvenated Londonderry/Derry and the 2012 London Olympics and the local tourism industry is expecting a very good year indeed.

Nearly a third of a billion pounds has been invested in Northern Ireland tourism infrastructure and collectively Northern Ireland’s tourism chiefs hope that this will attract more visitors in 2012, persuade them to stay longer and spend more – and then come back and do it again. Reducing and stabilising APD is an essential factor in enhancing the visitor experience, air route operator confidence and tourism prosperity.

And if there are any doubts about the effectiveness of APD in hitting business and tourism air travel, look no further than the Netherlands where the Dutch government introduced an aviation tax in 2008. While it raised around €380 million, it also resulted in an 8 per cent decline in passenger numbers at Schiphol Airport and an exchequer loss of around €1 billion as travellers exiting the Netherlands crossed land frontiers to fly out of other airports. The tax was subsequently scrapped.

Assisting one of our few international air connections improves the prospects for growth in tourism – one of the few sectors of the local economy which has solid growth prospects. At the same time, the Executive needs to consider how we could increase Northern Ireland’s connectivity to the rest of the world in terms of air routes and a route from Belfast to a hub in the Gulf/Middle East region should not be out of the question.

While the long haul APD has been reduced to the short haul rate – down from £60 to £12 (for economy passengers) – it’s still more than Dublin’s €3 flat charge. And as Treasury intends to increase APD yet again in April 2012, that gap will widen further, with their recent decision conferring no benefit on airlines operating on routes less than 2,000 miles. And while this would be unwelcome for Northern Ireland, there is a wider point at issue, which relates to the principle of devolving tax varying powers to the devolved regions of the UK.

In our response to APD consultation PwC argued that a variety of essential tax varying powers, including APD, could be devolved to the Northern Ireland Executive. Since such devolution would then give the Executive the option of a reduction in, or total removal of, the rate, we believe that devolution would reflect the UK Government’s current thinking in consulting on the devolution of the power to vary corporation tax.

The impact of APD on the competitiveness and growth prospects of the Northern Ireland economy is of vital importance. It should be given equal prominence with the Treasury process relating to the devolution of corporation tax varying powers and which ultimately seeks to rebalance the Northern Ireland economy. Effectively, our response argued that the Executive should look at which taxes and excise powers would be critical to rebalancing the economy and seek to have them all devolved, in precisely the same way as the Scots are responding to the proposals in the Scotland Bill.

There may be relief in the air as Westminster responds to the clear impact of air passenger duty on the Northern Ireland economy, but arguing for the devolution of that particular tax should be part of an argument for devolving the power to vary more of them.

Stephen Curragh is a partner with PwC in Northern Ireland and a specialist in the tourism and hospitality sector. He can be contacted on 028 9041 5495 or by email stephen.curragh@uk.pwc.com