The chancellor’s freeze on Air Passenger Duty (APD) in yesterday's Budget is the biggest headline for the travel and hospitality sectors; however the government has only deferred a rise to next April, when rates will increase in line with the Retail Price Index (RPI).
The RPI inflation rate hit 5.5% last month suggesting a significant rise, although the Treasury forecasts an average RPI rate of 3.6% next year. However, the 2012 rise in duty will also INCLUDE that deferred today which was planned for November. The Treasury confirmed next year’s rise in APD would include revenue lost by deferring an increase this year.
Treasury forecasts assume £145 million would have been raised from the postponed increase in the current tax year, but that £300 million will be added to the overall APD bill in 2012-13 – taking the total tax burden on air passengers to £2.8 billion.
The Chancellor also announced a consultation on the highly controversial banding, which sees destinations like the Caribbean disproportionately hit with tax. There are also plans to extend duty to flights on business jets.
Travel firms such as Thomas Cook, TUI and Virgin Holidays predictably reacted by describing the APD freeze as a 'stay of execution' rather than a reprieve, and lambasted the Government for its abandonment of the manifesto pledge to replace APD altogether with a per-plane tax. However considering that as recently as a few weeks ago (in their tourism manifesto) the government stated that there was little room for any leeway on tax for the sector, the APD freeze is privately being regarded as welcome (‘with trading as tough as at current, we’ll take anything’ one senior manager from a large travel company told me last night.)
The Budget was not good news for travel firms looking for an increase in the value of sterling against the euro and the US dollar to boost overseas travel. Stirling fell by 0.8% against the US dollar on the back of the Chancellor’s forecast reduction of UK economic growth to 1.7% this year from a previous forecast of 2.1%. Inflation is also expected to remain between 4% and 5% which raises the possibility of “stagflation”
Nick Ryder, global currency analyst at Smart Currency Exchange said ‘Whilst there were encouraging moves in the Budget aimed at bringing foreign business into the UK, downgraded growth and high forecast inflation is not the best of combinations to boost the pound."
Chartered tax advisor Mark Caldicott, who heads up industry accountant Whitehart Associates’ tax department, told Travel Weekly ‘ the chancellor had done as much as could be expected to encourage enterprise. He has only got a very limited scope to focus on growth given the budget deficit but he has come up with some quite clever ways to do that and done quite a good job,”
Caldicott welcomed the higher than expected reduction in corporation tax and the increased additional relief for investors in start up companies under the Enterprise Allowance Scheme.
From April 6 this has increased the income tax threshold for investment from 20% to 30% . The setting up of 21 new enterprises zones and increased research and development tax credit for firms developing leading edge technologies could also help firms in the travel and hospitality sectors. Hospitality particularly has seen some encouraging innovations recently, such as online booking tools being extended to small B&Bs and camping sites.
As there are many small businesses in our sector, Osbourne’s ‘ Start-UP Britain’ campaign, which was announced to help establish and grow businesses, is to be welcomed, as was the news that small businesses will have a business rate holiday extended for a further 12 months to October 2012, (at a cost of £370 million to the Exchequer).
The move to change the way tax allowances are calculated moving from a RPI to CPI basis, would be a hidden tax increase that would mainly impact on the lower paid, Caldicott added. Another significant move, to merge the income tax and national insurance systems, would be welcomed by businesses, Caldicott said, but he added this was a long-term measure.
The 2% reduction in corporation tax overall is to be welcomed, as were the wider, although limited relief to consumer spending through the fuel concessions. Overall, with limited scope given the state of the public finances, and little wriggle-room following the emergency budget last summer, the Chancellor has done what he can, and has at least given the impression that he is trying to stimulate growth. Any psychological impact this has on consumer spending will be welcomed by the travel & hospitality sectors.
Simon Ferguson