Tax exemptions saw Treasury lose £4.7 billion from aviation industry last year – study

The British government lost out on £4.7 billion in revenue last year due to the ongoing low levels of taxation in the aviation sector, a new study by green group Transport & Environment finds. The funding gap could pay for over 40 new hospitals to be built, or could cover the costs ten times  over of the recently announced plan to recruit and retain thousands more medical staff. It is equivalent to more than 1% of all income taxes collected by the Government last financial year.

The analysis looks at the revenues that should have been raised from air travel pricing if the sector did not benefit from such exemptions. It compares these revenues with those that were actually raised in a year. This is defined as the ‘tax gap’. In the UK, there is a ticket tax, Air Passenger Duty, but no kerosene taxation, no VAT and a carbon price on intra-European flights only.

Of the £4.7 billion gap, the UK government lost out on £1.29 billion from British Airways’ activity alone. The study differentiates between charges on passengers and on airlines. Ticket taxes and VAT are levied on ticket purchases, whereas fuel taxes and carbon pricing are directly attributable to airlines’ activities.

Matt Finch, Policy Manager at T&E UK, explains: “The UK is bleeding money by not effectively taxing the aviation sector. But the Government could fix this easily. A tax on jet fuel could be applied in the Autumn budget. It’s indefensible that any British driver paid more in fuel duty last time they filled up than British Airways has ever paid.”

Unless action is taken, the tax gap in the UK will increase by 56% by 2025, as the sector is set to grow in coming years. Eurocontrol estimates that traffic will reach 92% of pre-COVID levels in 2023 and a full recovery by 2025. By then, the tax gap in the UK could grow to £7.4 billion, T&E finds.

Addressing aviation’s under-taxation and closing the tax gap should be an utmost priority for the Government. The study recommends applying a fuel tax on kerosene, a 20% VAT rate on tickets and extending the carbon market for aviation to all industry activity, in common with other sectors of the UK economy. In the short term, T&E recommends increasing the rates of air passenger duty and applying fuel taxes at the Autumn budget.

The study shows that higher taxes will have an impact on passenger ticket prices. This could result in a decrease in demand and CO2 emissions savings. The study finds that ending exemptions in 2022 would have saved 5 Mt of CO2, with an even higher total climate impact accounting for non-CO2 effects of aviation. As the sector seeks to decarbonise, revenues raised by taxation should be partly reinvested in green technologies, including e-kerosene.

Matt Finch concludes, “Those who gain the most from aviation’s free-ride on tax are airline shareholders and bosses, as well as the business-class passengers who fly the most. Exempting airlines from taxes that other industries face means that the Treasury ends up having to raise taxes elsewhere. In a time of restrained public finances, the Chancellor should correct this bizarre situation as soon as possible.”

ENDS