Air Passenger Duty in the departure lounge as MPs examine prospects for Welsh devolution

10 Jan 2019

On Tuesday, the Welsh Affairs Committee began consideration of its inquiry into the potential devolution of Air Passenger Duty (APD) to Wales with an oral evidence session featuring representation from the Chartered Institute of Taxation.

On Tuesday, the Welsh Affairs Committee began consideration of its inquiry into the potential devolution of Air Passenger Duty (APD) to Wales with an oral evidence session featuring representation from the Chartered Institute of Taxation.

Joining Mike Trotman, member of the CIOT Welsh Technical Committee were David Phillips, Associate Director of the Institute for Fiscal Studies (IFS) and Tom Walsh, Partner at Deloitte LLP.

Prior to the session, the committee heard from Sir Paul Silk, chair of the Commission on Devolution in Wales and Gerald Holtham, chair of the Independent Commission on Funding and Finance in Wales.

Both provided the committee with an overview of the rationale for devolving APD to Wales, noting that it was a recommendation grounded in policy as opposed to revenue generation. They explained that the recommendations of the Calman Commission on further devolution of powers to Scotland had influenced the work of the eponymous Silk Commission.

Sir Paul in particular noted that the case for devolution was perhaps stronger than the time of the commission‚ s initial recommendations in 2011.

The main points of note during the meeting, which lasted for around 45 minutes, are set out below.

Guto Bebb (Conservative) asked the witness to set out the characteristics that make a tax easy to devolve. He also asked how APD would fit into this profile.

David Phillips said that when considering devolution, the location of the tax base should be easily identifiable, it should provide stable revenues, and be largely immobile to avoid, where possible, tax-motivated behavioural changes.

Tom Walsh added that for tax devolution to be effective, it needed to be supported by the appropriate tax collection infrastructure along with a suitable, managed transition period to allow continuity and familiarity with the incoming regime.

On this final point, Mike Trotman added that certainty was essential and added that appropriate mechanisms should be in place to review and change legislation where necessary.

Taking these factors as a whole, Phillips suggested that APD was perhaps not the most practical of taxes to devolve, describing it is a ‚ small‚ and ‚ volatile‚ tax. That said, the relatively small receipts generated by the tax in Wales (as a proportion of the overall Welsh budget) made it easier to manage.

Geraint Davies (Labour) wondered whether the devolution of APD would lead to a race to the bottom that would come at the expense of tax revenues and environmental considerations. Tom Walsh noted that in any tax competition of this nature, state aid and competition rules needed to be considered as, in the case of the devolved Scottish equivalent ‚ Air Departure Tax ‚ these had led to the postponement of the introduction of the tax last year.

Chris Davies (Conservative) asked witnesses to set out the practical steps needed to support devolution. Mike Trotman noted that much of the infrastructure needed to support the devolution of APD to Wales could already be in place as a result of the establishment of the Welsh Revenue Authority.

Later in proceedings, he would also note that this infrastructure meant that Wales was well prepared to assume responsibility for the tax if and when devolved.

Tom Walsh noted that the regionalisation of APD may result in extra challenges for airlines in their reporting of APD receipts, given that they would face the potential prospect of managing different tax regimes in England, Wales, Northern Ireland and Scotland.

Walsh also returned to the question of transitioning from one regime to another. He said that the work undertaken between HMRC and Revenue Scotland had been viewed by those involved as an integral part of preparations for the introduction of the tax (which has since been postponed due to the reasons noted above).

Guto Bebb asked whether there was a stronger case for devolution in Scotland and Northern Ireland compared with Wales. Tom Walsh explained that Northern Ireland was a unique case given that it both held a land border with another EU country in the Republic of Ireland and had been forced to respond to more attractive rates of tax in the Republic that had led to many people choosing to fly from Dublin instead of Belfast.

Chris Davies asked what lessons could be learned from the devolution of APD to Scotland, to which Walsh said it was still not possible to fully explain given that plans to begin collecting the devolved replacement, Air Departure Tax, were still on hold.

MPs also questioned the need to devolve the tax at all, given the relatively low receipts that it contributes to the overall Welsh budget. On this point, Tom Walsh explained that the wider economic impacts of the devolution of the tax needed to be considered in order to understand what additional impacts the flexibility of controlling the tax in Wales might bring.

If the policy intention was to reduce or abolish the tax (as is the case in Scotland), a clear rationale was needed along with a strategy to recoup lost revenues elsewhere. David Phillips pointed out to the committee that the revenues raised from APD receipts in Wales were equivalent to around an increase of 0.6p or 0.7p one of Income Tax, VAT or employee National Insurance Contributions (NICs).

Each of the witnesses also stressed the importance of having an independent, impartial analysis of the potential impact of the devolution of APD undertaken. This was an area that the CIOT in Scotland argued strongly for in early 2017 as the Scottish Parliament was considering the legislation needed to devolve Air Departure Tax (and which the Scottish Government eventually agreed to commission following pressure from the CIOT and others).

In concluding questions, Tonia Antoniazzi (Labour) asked whether the UK‚ s impending departure from the EU could strengthen the case for APD devolution. Walsh said that the fact that APD was not underpinned by EU legislation (as is the case with VAT) made it less of a consideration. However, he did return to his earlier point about the issue of state aid, which is underpinned by EU laws and which had the potential to constrain the development of distinct policy choices once devolved.

The committee continues to seek input to its inquiry and is inviting written submissions from interested parties. Further information can be found on the committee's website, which can be found by clicking here.