Federation of Tour Operators & Ors, R (on the application of) v HM Treasury

This is an appeal from one aspect of a decision of Stanley Burnton J (as he then was) handed down on 4^th September 2007. On 6^th December 2006, the Chancellor of the Exchequer announced in his Pre-Budget Report (PBR), the doubling of Air Passenger Duty (APD) with effect from 1 February 2007 (i.e. only 7 weeks later). The tax was to be paid by operators of aircraft on passengers flying. Airlines were likely to pass the tax on to passengers with whom they had direct contracts and to Tour Operators where they had not, even in relation to pre-booked flights. Unlike the airlines, Package Tour Operators would be largely precluded from passing on the increase to passengers who had already booked their holidays, by virtue of the Package Travel, Package Holidays and Package Tour Regulations 1992 (the Package Travel Regulations). If implemented on such short notice the effect would be to impose the burden of the tax on the Tour Operators without any ability for them to pass the same on to passengers.

The Tour Operators immediately drew this fact to the attention of the Government. The Government, however, refused to postpone the introduction of the increase. On 11^th December they announced that the decision was fixed. In the result a Parliamentary Resolution passed under Section 1 of the Provisional Collection of Taxes Act 1968 on 27 March 2007 applied the increase to flights departing on or after 1stFebruary 2007. The Finance Bill, making provision for doubling APD rates with effect from 1^st February 2007, received its second reading on 23^rd April 2007. It was debated in Committee of the Whole House on 1^st May 2007. It received its third reading on 25^th and 26^th June 2007 and was given Royal Assent on 19^th July 2007.

The Federation of Tour Operators and two representative Tour Operators commenced proceedings. They attacked the lawfulness of the tax itself and thus the lawfulness of the increase, alleging a breach of Article 15 of the 1944 Chicago Convention and a breach of Article 49 of the European Treaty. It was also alleged that the increase in duty, imposed in the manner it was, infringed the Tour Operators’ rights under Article 1 of the First Protocol (“A1P1”) to the European Convention on Human Rights. Stanley Burnton J rejected all lines of attack.

On appeal the Tour Operators wished to pursue only one argument. They confined their appeal to a single ground; they said the timing of the implementation of the increase in APD gave rise to unjustified interference with Tour Operators’ property rights, contrary to A1P1. The relief they seek on the appeal is “a declaration of incompatibility” pursuant to section 4 of the Human Rights Act 1998 (HRA) in respect of section 12 of the Finance Act 2007.

They submit that there was an easy solution which would have avoided imposing a burden on the Tour Operators. Before Stanley Burnton J they produced Section 12 with an amendment to subsection (4) which made that subsection read as follows:-

The submission is that, without the amendment, Section 12 is incompatible with the Tour Operators’ rights under A1P1.

The judge sets out the full history of the introduction of APD and the increases thereto over the years. He details the fact that previously concessions were made by reason of the special position of Tour Operators. He spells out what occurred up to and following the PBR on 6^th December 2006. All the above he does from paragraphs 8 to 33 of his judgment and there is no challenge to that account. In short it comes, I believe, to this. APD was introduced by the Finance Act 1994. The duty was to be paid by the operator of the aircraft on each passenger and was due when the aircraft took off. Where flight tickets have been purchased other than through Tour Operators, operators of the aircraft can recover the duty from the passengers. Normally so far as bookings made through Tour Operators are concerned, the operator of the aircraft can recover through the contracts maintained with Tour Operators the same from the Tour Operator. Where a Tour Operator is also the operator of the aircraft the duty necessarily falls on it.

Regulation 11 of the Package Travel Regulations constrains the ability of Tour Operators to recover the duty from passengers who have booked through them. Furthermore many Tour Operators include “no surcharge guarantees” in their conditions of contract.

When APD was introduced in 1994 its implementation was postponed in recognition of the position of the Tour Operators. The News Release of 31^st January 1994 contained this paragraph:-

It is of relevance that although it is the position of Tour Operators which was being recognised, the delay in implementation was not limited to Tour Operators, but applied to airlines as well.

On 26^th November 1996 an increase in the rate of APD was announced to be implemented 11 months later, again the Chancellor in Parliament recognising the position of Tour Operators but, once again, the date for implementation applying to all.

There were further changes announced in March 2000 but only taking effect on 1^st April 2001.

The increase with which these proceedings are concerned was announced on 6^th December 2006. The judge spells out the details of how the same would impact on Tour Operators if the date for implementation of 1^st February 2007 were adhered to in paragraphs 19 and 20. Suffice it to say the impact is accepted as being serious, estimated in the region of £50 million.

Between paragraphs 21 and 33 the judge spells out the detail of the negotiations and makes findings of fact from paragraphs 139 to 153. Since there is no challenge to his findings I can summarise the position as follows. Prior to making the announcement on 6^th December 2006 those responsible had overlooked the effect of the Package Travel Regulations and, as the judge said, “that this should have occurred does not speak well of the process of decision-making by the Treasury.” But the Regulations and their effect was most emphatically brought to the attention of the Government by the claimants. The Government then decided that, despite the effect on Tour Operators, they were not prepared to postpone implementation.

When the increase in APD had been announced, its objectives were said to be “to protect the environment, broaden the tax base and raise revenue”. Insofar as the tax burden was to fall on Tour Operators rather than passengers in relation to holidays already booked, there could be no environmental justification, save in a speculative sense arising from the possibility that Tour Operators might increase their prices in following seasons to recoup losses.

The judge accepted however that the possible loss of revenue, if there was a postponement of the implementation, was “a, if not the, major consideration of the Ministers in refusing any concession to the Tour Operators”. The judge found that a general postponement would have involved loss of revenue to the extent of some £100 million; a postponement for Tour Operators alone would have involved £50 million. The figures given by the Government in their skeleton argument on the appeal suggest a postponement from 1^st February to 1^st November 2007 would actually have involved foregoing some £800 million [see paragraph 27].

The judge, it is right to say, rejected the Government’s argument that there would have been “legal and administrative difficulties involved in an exemption for Tour Operators’ existing bookings” [see paragraph 146]. He also accepted that the increase in APD was “practically a retrospective measure, since it was payable on flights that had already been contracted when it was announced” [paragraph 148]. But he was far from sure that “exempting package holiday passengers, while retaining liability for other passengers, would have been seen as, or would have been, fair and non-discriminatory and in that context the judge thought “there were substantial reasons not to defer or to exempt existing package holiday bookings.” [paragraph147]

The judge considered proportionality from paragraphs 150 to 153. He pointed out that the burden imposed on Tour Operators is actually an incident of their contractual arrangements with the airlines. Other surcharges can be passed on to Tour Operators under those contracts and Tour Operators absorb those charges giving as many of them do “no surcharge guarantees”. He points to the fact that one Tour Operator has increased its prices for flights booked after the date of the announcement to recoup the loss of being unable to pass the increased APD to those that had already booked. He points to the fact that one airline took the commercial decision not to pass on the increased APD. Finally he finds that none of the 12 Tour Operators constituting the claimants could be shown to have suffered specific hardship.

A1P1 provides as follows:-

It is common ground that, notwithstanding the second paragraph of the Article, tax measures are not immune from scrutiny under A1P1. Mr Haddon-Cave QC for the appellants was however critical of the judge’s approach in paragraph 132 of his judgment, where Mr Haddon-Cave suggested that the judge was saying that a tax could be justified simply on the basis that it was a tax. The passage needs to be read in context and I thus quote paragraphs 131 and 132 where he said this:-

In my view the judge is not saying that simply because the objective is to raise revenue that makes a taxation measure immune from scrutiny. The following passages of the judge’s judgment make that clear and, in my view, accurately reflect the law:-

The judge summarised the submissions before him and they accurately reflect in summary form the submissions before us:-

Those made to the judge he summarises at paragraph 128. The judge rejected the submissions as to administrative difficulty and retrospectivity and no attempt was made to reopen those points. The judge’s summary of the other points taken by the respondents accurately reflects the arguments before us. One can thus summarise the position of the respondents before us in this way:-

The main burden of Mr Haddon-Cave’s submissions was that what had occurred was that the Government had imposed a tax on his clients by mistake because they overlooked the Package Travel Regulations. If his clients had been attacking a decision taken on 6^th December 2006 that might be a proper characterisation of the situation but by the time that section 12 was enacted by Parliament the legislators were absolutely aware of the likely effect on the Tour Operators.

That being so it seems to me that if the Tour Operators were to have a legitimate complaint it must 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 seems to me helpful to start by asking whether the correct view to take is that this 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 this was a tax on operators of aircraft likely to be passed on to passengers which had a justification but which caught the Tour Operators. I would accept that Mr Haddon-Cave’s case would be stronger if the correct view was to see this as a tax aimed at Tour Operators alone.

But it seems to me that the correct view is to see APD as a tax on flight operators, by reference to the passengers they carry, the justification for which in general terms would not be susceptible of challenge under A1P1.

The question then is, 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 will fall on those Operators, did a decision not to exempt passengers who had pre-booked through Tour Operators place “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 has been accepted that it is 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 has to be treated as “de facto” a tax on Tour Operators but it is not an “individual tax” on them. In considering whether the tax is “excessive” the question is whether it is “proportionate”.

I agree with the judge that 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 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^th 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.

In agreement with the judge, in my view, it is impossible to conclude that if Section 12 fails to exempt passengers who booked with Tour Operators prior to 6^th December 2006, it imposes either an excessive or individual burden on Tour Operators and/or is devoid of reasonable foundation, and I would dismiss the appeal.

I agree.

I also agree.