British families planning a getaway this summer could find the cost of flights rising again, after it emerged that Treasury officials are quietly making plans to raid £1bn of VAT on airfares charged by airlines, a move the industry has called a secret tax on tourists and exporters alike.
The proposals, which are still being drafted within HMRC, would impose a standard rate of 20 per cent VAT on the per passenger charges levied by airports such as Heathrow, Gatwick and Manchester for the use of runways, terminals and ground services. Those costs are almost always passed directly to passengers through the ticket price, meaning the burden will fall squarely on travelers and small and medium-sized businesses that depend on affordable air travel to reach overseas customers.
At Heathrow, where the regulated charge currently sits at around £24 a head, the change will add around £5 to the cost of every passenger – before even a single cent is added for Air Passenger Duty, fuel surcharges or booking fees. The official APD prices published by HMRC already range from £15 to £106 for an economy seat depending on the class, and will rise again from April under increases penciled in the Autumn Budget.
Back sting
The biggest fear for airlines and airports is not just the prospect of a new tax, but the possibility that Whitehall could reverse it. Industry sources tell Business Matters that ministers are looking at whether they can spend the money from four years, the maximum allowed under current law, which has brought the Exchequer up to nearly £1bn from Heathrow alone.
Heathrow generated £1.13bn in revenue from passenger fees last year, while Gatwick reported £607m and Manchester Airports Group, owner of Manchester and Stansted, recorded £470m. Compared to smaller hubs, the total VAT figure could comfortably exceed £1.5bn, although officials have yet to specify whether the tax will bite on both the outgoing and incoming legs.
One airline industry insider described the scheme as “a hidden tax on families at a time when the cost of living crisis means many people are already struggling to afford a holiday”. The warning comes alongside fresh evidence that Britons are already tightening their travel belts, with data from Barclays recently showing that holiday spending fell for the first time since the pandemic as the cost of living and the Iran conflict fear to bite.
Reeves gives, HMRC takes
This revelation could not have come at a more difficult time for the Chancellor. Even as her officials were sharpening their pencils on aviation VAT, Rachel Reeves was on her feet in the Commons to present a £1bn cost-of-living package designed to take the sting out of the school holidays.
From June 25 to September 1, theme parks, zoos, museums, cinemas, soft play areas and theaters will charge a reduced tax of five percent instead of the usual 20 percent. Baby food has been cut, with the Treasury costing £300m. The government says the measure will take £20 off an amusement park day for a family of four, £1.50 off cinema tickets and £2 off family meals.
Fuel costs will be frozen for a year, children can travel by bus for free during August, and import duty will be reduced on the basic food basket. The energy-intensive chemicals and ceramics sectors will share a £470m bailout aimed at protecting jobs at some of the country's most exposed manufacturing sites.
Ms Reeves told MPs the package would be paid for by raising “hundreds of millions of pounds a year” for oil and gas majors such as BP and Shell, and the Office for Budget Responsibility due to assess the impact of the autumn financial event. Broad support for energy bills has been kept in place, with the Chancellor indicating that targeted aid will follow in the autumn “if bills continue to rise”.
Hospitality and the tourist economy were quick to embrace this move. Fiona Eastwood, chief executive of Merlin Entertainments, which operates Alton Towers and Legoland, confirmed that the discount will apply to both entry tickets and children's meals. Kate Nicholls, chair of UKHospitality, said it was “a quick and easy way to reduce prices and improve consumer confidence”.
The plane makes a terrible noise
The aviation industry however is in no mood to applaud. A spokesman for Airlines UK said: “The UK is already one of the most taxed aviation markets in the world and, as the cost burden increases, we risk becoming even more uncompetitive. The only people who would appreciate a move like this would be those operating rival airports overseas.”
Industry analysis supports the point. The Office for the Budget already predicts that APD will raise around £5bn a year by the end of the decade, while research by Airlines UK suggests that mandatory taxes could cost around half the price of a low-haul ticket. A reduction in VAT on airport charges would add to the tax burden that low-cost carriers are already pushing routes, and the SME-friendly connections that come with it, on the European continent.
Andrew Griffith, the shadow business secretary, was still confused: “Any additional tax on aviation is a tax on doing business, a brake on exports or an attack on hard working families.
The proposals may also run afoul of international aviation laws, which broadly exempt airline payments from the Customs Union. Heathrow is understood to be taking specialist tax advice, with one industry source describing the job within HMRC as a “fishing trip” for officials looking for new money. “It's a very technical discussion, with HMRC trying to figure out if they can capture more tax revenue,” the source said. “The question is whether it will go forward and, if it does, will it hit the passengers.”
What it means for SMEs
For Britain's small and medium-sized businesses, the stakes are real. Air freight, sales trips and trade show attendance all sit at the bottom of an airport's economy, and any increase in landing costs quickly feeds into the cost of each trip. It is the second time in twelve months that the regulator has clashed with Heathrow's pricing model, earlier this year Heathrow was forced to drastically reduce passenger fares by the Civil Aviation Authority, closing costs below the level the airport wanted.
Airports are unlikely to take the new VAT charge in-house. Heathrow has been vocal in its calls for measures to restore competitiveness, including the return of VAT-free shopping for international tourists, warning that the UK is losing out to European rivals on tariffs. Adding a new layer of 20 percent to its regulated charge, the airport believes, is in direct conflict with the Government's growth agenda.
A government spokesman insisted there was no official policy change on the train, telling reporters: “The government is not considering changes to tax laws in this area.
That is unlikely to settle the nerves in West London apartments or on airplanes. In the meantime, families booking summer flights can enjoy a temporary VAT reduction at the park's interchange, but the smartest money at the airport is in the coldest autumn at the airport check-in desk.
