House of Commons - Pre-Budget Report 2008

Pre-Budget Report 2008 - Treasury Contents

6 Other tax measures

The environment: taxes on aeroplanes and automobiles

146. Presenting his 2008 Pre-Budget Report to the House, the Chancellor stated that he was "determined that the present economic uncertainty does not push aside the importance of protecting the environment and our long-term needs for a greener and secure energy future".[304] The 2008 Pre-Budget Report announced that £535 million of capital spending on energy efficiency, rail transport and adaptation measures was being accelerated.[305] The Pre-Budget Report also, however, included changes to two of the Government's environmental tax policies relating to vehicle excise duty[306] and air passenger taxes.[307]

Vehicle excise duty

147. The 2008 Budget announced the introduction of new Vehicle Excise Duty (VED) bands designed to impose higher rates on more polluting cars.[308] The 2008 Pre-Budget Report, announced a change to this policy. Under revised arrangements, drivers of cars emitting over 225 g/km registered between 1 March 2001 and 23 March 2006 will be moved into the new band K in 2009 and remain there in 2010.[309] This means that owners of the most polluting cars, who purchased their car prior to 23 March 2006, will pay less because band K cars are subject to VED of only £405 in 2009-10 and £425 in 2010-11, some £515 less then the maximum £950 to be paid on highly polluting cars purchased after 23 March 2006.[310]

148. Mike Brewer, of the Institute for Fiscal Studies, told us that in the case of VED, the Government had used the recession as a reason to weaken its defence of the environment:

reforms to VED which undoubtedly watered down their environmental impact and the reason the Treasury gave was that it did not want to raise the level of VED. They were ostensibly pointing to the recession as an excuse not to do an environmental measures[311]

149. The interpretation offered by Mr Brewer was echoed by a public statement made by KPMG:

The Chancellor has effectively prioritised fiscal sustainability over environmental sustainability. Drivers of gas-guzzling 4x4s are getting off lightly as the expected increase in Vehicle Excise Duties and the so-called "showroom tax" for all cars will now be much lower even for the most polluting cars… The mere fact that in his speech he announced no new green taxes or tax rebates shows that changing the impact of people's behaviour on the environment is not on the radar this year.[312]

Air passenger duty

150. The 2007 Pre-Budget Report included a commitment to replace air passenger duty (APD), a duty paid per passenger, with a duty payable per plane from 1 November 2009.[313] In a subsequent written statement, Angela Eagle informed the House that a per plane tax would "send better environmental signals, encourage the more efficient use of aircraft and ensure aviation makes a greater contribution to both environmental costs and the public finances".[314] In our report on Climate Change and the Stern Review, we welcomed the proposal of a per plane tax and recommended that the government should ensure that freight and private planes were included in any revised aviation tax.[315]

151. In the 2008 Pre-Budget Report, the Government stated that "the Government has … decided to reform the air passenger duty regime rather then proceed with a per plane tax".[316] This measure, according to John Whiting of PwC, came as "a surprise" to many who had been observing and participating in the debate.[317]

152. When questioned on whether the distance banding of APD would encourage passengers to fly via European hubs, Mr Troup acknowledged the difficulty but suggested that the per passenger approach would have less of a diversionary effect then a per plane approach:

we are actually making it more difficult to fragment flights [book flights via hub airports in separate components] because it does require passengers actually to buy two separate tickets. So, to the extent that there is a problem of diversion, it is actually a greater problem under a per plane tax than it is under a reformed, banded APD. While, as I say, we recognise that there is a risk of diversion fragmentation, actually these reforms carry a lesser risk and unless we are to give up on any attempt to band APD and air passenger taxation to try and ensure a proper contribution with a greater degree of proportionality to emissions, I think that problem will always exist.[318]

153. We note that Air Passenger Duty excludes freight flights and imposes comparatively low charges on private planes, maintaining an inconsistent handling of aviation emissions. We further note the risk that distance based bands of APD will encourage travellers to fly via European hubs. We are of the view that the disparity in fare level will indeed encourage passengers to fly via European hubs. We recommend that the Government monitors the impact of the introduction of higher banding Air Passenger Duty in order to ascertain the impact of APD on UK hubs, passenger preferences, and the financial consequences for airlines. If the recovery from recession is to be a 'green recovery', as the Pre-Budget Report has stated, this rhetoric has to be supported by an appropriate taxation strategy.

Fuel duty and the haulage industry

154. Budget 2008 announced that a 2 pence per litre increase in fuel duty would be postponed from April 2008 to October 2008. In March 2008, the Chancellor informed us that the decision to delay was due to the increased prices people were facing due to the high price of oil.[319] The 2008 Pre-Budget Report announced that this increase would come in to place from the 1 December 2008.[320]

155. The Government observed that "as a result of the 2.5 per cent cut in VAT this December, the cost of petrol and diesel will fall for private motorists who should see no increase in the price they pay at the pump this year from this measure".[321]

156. When challenged to defend the situation faced by businesses, particularly the haulage industry, that reclaim VAT and therefore will not feel a counterbalancing benefit from the cut in VAT, the Chancellor noted that their loss would be counterbalanced by falling fuel prices:

I understand that problem, and obviously for sometime we have been concerned about the road transport industry generally. However, they are benefiting from the fact that fuel prices are falling now, and you can see that at the pump, especially in petrol, slightly more slowly in diesel, which I understand is partly due to refining capacity, and prices are further apart than one would like but that is where we are. What I wanted to do with the VAT reduction was to benefit as many people as I could, but I do have to get some revenue in at some stage.[322]

157. We note that the Government is relying on falling oil prices to counterbalance the impact on businesses of the 2 pence per litre rise in fuel duty. We believe that the Chancellor has missed an opportunity to assist the road haulage industry, a matter we think the Chancellor should address at the time of the Budget. We recommend that the Government continues to monitor oil prices and adjusts the level of fuel duty in light of any future increase in oil prices.

304 HC Deb, 24 November 2008, Col 498 Back

305 Cm 7484, Pre-Budget Report 2008, p 125 Back

306 Ibid., p 134, para 7.33 Back

307 Cm 7484, Pre-Budget Report 2008, p 138, para 7.55 Back

308 HM Treasury, Budget 2008, HC 388, March 2008, p 96, para 6.28 Back

309 Cm 7484, Pre-Budget Report 2008, p 134, para 7.33 Back

310 Ibid., p 134, Table 7.1 Back

311 Q 97 Back

312 KPMG, Chancellor sacrifices environmental sustainability for fiscal sustainability, 24 November 2008, www.kpmg.co.uk Back

313 HM Treasury, 2007 Pre-Budget Report and Comprehensive Spending Review, Cm 7227, November 2007, p 123, para 7.56 Back

314 Written Ministerial Statement by Angela Eagle, Exchequer Secretary to the Treasury, 31 January 2008. Back

315 Treasury Committee, Fourth Report of Session 2007-08, Climate Change and the Stern Review: the implications for Treasury policy, HC 231, January 2008 Back