The Federation of Tour Operators failed in a challenge to an increase in the rate of air passenger duty and to the lawfulness of the duty itself.

Facts

On 6 December 2006, the Chancellor of the Exchequer announced the doubling of air passenger duty (‘APD’) with effect from 1 February 2007. Unlike airlines, tour operators, who sold package holidays, were largely precluded, by the Package Travel, Package Holidays and Package Tours Regulations 1992 (‘the Package Travel Regulations’), from passing the increase on to those of their travelling customers who had already booked their holidays. The tour operators immediately brought that to the attention of the Government which refused to postpone or to modify the introduction of the increase in the duty.

Therefore the taxpayers (the trade association that represented the major UK tour operators, and two representative tour operators) applied for judicial review, contending that the increase in APD was unlawful, and that the duty itself had always been unlawful. They argued that the imposition of the duty was in breach of art. 15 of the 1944 Chicago Convention on International Civil Aviation which had been incorporated into English municipal law by the EU legislation on the creation of a Single European Sky and prohibited fees, dues or other charges in respect solely of the right of exit from the territory of a contracting state; that the increase in the duty, imposed in the manner in which it was, infringed their rights under art. 1 of Protocol 1 to the European Convention on Human Rights because it did not satisfy the test of proportionality; and that the imposition of APD or its increase was contrary to art. 49 of the EC Treaty since it interfered with the freedom to provide services.

The Treasury contended that none of the grounds of challenge were well founded. It argued that art. 15 of the Chicago Convention had no application to APD; that in any event the European legislation relied upon by the taxpayers did not apply to APD; that the increase in APD did not infringe the taxpayers’ rights under art. 1 of Protocol 1 to the ECHR; and its imposition and increase did not infringe art. 49 of the EC Treaty.

Both parties submitted that the meaning of art. 15 of the Chicago Convention was quite clear, but differed in their interpretations. The taxpayers submitted that the words ‘fees, dues or other charges’ included a tax, such as APD, and that most passengers who paid it did so only for the right of exit from the territory of the UK, since they were flying from a UK airport to one abroad. The Treasury submitted that the words ‘fees, dues or other charges’ were restricted to charges, and did not include a tax, and therefore did not apply to APD. Secondly, APD was payable in respect of passengers flying to destinations within the UK, and was therefore not payable ‘solely’ in respect of the right of transit over or entry into or exit from its territory.

Issue

Whether the introduction of and increase in APD was lawful and justified.

Decision

Stanley Burnton J dismissed the application.

Chicago Convention

Article 15 was essentially an anti-discrimination provision, precluding a state from favouring its national airline or airlines when imposing charges. A fee, due or other charge imposed in relation to the right to enter the territory of a state, or the right to leave it, or to cross over it, would discriminate in favour of a local or national airline as against the airlines of foreign states. A fee, due or charge that was payable on take-off, irrespective of destination, including destinations within the territorial state, did not discriminate against foreign airlines, and was therefore not objectionable. It was correct that a passenger on a flight going to a foreign destination might feel that he was paying a tax because his plane was exiting from the territory of the imposing state; but the tax was not in fact payable ‘solely’ for the right to exit that territory, since it would be equally payable if his flight did not leave that territory. On that basis, art. 15 did not prohibit APD, whether or not taxes such as APD were within the scope of ‘fees, dues or other charges’.

There was substantial evidence of state practice inconsistent with the taxpayers’ interpretation of art. 15 and an absence of any challenge or objection to that practice based on art. 15. That evidence established an agreement by the parties to the Chicago Convention that a tax on flight tickets, such as APD, was not prohibited by art. 15.

The taxpayers failed to establish that art. 15 had been incorporated into domestic law through Community law, and specifically by art. 14 of Regulation No. 550/2004 of the European Parliament and of the Council of 10 March 2004 on the provision of air navigation services in the single European sky, known as the Service Provision Regulation.

ECHR

Although a literal reading would suggest that legislative provisions for the payment of taxes were outside the ambit of art. 1 of Protocol 1, the jurisprudence of the European Court of Human Rights established that they were not: they were subject to the rights of natural and legal persons conferred by the first paragraph. It followed that such laws had to satisfy the requirement of proportionality between legitimate aim and means. It was for the Government to demonstrate that a measure that engaged art. 1 of Protocol 1 satisfied the requirement of proportionality. Formally, APD was a tax imposed on aircraft operators. As a result of the contractual arrangements between those operators and passengers, or between the operators and tour operators, and between tour operators and their customers, the financial burden of the tax was normally passed on to passengers; but, by reason of the provisions of the Package Travel Regulations, the substantial effect of the increase announced in December 2006 was to impose the financial burden of that increase, in respect of passengers who had already made their bookings, on tour operators. The Treasury rightly did not dispute that that financial burden entitled the taxpayers to invoke art. 1 of Protocol 1: i.e. that the Convention looked at the effective financial burden imposed by the tax rather than merely the legal burden.

There was no difference between the approach of the court to a measure to secure the payment of taxes and the approach to a substantive tax measure, i.e. a decision to impose a particular tax or to increase it. In order to challenge successfully such a measure, it had to be shown that the legislature's assessment was ‘devoid of reasonable foundation’. Furthermore, the jurisprudence of the European Court of Human Rights did not justify the national court in declaring a tax measure incompatible because its objects could have been secured more efficiently or effectively by a different measure. The fact that a particular class of persons was subject to a measure that engaged art. 1 of Protocol 1 was a factor to be taken into account, but did not of itself lead to a conclusion of incompatibility.

There was no doubt that the loss of revenue involved in exempting existing bookings or in postponing introduction of the increase was a major consideration of ministers in refusing any concession to the operators. A concession would presumably have involved either an increase in some other tax, or an increase in government borrowing, or a reduction in government spending. It was important, when assessing the question of proportionality, to consider the financial and business context. The impact of APD on tour operators derived not simply from the tax legislation itself, which imposed no tax burden on them, or on the Package Travel Regulations alone, but on the business and contractual arrangements of tour operators.

The hurdle for the taxpayers on art. 1 of Protocol 1 was very high. They had to demonstrate that the decision to increase APD with effect from 1 February 2007 without any concession in relation to bookings made before the announcement of the increase ‘was devoid of reasonable foundation’. While that decision was open to criticism, having been made in the first place without consideration of the effect of the Package Tour Regulations, and with a retrospective effect, possibly under a mistaken view of the difficulties of exempting tour operators' existing bookings, it was impossible to conclude that the measure was devoid of reasonable foundation. The revenue involved was considerable, and the burden on the taxpayers was an incident of their business. Thus the requirement of proportionality was satisfied.

Freedom to provide services

Article 49 protected not only the right to provide services but also the right to receive services. Article 49 was on the face of it of wide import. Its application to tax measures required particular caution. That every member of the EU had to impose taxes went without saying: it was financed from the proceeds of a tax (VAT), and there were provisions of the EC treaty that presupposed that member states levied indirect taxes. Any indirect tax on goods was liable to inhibit the demand for those goods, and therefore to inhibit their importation from other EU states. Even a direct tax inhibited consumption of goods and services, and therefore might affect freedom of movement of goods and services. Thus, too general an application of art. 49 would have unintended and unacceptable consequences.

APD did not infringe art. 49 because it was not discriminatory, applying (with a minor exception) to both EU and domestic flights at the same rate, and its effect was not direct or demonstrably inhibiting (Mobistar SA v Commune de Fl¥eron and Belgacom Mobile SA v Commune de Schaerbeek [2005] 3 CMLR 46 considered).

If art. 49 did apply, APD could be justified and satisfied the test of proportionality. Given the modest amount of the tax, the fact that aviation was otherwise very lightly taxed, the fact in particular that APD was non-discriminatory, the uncertainty as to its effect on EU service providers, and the scope for it to be wholly or partly absorbed by tour operators or its effects mitigated by adjustment to their prices, APD was justified as a proportional measure aimed at reducing air travel below the level at which it would otherwise be, and thereby reducing the damage caused to the environment by such travel, and as a revenue- raising measure. Accordingly, the taxpayers failed to establish a breach of art. 49.

Queen's Bench Division (Administrative Court). Judgment
delivered 4 September 2007.