The Court of Appeal upheld a decision not to exempt existing pre-booked package holidays through tour operators from the effects of an increase in air passenger duty on operators of aircraft, on the basis that the decision did not place an individual and excessive burden on tour operators so as to render it devoid of reasonable foundation.

Facts

On 6 December 2006 the Chancellor of the Exchequer announced the doubling of air passenger duty (APD) with effect from 1 February 2007 (FA 2007, s. 12). Unlike airlines, tour operators, who sold package holidays, were largely precluded, by the Package Travel, Package Holidays and Package Tours Regulations 1992 (SI 1992/3288), 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 (ECHR) 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.

Stanley Burnton J dismissed the application. Under the ECHR, an especially wide latitude was permitted to the executive and legislature in determining whether tax measures infringe art. 1 of the First Protocol. The decision to increase APD and not to exempt existing bookings was within the margin of appreciation of the Government. The taxpayers appealed on the ECHR point.

Issue

Whether the increase in air passenger duty infringed the taxpayers’ rights under art. 1 of the First Protocol without an exemption in FA 2007, s. 12 in respect of passengers whose carriage formed part of a package holiday booked prior to 6 December 2006.

Decision

Waller LJ (Buxton and Smith L JJ agreeing) dismissed the appeal. He said that the main burden of the taxpayers’ submissions was that what had occurred was that the Government had imposed a tax on the taxpayers by mistake because they overlooked the Package Travel Regulations. If the taxpayers had been attacking a decision taken on 6 December 2006 that might be a proper characterisation of the situation but by the time that s. 12 was enacted by Parliament the legislators were absolutely aware of the likely effect on tour operators.

Therefore if the tour operators were to have a legitimate complaint it had to be on the basis that the Government knowingly imposed a tax burden on them in some way which was illegitimate. In considering that question it was helpful to start by asking whether the correct view to take was that that was a tax imposed on the tour operators alone, who were in effect being targeted with a tax imposed on them without any justification, or whether that was a tax on operators of aircraft likely to be passed on to passengers which had a justification but which caught the tour operators. The taxpayers’ case would be stronger if the correct view was that the tax was aimed at tour operators alone.

However, the correct view was to see APD as a tax on flight operators, by reference to the passengers they carried, the justification for which in general terms would not be susceptible of challenge under art. 1 of Protocol 1. The question then was, having decided to introduce a tax on aircraft operators by reference to passengers as from a certain date, and on discovering that in relation to passengers pre-booked through tour operators the tax burden would fall on those operators, whether a decision not to exempt passengers who had pre-booked through tour operators placed an individual and excessive burden on tour operators, such as to render the decision devoid of reasonable foundation. Although this was not in fact a tax on tour operators as such, it was necessary to ‘look behind the appearances and investigate the realities of the situation ’ (see Sporrong and Lonnroth v Sweden (1983) 5 EHRR 35, para 63). On that basis the tax had to be treated as de facto a tax on tour operators but it was not an ‘individual tax’ on them. In considering whether the tax was excessive the question was whether it was proportionate.

It was, in fact, an entirely understandable decision not to exempt only passengers who had pre-booked through tour operators. When on previous occasions the interests of tour operators had been taken into account and dates for implementation extended, the extensions had applied across the board. A postponement on this occasion for tour operators alone would have been difficult to justify to the operators of airlines. Postponement of implementation across the board would have involved a very substantial loss of revenue and at least one object of increasing the tax was to raise revenue. Indeed as regards any passengers who had pre-booked, whether direct with airlines or through tour operators, the tax was not going to discourage them from flying and thus the direct environmental impact was not present.

The tour operators were not uniquely disadvantaged. The airlines would have to take a commercial risk if they passed the increase on to pre-booked passengers and in at least one case they did not in fact do so. Tour operators could in fact mitigate the harmful effect by increasing charges thereafter for passengers who booked after 6 December 2006. Tour operators were not unable to absorb the impact even if it did have an effect in the short term on their profits. Accordingly, it was impossible to conclude that if s. 12 failed to exempt passengers who booked with tour operators prior to 6 December 2006, it imposed either an excessive or individual burden on tour operators and/or was devoid of reasonable foundation.

Court of Appeal (Civil Division).
Judgment delivered 2 July 2008.