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

On 6 December 2006, the Chancellor of the Exchequer announced, in his Pre-Budget Report (referred to as the “PBR”), the doubling of Air Passenger Duty (“APD” or “the Duty”) with effect from 1 February 2007, only 7 weeks later. Unlike airlines, tour operators, who sell 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 this to the attention of the Government. The Government however refused to postpone or to modify the introduction of the increase in the Duty. The increase has been given effect by the Finance Act 2007, which received the Royal Assent on 19 July 2007.

In these proceedings, the Claimants, the Federation of Tour Operators (“the FTO”), the trade association that represents the major UK tour operators, and two representative tour operators, contend that the increase in APD was unlawful, and that the Duty itself has always been unlawful. They contend:

that the imposition of the Duty is in breach of Article 15 of the 1944 Chicago Convention on International Civil Aviation (known as the Chicago Convention), which has been incorporated into our municipal law by the EU legislation on the creation of a Single European Sky;

that the increase in the Duty, imposed in the manner in which it was, infringed their rights under Article 1 of the First Protocol (“A1P1”) to the European Convention on Human Rights;

that the imposition of APD or its increase is and was contrary to Article 49 of the European Treaty.

The Treasury contends that none of these grounds of challenge is well founded. It contends that Article 15 of the Chicago Convention has no application to APD; that in any event the European legislation relied upon by the Claimants does not apply to APD; that the increase in APD did not infringe the Claimants’ Convention right under A1P1; and its imposition and increase did not and do not infringe Article 49 of the EC Treaty.

Her Majesty’s Revenue and Customs is responsible for the collection of the Duty. It was joined as an Interested Party, but has not taken a separate part in these proceedings on the basis that its case is adequately represented by the Treasury.

The Speaker of the House of Commons intervened because of the Claimants’ reliance in these proceedings on evidence given to Committees of the House and on a report of the Treasury Select Committee. It was submitted on his behalf that their reliance on these matters in these proceedings involved a breach of Article 9 of the Bill of Rights and the wider principle of Parliamentary privilege.

Although the decision to impose APD dates from 1994, no point has been taken by the Treasury on the Claimants’ delay in bringing proceedings to challenge its original imposition. Of course, no proceedings could then have been brought in this Court challenging the tax under the European Convention on Human Rights, since the Human Rights Act 1998 did not come into force until October 2000. Similarly, the challenge based on Article 15 of the Chicago Convention could not have been brought until its alleged incorporation into our municipal law by Article 14 of the Service Provision Regulation (EC) No. 550/2004, which came into force on 20 April 2004. Proceedings could, however, have been brought challenging the Duty under Article 49 of the European Treaty.

This was a rolled-up hearing, i.e. a hearing of the Claimants’ application for permission to apply for judicial review, with the substantive hearing to follow immediately if permission was granted. The parties adduced comprehensively the evidence on which they relied (the evidence to which the Speaker objected being considered de bene esse) and made their submissions on all the issues in the case. It is evident that the Claimants’ claim is arguable, and permission to apply for judicial review will therefore be granted. I consider below whether their case for judicial review is made out.

APD was introduced by section 28 of the Finance Act 1994. It provided:

Although the Duty is payable by the operator of the aircraft, where the flight ticket has been purchased otherwise than as part of a package airlines’ standard terms normally permit the operator to recover the duty, and any increase in it, from the passenger, and in practice it normally does so.

Where in the case of a scheduled flight the ticket has been purchased by a tour operator as part of a package holiday, the contract between the operator of the aircraft and the tour operator will normally provide for the cost of the duty to be passed on to the tour operator. Similarly, in the case of a charter flight arranged by a tour operator, the charter contract will normally require the tour operator to bear the cost of the APD payable in respect of the passengers. If the tour operator is itself the flight operator, it will necessarily bear the liability for payment of the Duty.

However, unlike a flight operator, the ability of a tour operator to pass on the cost of APD or any increase in APD is constrained by regulation 11 of the Package Travel Regulations 1992:

Some tour operators include a “no surcharge guarantee” in their conditions of contract. They of course could not pass on to their customers any increase in APD taking effect after the date of their contract. But even where their conditions of contract permitted a tour operator to pass on to its customers any increase in APD taking effect after the date of their contract, they could not do so in respect of customers whose holidays began less than 30 days after the announcement of the increase. In addition, in respect of other customers who have entered into a contract, the tour operator has to bear the first 2 per cent of the increase in costs. In many cases the increase that is the subject of these proceedings would have been less than 2 per cent, or insignificantly more than 2 per cent, and in those cases too the practical effect of the Regulations was to impose the financial burden of the increase, or the major part of it, on tour operators.

APD was introduced by the Finance Act 1994. It was first announced by the then Chancellor in his budget statement of 30 November 1993, and was originally due to come into force in October 1994. The duty was set at £5 for departures to the UK and the European Union and £10 for departures to other destinations. Its implementation was, however, postponed following representations by the FTO and its members. In a letter dated 15 December 1993 to the then Paymaster General, Alan Flook, the Secretary General of the Tour Operators’ Study Group, the forerunner of the FTO, stated:

On 31 January 1994, Customs & Excise issued a news release which stated:

The Paymaster General replied to Mr Flook by letter dated 8 February 2004:

Thus, as a result of the decision to defer, the duty was introduced on 1 November 1994, 11 months after it had been announced.

On 26 November 1996, an increase in the rate of APD was announced in the Budget Statement. The change did not come into effect until 11 months later, on 1 November 1997. The then Chancellor told Parliament:

Further changes to the rates of APD were announced in the budget statement of 21 March 2000. They took effect over a year later, on 1 April 2001.

As mentioned above, in the present case, the increase was announced on 6 December 2006 to take effect on 1 February 2007, just seven weeks later. The Duty was increased as follows:

for passengers flying to destinations within the UK, the Isle of Man, the Channel Islands and members of the European Economic Area, and the European Common Aviation Area (in addition to the countries of the EU, Albania, Bosnia Herzegovina, Bulgaria, Croatia, Iceland, Macedonia, Norway, Serbia-Montenegro, Romania and the temporary UN mission in Kosovo) and Switzerland, from £5 to £10 for standard (i.e. tourist) class passengers, and from £20 to £40 for other (first, business and premium economy) classes;

for passengers flying elsewhere, from £10 to £20 for standard class passengers and from £40 to £80 for other passengers.

It can be seen that, on a package holiday to a resort in the EU costing £500, the tour operator would have to bear the entirety of the increase in APD for a tourist class passenger (as most are) who had already booked his holiday, since the increase did not exceed 2 per cent of the price. On a long-haul pre-booked holiday, assuming a price exceeding £750, the tour operator would have to bear a larger sum: for example, on a holiday costing £1,500, it would have to bear the entirety of the increase in APD for a tourist class passenger, and all except £10 for a premium economy or higher class passenger.

The Claimants and others immediately protested and made their complaints known. Andrew Cooper, the Director General of the FTO, wrote to the Chancellor of the Exchequer on 7 December 2006. He stated:

As a result of this and other representations, a meeting was held on 11 December 2006 between civil servants and industry representatives. Those present included, on the Government side, Edward Troup, the Director of Business and Indirect Taxes in HM Treasury, Beth Russell, the Head of Environment and Transport Taxes and Martin Johnson of that division, and officials from HMRC. The industry representatives included Mr Cooper of the FTO, Danny Bernstein, the Chairman of the British Air Transport Association, Keith Williams, the Chief Financial Officer of British Airways, Barry Humphreys of Virgin Airways, Jonathan Crick from Monarch Airlines (which is involved in charter flights), and representatives of non-UK airlines. The Treasury minute records that Mr Johnson set out background information on the decision to increase APD. He referred to the environmental issues, including climate change, and continued:

Mr Troup then said that:

Mr Bernstein opened up for the industry. Among the points he made were the following:

Mr Crick made the point that this was the first time that changes have been introduced “retrospectively” and companies would need to go back to customers to ask for more money. That was extremely difficult since customers had purchased on the basis of advertised prices with tax included. Mr Hylton of British Airways referred to previous cases in which the government had decided to defer an implementation date for a change in taxation. The examples he gave included the introduction of APD in 1994.

“Retrospectively” was put in quotation marks in the Treasury minute because the government representatives did not agree that the changes were retrospective. The minute states:

Mr Cooper, who represented not only UK but also EU tour operators, is recorded as making the following points:

After further representations the note records:

the decision to double the rates

the 1 February start date, and;

the (Virgin Atlantic) issue of whether the banding descriptions were fit for purpose – which we could follow up in the coming months.

Mr Hylton said:

At the close of the meeting, Mr Troup:

There was a smaller meeting between Mr Troup and Ms Russell, among others, on the Government’s side and representatives of the Association of British Travel Agents on 12 December 2006. Similar points to those put forward on the previous day were made on both sides.

On 31 January 2007, Herbert Smith, the solicitors for the FTO, sent a letter before claim to the Chancellor of the Exchequer. It stated:

It is common ground that the implementation of the increases in APD with effect from 1 February 2007, with no exception for bookings made before 6 December 2006, cost the members of the FTO some £40 to £50 million. APD at the increased level realises about £2 billion per year for the Exchequer. Thus the financial consequences of the claims made in these proceedings are very substantial indeed.

Because it has been the subject of legislation, the Claimants’ challenges have been necessarily confined to those applicable to an Act of Parliament. It follows, for example, that they cannot challenge the decision to increase APD on the grounds for judicial review that would be available if that decision had purely been a decision of the Executive. Most significantly, they have been unable to challenge the decision to increase APD with effect from 1 February 2007 on the ground that the Government failed to take into account a material consideration, namely the provisions of the Package Travel Regulations restricting the ability of package holiday operators to recover the duty from their customers. Thus the challenges to APD and its increase have been based on European law, which takes precedence over municipal law, and the European Convention on Human Rights, incompatibility with which would result in a declaration of incompatibility and in remedial legislation.

I turn to consider the heads of challenge to APD and its increase.

Although in 1944 the Second World War was still raging in Europe and in Asia, the USA and other states had in mind to foster the post-war development of civil aviation. The following account is taken from the website of the ICAO:

The original signatories and parties to the Chicago Convention were the majority of independent states in existence in 1944. Today, the great majority of states are parties to it. As appears from the above extract, the ICAO is an international treaty organisation. The parties to the Chicago Convention are members of the ICAO.

The Third Preamble to the Convention recorded:

When adopted and signed on 7 December 1944, the Convention was in English. French and Spanish texts were adopted by the Protocol on the Authentic Trilingual Text of the Convention, signed in Buenos Aires in 1968. Russian was added by the Protocol signed in Montreal on 30 September 1977. As amended, the final paragraph of the Convention provides that all four languages are of equal authenticity.

Despite the lofty hopes expressed at the Convention, it did not introduce freedom of the skies. Although Article 5 provided for the right of non-scheduled flights to make flights into or in transit non-stop over the territory of contracting States, and to make stops for non-traffic purposes, Articles 6 and 7 provided:

The English text of Article 15 is as follows:

Article 68, to which Article 15 refers, provides:

At the same time as the Chicago Convention, two other international agreements were concluded. The International Air Services Transit Agreement, known as the Two Freedoms Agreement, was entered into by most of the States that entered into the Chicago Convention. Only 5 States were signatories to the International Air Transport Agreement, known as the Five Freedoms Agreement, and the USA dropped out of that Agreement, preferring to conclude bilateral agreements with other States. The Two Freedoms, granted by each contracting State to the others, are the privilege to fly across its territory without landing and the privilege to land for non-traffic purposes. The Five Freedoms were the Two Freedoms plus:

Because the Five Freedoms Agreement is and was so limited in its signatories, and the Two Freedoms Agreement was and is so limited in its effect, I derive no assistance from them in construing Article 15 of the Chicago Convention.

In order to understand the issues between the parties, it is necessary to understand the distinction, which is common ground, between a charge and a tax. In this context:

The issue between the parties concerns the last sentence of Article 15. Both parties submitted that the meaning of Article 15 is quite clear, but their clear meanings differed from each other. The Claimants submit that the words “fees, dues or other charges” include a tax, such as APD, and that most passengers who pay it do so only for the right of exit from the territory of the UK, since they are flying from a UK airport to one abroad. The Treasury submits that the words “fees, dues or other charges” are restricted to charges, and do not include a tax, and therefore do not apply to APD. Secondly, the Treasury relies on the word “solely”: it submits that APD is payable in respect of passengers flying to destinations within the UK, and is therefore not payable “solely” in respect of the right of transit over or entry into or exit from its territory. The Claimants put their submission as follows in their skeleton argument:

In his reply, Mr Haddon-Cave QC put the argument differently. He submitted that “solely” refers to aircraft, persons or property. Since APD is solely payable in respect of persons, its imposition contravenes Article 15.

The general principle applicable to the interpretation of treaties is prescribed by Article 31(1) of the Vienna Convention on the Law of Treaties, which, although it came into force well after the conclusion of the Chicago Convention, is generally accepted as declaratory of existing international law:

State practice is relevant to the interpretation of a treaty. Article 31(3) of the Vienna Convention requires there to be taken into account, together with the context:

Reference to the travaux préparatoires is only a supplementary means of interpretation. Article 32 of the Vienna Convention provides:

Article 33 of the Vienna Convention concerns treaties authenticated in two or more languages:

Mr Haddon-Cave placed strong reliance on the French, Spanish and Russian texts of Article 15 as supporting the Claimants’ interpretation of “fees, dues or other charges”. The French is “droits, taxes ou autres redevances”; the Spanish is “derechos, impuestos u otros grávemenes”. (I have omitted the Russian text because of the difficulty of inserting the Cyrillic letters.) I said during Mr Haddon-Cave’s opening submissions that the French taxes seemed to me to point clearly to taxes being within the prohibition. This led to the evidence of Richard Littlewood, the Head of Translation and Interpreting at the Foreign and Commonwealth Office, being belatedly put in by the Treasury. His evidence is based on his professional knowledge of French and Spanish, and on the advice of colleagues in relation to Russian. His view is that taxe in the French text is used in the strict sense of “a compulsory levy of the same nature as a tax but intended to finance a particular public service and payable only by the users of the service” (see Cornu, Vocabulaire juridique); and that if it had been intended to denote a tax in the English sense, impôt would have been used. On this basis, the French text does not refer to taxes in the English sense. He accepted, however, that taxe often means “tax”, as in taxe à la valeur ajoutée. However, both the Spanish and the Russian texts use words that unequivocally translate as “taxes”.

Mr Anderson QC, predictably, placed more weight on the English text, a reliance I teasingly criticised as implying that, while all four texts are equally authentic, English is more authentic than the others. Mr Haddon-Cave placed considerable reliance on the Spanish and Russian texts, and on the wider meaning of taxe in French as meaning “a type of fiscal or parafiscal levy” (see, again, Cornu, Vocabulaire juridique).

Nonetheless, on the question whether Article 15 applies to a tax, as distinguished from a charge, there is, as will be seen, a difference between the authentic texts, and the question therefore arises whether the difference can be resolved by the application of Articles 31 and 32. I shall first, however, address the interpretation of the English text.

By itself, the word “dues” is apt to include taxes. However, it does not stand alone. It is in a provision headed “Airport and similar charges”, which indicates that it does not deal with taxes, and it is part of a composite phrase, “fees, dues or other charges”, which indicates that “dues” are charges; and if so, taxes are not “dues”. Furthermore, if it had been intended to include taxes in the prohibition, I think that that word would have been used, rather than the more ambiguous “dues”. Dues may be charges, and may be taxes; but “taxes” is clear and unambiguous.

More importantly, since it is not affected by possibly conflicting texts, I find the meaning of the words “in respect solely of the right of transit over or entry into or exit from its territory of any aircraft of a contracting State or persons or property thereon” to be clear. A due imposed for something other than transit or entry or exit of an aircraft (or persons or property on it) is not a due imposed solely in respect of the specified rights. This is consistent with the remainder of Article 15. It is essentially an anti-discrimination provision (or most favoured State 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 transit 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 is payable on take-off, irrespective of destination, and including destinations within the territorial State, does not discriminate against foreign airlines, and is therefore not objectionable. It is correct that a passenger on a flight going to a foreign destination may feel that he is paying a tax because his plane is exiting from the territory of the imposing State; but the tax is 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 this basis, Article 15 does not prohibit APD, whether or not taxes are within the scope of the last sentence.

I turn to consider subsequent State practice, reference to which is enjoined by Article 32(b), to see whether “it establishes the agreement of the parties regarding its interpretation”.

Mr Anderson submitted that subsequent State practice should be taken into account in the interpretation of Article 15. Although in argument both counsel referred to the travaux before State practice, logically the Court should consider State practice first, since Article 31.3(b) of the Vienna Convention requires there to be taken into account:

The subsequent practice relied upon by the Treasury is principally:

The imposition of APD by the UK Government in 1994.

The lack of any protest or complaint to its doing so in the 13 years since it was first imposed.

The fact that other states have imposed similar taxes without protest or complaint.

The lack of any condemnation of any such tax by the ICAO.

The fact that a large number of States support the imposition of the so-called Chirac tax, which, on the Claimants’ case, would also infringe Article 15.

It is unnecessary to enlarge upon (a) and (b). So far as (c) is concerned, there is an issue as to the extent to which other States have imposed such taxes. I suspect that it was as a result of my mentioning that I had had to pay a departure tax in Peru that the Treasury belatedly placed before the Court an article published in volume 28 of Fiscal Studies (2007) Indirect Taxes on International Aviation, by Michael Keen and John Strand of the Fiscal Affairs Department of the International Monetary Fund. The article includes two tables giving details of airport and trip charges in 47 States. However, the listings in those tables must be treated with caution, because, as the authors comment:

The tables are best used in conjunction with the returns made by member States of the ICAO to the Council (of the ICAO) Resolution on Taxation of International Air Transport of 14 December 1993. From the Second Edition, 1994, of those returns, one sees that:

Australia had a departure tax until 31 December 1994, when it was replaced by a charge. It made the general comment cited below.

Until 31 December 1997, Barbados had a travel tax of 20 per cent on airline tickets.

Hong Kong had an Air Passenger Departure Tax payable by every passenger unless exempted.

Ecuador imposed a tax of 10 per cent of their value on airline tickets.

India imposed a Foreign Travel Tax on every passenger leaving India by flight.

Pakistan declared that it was free to impose such taxes as it thought fit, without regard to ICAO policies (to which I refer below).

Peru imposed a tax, quantified in Indirect Taxes on International Aviation at US$43 per passenger.

From the Third Edition (2000) of the State returns, one sees that:

Austria had “a ‘Security Levy’ to be paid by departing passengers which has the characteristics of a Federal Tax”.

Ireland had a travel tax of Ir£5 on all passengers departing by both air and sea.

Norway levies “a tax … per passenger on the main routes of Southern Norway as well as on international scheduled and non-scheduled flights. The revenue from the tax accrues direct to the Norwegian Exchequer.”

On the other hand, a number of States imposed no taxes on international air transport. But what I find significant is not only the fact that a number of States imposed such taxes, but also the absence of any suggestion that their doing so constituted a breach of Article 15. Pakistan was not the only State to proclaim that it was free to levy taxation as it thought fit. In its 1994 return, Australia stated:

Furthermore, the resolution of the ICAO, which may be regarded as the guardian of the Chicago Convention, by which it was created, is inconsistent with the Claimants’ interpretation of Article 15. The ICAO’s Policies on Taxation in the Field of International Air Transport, third edition 2000 (Doc 8632) state, in the Introduction:

The Council of the ICAO is its governing body; it is elected by the Assembly, which consists of all its member States, for a three-year term, and is composed of 36 States. The Council Resolution on Taxation of International Air Transport is in my judgment inconsistent with the Claimants’ interpretation of Article 15. Its recitals do not refer to Article 15. The relevant recital on taxes on the use of international air transport is as follows:

The relevant part of the Council Resolution is paragraphs 3, 4 and 5:

Lastly, the Treasury rely on the international response to the suggestion, originated by France, that a tax should be imposed on air travel in order to provide funds for the needs of developing countries: the so-called Chirac tax. The Declaration on Innovative Sources of Financing for Development signed in New York on 14 September 2005 by the Presidents of Chile, France and Brazil stated:

The initiative appears to have received wide support. According to a document posted on the website of the French Ministry for Foreign Affairs:

The emphasis is in the original. It is evident that none of the States supporting this initiative consider the proposal to impose a tax on air tickets to be unlawful under public international law. It is not conceivable that they would have overlooked the Chicago Convention. Nor is it conceivable that no other State, or the ICAO, would have raised the question of the breach of Article 15 if it thought there had been one or that one was proposed.

There is thus substantial evidence of State practice inconsistent with the Claimants’ interpretation of Article 15 and an absence of any challenge or objection to that practice based on Article 15. In my judgment, this evidence does establish an agreement by the parties to the Chicago Convention that a tax on flight tickets, such as the APD (referred to in the above extract) is not prohibited by Article 15. It resolves the doubts resulting from the inconsistency between the different languages’ texts of the Convention.

Given that I have arrived at a clear interpretation of Article 15 without reference to the travaux, it is strictly unnecessary for me to do so. However, both parties referred to and relied upon the travaux préparatoires, and I shall shortly state my conclusions on them

I was referred to the judgments of the House of Lords in Fothergill v Monarch Airlines Ltd [1981] AC 251. Their Lordships confined the use of travaux as an aid to interpretation to cases where the text of the treaty is ambiguous or obscure (see e.g. Lord Diplock at 283; c.f. Article 32(a) of the Vienna Convention). However, Mr Haddon-Cave pointed out that the Vienna Convention permits reference to the travaux in any case “in order to confirm the meaning resulting from the application of Article 31”, as well as where the meaning is ambiguous or obscure. He did so, I assume, because his case is that Article 15 is unambiguous and clearly prohibits a tax such as APD.

Article 15 emerged as a result of consideration of the different negotiating positions of the US, UK and Canadian delegates. The USA originally proposed the following text, which was Article 9 in their draft:

Leaving aside the controversy as to the meaning of “dues, fees and other charges”, it can be seen that it was in two parts: a prohibition of dues, fees and other charges payable for transit, and a prohibition of discrimination in the levying of landing “dues, fees and other charges”. Article 22 of the US draft was a prohibition on discrimination in the levying of charges for navigational facilities and landing. Article II Section 2 of the Canadian proposal permitted a member State to impose “just and reasonable charges for the use of the airports and other facilities on its territory, which shall not be higher than would be paid by a national aircraft engaged in comparable international services”: again, a non-discrimination provision. It did not extend to taxes.

The Second Interim Report of the relevant Drafting Committee contained the following text for what became Article 15:

The next draft included an Article 15 that closely resembled the final Article, and in addition an Article 68 that duplicated it in part. That duplication led to the revision of Article 15, and the transfer to it of part of Article 68. The final form of Article 15 is as above.

The Claimants rely on the change from the US draft, which used the words “transit (including entry and exit)” to “transit over or entry into or exit from” as indicating that a difference of meaning was intended. Entry and exit were no longer part of transit, but separate, so that a tax on exit is within the prohibition, whether or not the flight exiting the territory could be described as a transit.

In my judgment, there is nothing in the travaux to indicate that my conclusion as to the meaning of Article 15 is mistaken. None of the precursors to the final Article 15 went beyond prohibiting discrimination. It would be surprising if the final text did so, at least without some indication in the open proceedings of the Convention that an extension of the prohibition was intended. It would be similarly surprising if an absolute prohibition were included as the last sentence of what is otherwise a non-discrimination provision.

I add that, in my judgment, despite my comment during his argument referred to in paragraph 53 above, Mr Anderson was right to give some primacy to the English text, not because it is more authentic than the other texts, but because the travaux were in English, and reference to them necessarily involves reference to the English texts. Furthermore, the texts in the other languages are translations from the English, and could not have been intended to change the meaning of the English.

The Claimants’ case is supported by the decision of the Belgian Council of State in B.A.R. Belgium v the Belgian State, Decision 144.081 of 3 May 2005. The case concerned a yearly tax on the operation of aircraft imposed by the Belgian local council of Zavantem on persons having a civil aircraft “regularly participating in air traffic, from and/or to the territory of the district”, the amount of which depended on the number of passengers carried. The Council of State held that Article 15 was directly enforceable in Belgian law, and that the tax contravened the last paragraph. It is sufficient to cite paragraphs 3.10 and 3.12 of the decision:

I confess to not following all of this reasoning. For example, Article 15 refers to the territory of the State, not the territory of a district within the State. In the last cited paragraph of the judgment of the Council of State, the two seem to be confused. I do not know whether the Council of State considered the English text, or State practice. While according its decision all due respect, I regret that it does not lead me to alter my above conclusion.

I should also refer to the judgment given on 18 February 1999 of the Swiss Federal Tribunal in IATA v Zurich, of the relevant parts of which I was provided with a translation. The case concerned a challenge to an emissions charge levied by Zurich Airport. The charge was considered as a charge, rather than a tax: there is nothing in the judgment of the Tribunal to indicate that there was any argument as to whether a tax is within the scope of Article 15. The Tribunal held that the charge was non-discriminatory and that it satisfied the cost recovery principle: it seems that the revenue from the charge was used to cover measures for air monitoring connected with the emissions caused by air traffic. I do not derive any assistance from the judgment.

For the above reasons, in my judgment Article 15 did not prohibit the imposition of APD, or its increase.

Article 15 of the Chicago Convention is not enforceable in our Courts unless it has been incorporated into our municipal law by our domestic or by European legislation. It has not been incorporated by our domestic legislation. The Claimants contend that it has been incorporated in our law through European law, and specifically by Article 14 of Regulation (EC) 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. My conclusion as to the interpretation of Article 15 of the Chicago Convention strictly renders the issue as to the effect of Article 14 of the Service Provision Regulation academic, but again I shall shortly state my conclusions.

The recitals to the Framework Regulation (Regulation No 549/2004 of March 2004 laying down the framework for the creation of the single European sky) (“the Framework Regulation”) include the following:

These do not indicate that the Framework Regulation is to extend to the regulation of taxes on air travel: the regulation of such taxes is unconnected with the aims of safe airspace management, air traffic control and air traffic flow management. “The principles laid down by the Chicago Convention”, referred to in recital (4), seem to me to be primarily concerned with non-discrimination in the levying of charges; the formulation in that recital does not indicate that the proposals for a single European sky extend to taxes on air travel.

The substantive provisions of the Framework Regulation confirm this view. Article 1 sets out the objective and scope of the Regulation:

It is not suggested that Article 1.3 of itself incorporated Article 15 of the Chicago Convention into EU law: clearly it did not. The objectives stated in Article 1 have nothing to do with the taxation of air travel. Article 1.3 takes the case no further.

Article 2 contains definitions of important services involved in air transport. Worth noting are the following:

The Service Provision Regulation is, as its name suggests, concerned with air navigation services and the charges for them. I refer in particular to recitals (4) and (5) and to (19), (20), (21) and (27):

Again, the limitation of this Regulation to charges for services is confirmed by its substantive provisions. Article 1 is as follows:

Article 14 itself provides:

APD is not a charge for air navigation services and is outwith the scope of Article 14. The scheme to be developed pursuant to Article 14 must be consistent with Article 15 of the Chicago Convention: essentially, it must not discriminatory and must not make a charge solely for transit, entry or exit.

The Claimants also rely on the provisions of Commission Regulation EC 1794/2006 (“the Common Charging Scheme Regulation”) and of the Commission’s “Mandate to Eurocontrol to assist the European Commission in the development of implementing rules on a common charging scheme for air navigation services” dated 9 February 2004 (SSC/1/3) (“the Mandate”). In my judgment, they take the Claimants’ case no further; to the contrary, they are inconsistent with it.

The Common Charging Scheme Regulation laid down detailed provisions for the common charging scheme which the Commission was required to establish. The recitals include:

The development of a common charging scheme for air navigation services provided during all phases of flight is of the utmost importance for the implementation of the single European sky. The system should contribute to the achievement of greater transparency with respect to the determination, imposition and enforcement of charges to airspace users. The system should also encourage the safe, efficient and effective provision of air navigation services to the users of air navigation services that finance the system and stimulate integrated service provision.

Article 3 of the Common Charging Scheme Regulation lays down principles for the charging scheme:

The charging scheme shall provide transparency and consultation on the cost bases and on the allocation of costs among different services.”

All of this confirms that, as its title suggests, the Common Charging Scheme Regulation is concerned with charges for air navigation services and not taxes.

The Claimants rely on section 3 of the Mandate:

Neither section 3 of the Mandate, nor its other provisions, suggests that the Service Provision Regulation extend to taxes, as distinguished from air navigation charges.

My conclusion as to the effect of the Service Provision Regulation makes it unnecessary for me to address the question whether the increase in APD would infringe it if that tax were within its scope.

It follows that the Claimants have not established their claim under the single European sky legislation, and in particular Article 14 of the Service Provision Regulation.

A1P1 is as follows:

Although a literal reading would suggest that legislative provisions for the payment of taxes are outside the ambit of A1P1, the jurisprudence of the European Court of Human Rights establishes that they are not: they are subject to the rights of natural and legal persons conferred by the first paragraph. It follows that such laws must also satisfy the requirement of proportionality between legitimate aim and means: see, e.g., James v United Kingdom (1986) 8 EHRR 123 at paragraph 37. It is for the Government to demonstrate that a measure that engages A1P1 satisfies the requirement of proportionality: c.f. R (Laporte) v Chief Constable of Gloucestershire Constabulary [2007] 2 WLR 46, [2006] UKHL 55 at paragraphs 38 and 106.

Formally, APD is a tax imposed on aircraft operators. As has been seen, 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 is 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 does not dispute that this financial burden entitles the Claimants to invoke A1P1: i.e. that the Convention looks at the effective financial burden imposed by the tax rather than merely the legal burden: see, e.g.: Sporrong and Lönnroth v. Sweden (1983) 5 EHRR 35 at paragraph 63.

It is because the Claimants were compelled to bear only the December 2006 increase in APD that their challenge under this head is confined to its increase. Subject to their case on Article 15 of the Chicago Convention and Article 14 of the Service Provision Regulation, they do not dispute that the increase was imposed “in the public interest” and “subject to the conditions provided for by law”. Their contention is that the increase does not satisfy the requirement of proportionality, a requirement that is particularly stringent in the case of a measure having retrospective effect, as they say the increase had.

The Treasury contends that the requirement of proportionality is satisfied. It disputes that the increase had retrospective effect. It contends that the particularly wide latitude, or margin of appreciation, accorded to the executive and to the legislature in this context makes it impossible for the Court to find that the increase in APD infringed the Claimants’ rights under A1P1.

In support of their case on the lack of proportionality, the Claimants referred to evidence given by the then Chancellor of the Exchequer and the Treasury’s Managing Director, Budget, Tax and Welfare to the Treasury Select Committee of the House of Commons. The purpose of these references was to show that the Treasury was aware of the retrospective nature of the increase, and that the evidence gave an incomplete or inaccurate account of the effects of the increase.

The report of the Treasury Select Committee was also relied upon, in part for its comments on the retrospective effect of the increase, but also for its comments on matters of Parliamentary procedure arising from the timing of increase.

In addition, the Claimants seek to rely on evidence given by the Financial Secretary to the Treasury to the Select Committee on the Environment in support of their case on APD as an instrument of environmental policy.

The Speaker of the House of Commons, while of course not seeking to interfere with the Court’s determination of the substantive issues before it, objected to the Court receiving this evidence on the ground that to do so would constitute a breach of Article 9 of the Bill of Rights and an infringement of the wider principle of Parliamentary privilege.

As will be seen, I do not think it necessary to determine the issues he raised in order to decide the substantive issues before me, but in deference to the arguments put before me I shall briefly address the principal points.

Article 9 of the Bill of Rights is as follows:

The key words here are “impeached” and “questioned”. In addition, as Mr Lewis QC pointed out, the courts further recognise that:

Toussaint clarifies, and in my view limits, the exclusion resulting from an allegation of impropriety. It establishes that it is proper for a claimant to rely on evidence of what was said by a Minister in Parliament to show what was the motivation of the executive’s action outside Parliament, in that case the compulsory purchase of Mr Toussaint’s land. He alleged that the compulsory purchase was discriminatory or illegitimate expropriation: an allegation of impropriety. He was entitled to rely on the Minister’s statement to show what was the true motivation for the compulsory purchase. It is to be noted that Mr Toussaint did not allege that the Minister had misled Parliament; to the contrary, it was alleged that what he said to Parliament disclosed his true motivation. The allegedly wrongful act in that case was not the statement to Parliament, but the compulsory purchase to which it related: see paragraphs 19 and 20 of the judgment of the Judicial Committee. Mr Toussaint was similarly entitled to rely on what the Minister said to Parliament in support of his allegation that the purpose stated in the declaration for compulsory purchase was a sham: paragraph 23.

Mr Lewis sought to distinguish Toussaint, and the earlier decision of the House of Lords in R v. Secretary of State for the Home Department, ex p. Brind [1991] 1 AC 696, on the basis of three propositions, which I take from his supplementary skeleton argument:

those cases do not deal with the question of whether (i) statements made in evidence to Select Committees by officials or others can be adduced in evidence or (ii) the extent to which it is appropriate or permissible to adduce the reports of such Committees for the purposes of supporting or defending a claim;

the Claimants are not challenging a decision of a Minister (or of the Executive generally). Their challenge is to an Act of Parliament. [Certain of the] statements to which [the Claimants] refer were made by the then Chancellor of the Exchequer and one of his officials in the course of giving evidence to the Treasury Select Committee. Such statements cannot be equated with Parliament’s reasons for enacting a particular legislative provision;

unlike Mr Toussaint, the Claimants are not simply seeking to refer to statements made during proceedings in Parliament without questioning or challenging them. The evidence of Mr Cooper (which the Claimants have not disclaimed reliance on) is that, in giving evidence to the Treasury Select Committee, a civil servant seemed to have “forgotten” a point of significance … and that the then Lord Chancellor of the Exchequer, in giving his evidence, seemed to have “forgotten” or “ignored” further points of significance …, made an “inaccurate” claim and made a statement that was “not correct” and based upon a confusion. The Claimants are thus seeking to question and challenge the various statements at issue.

In my judgment, the first two of these propositions are too widely stated. I see no basis for distinguishing between what a Minister says in the House of Commons (or the House of Lords), which may be considered by the Court in a case such as Toussaint, and what he or she says to a Select Committee. Whether what is said by an official should be received in evidence must depend on the circumstances: what he says, his authority, and the reason for which it is sought to rely on it. In general, the opinion of a Parliamentary Committee will be irrelevant to the issues before the Court (as in R (Bradley) v Secretary of State for Work and Pensions [2007] EWHC 242 (Admin) and, as will be seen, the present case), and accordingly I do not think it sensible to seek to consider the admissibility of such a report in a case in which its contents are relevant.

The difficulty with Mr Lewis’s second proposition is that the Treasury’s own evidence is of the Government’s reasons for increasing APD, and implicitly identifies the Government’s reasons (and its consideration of the impact of the increase on tour operators) with Parliament’s. The basis of the admissibility of Parliamentary proceedings under the rule in Pepper v Hart [1992] UKHL 3, [1993] AC 593 is that in defined circumstances the statements of Ministers can be taken to represent the intention of Parliament. As will be seen, it is unnecessary for me to form a view as to Mr Lewis’s third proposition.

The Claimants do not accept that the Speaker’s objections are well founded; but in fact most of the material the admissibility of which was disputed was not referred to during the course of the hearing. As Mr Haddon-Cave commented, the evidence in the case has moved on since the Claimants sought to rely on that challenged by the Speaker.

In my judgment, the Speaker’s submissions, and the authorities to which I have referred, demonstrate the importance of identifying the purpose for which evidence of proceedings in Parliament is relied upon. Like Bean J in Bradley, it is the relevance of that material as well as its origin that the Court must consider. It is necessary to consider whether this material would otherwise be admissible on or relevant to the determination of the Claimants’ substantive claims, before deciding whether its origin precludes their adducing it in evidence.

Whether the increase in APD was retrospective is to be determined objectively, by reference to the terms of the provision effecting the increase and its practical financial effects. Whether a Parliamentary Committee did or did not consider it to be retrospective is, in my judgment, irrelevant to the legality of the increase, and on that account its opinion is inadmissible.

Whether any witness gave a complete or an incomplete account of APD or its increase or the effects of the increase to a Parliamentary Committee is also irrelevant to the determination of the substantive issues before me. It is for Parliament, not the Courts, to assess the completeness and reliability of such evidence. This Court is not concerned with such matters, which do not affect or go to the lawfulness of the increase.

Similarly, whether the Parliamentary procedure by which the increase was introduced was appropriate has no bearing on its legality. That is most certainly not a matter for judicial investigation or comment.

The efficacy or otherwise of APD as an environmental measure is also, in my judgment, a question which, if relevant, is to be determined on the basis of evidence and argument before the Court, and not on the basis of the opinion of anyone whose evidence is not before the Court. There is, however, no reason why the Claimants cannot take from what has been said to or by a Select Committee points that can be put before the Court. For example, what was said by the Financial Secretary to the Treasury to the Select Committee on the Environment is not rocket science, but something that would be obvious to anyone who gave the matter some thought. The points he made can be made independently, without reference to his statement.

Thus, in the end, I do not think that the Parliamentary material referred to by the Claimants, which I have looked at de bene esse, as such advances their case.

In support of their case on proportionality, the Claimants asserted the following:

The Government made the decision to increase APD without taking into account the Package Travel Regulations, and therefore in ignorance of the impact of the increase on tour operators.

The environmental aim of the increase, i.e. to reduce air travel, manifestly could not be accomplished in relation to existing bookings of package holidays. Package holiday passengers with existing bookings would not bear the increase (or could at most be liable for the relatively small part exceeding 2 per cent of the package price if permitted by regulation 11(3)(i) of the Package Travel Regulations). A tax borne by tour operators in relation to existing bookings could not have the effect of reducing air travel.

It would have been legislatively and administratively easy to have exempted existing bookings.

The increase was retrospective. For the purposes of A1P1, a more stringent test is applied to retrospective taxation than is applicable to tax measures that apply to future transactions only.

Accordingly, the Claimants contended that, in increasing APD as it had done, the State had failed to strike “a fair balance between the demands of the general interest of the community and the requirements of the protection of [their] fundamental rights”, and had imposed, albeit temporarily, an “individual and excessive burden” on the tour operators (see, e.g.: Sporrong and Lönnroth v. Sweden at paragraphs 69 and 73):

In response, the Treasury contended:

If the effect of the Regulations had originally been ignored when the decision to increase APD had been made, their effect was taken into account by the Government when it decided to make no change to its original decision.

The environmental benefits of the tax were not the only reason for its increase: the raising of revenue was an important consideration, and the exclusion of pre-booked flights would have substantially reduced that revenue, by, as the Claimants themselves assert, between £40 and £50 million.

Previous postponements of the introduction or increase of APD were not comparable.

It would have been administratively and legislatively difficult to exempt existing bookings.

The increase was not retrospective: it applied only to future flights.

The risk of the increase in APD was a risk of the tour operators’ business that they could be expected to deal with.

Under the Convention, an especially wide latitude was permitted to the executive and legislature in determining whether tax measures infringe A1P1. The decision to increase APD and not to exempt existing bookings was within the margin of appreciation of the Government.

The relationship between the first and the second paragraphs of A1P1 has been explained by the European Court of Human Rights on numerous occasions: see, e.g., its judgment in Gasus Dosier- und Fördertechnik GmbH v. The Netherlands (Application no. 15375/89):

The Convention requires that a measure engaging the first paragraph of A1P1 should be proportionate to the object for which it is imposed. It is therefore necessary to identify that object or those objects. According to the Defendant’s letter in response to the Claimant’s solicitors’ letter before claim:

The classic statement of the requirement of proportionality is that of Lord Steyn in R v. Secretary of State for the Home Department ex p Daly [2001] 2 AC 532 at paragraph 27, namely:

However, the application of this test requires modification, or at least caution, when it is sought to apply it to a tax measure such as the imposition of or increase in APD. Taxation is one of life’s certainties: it is essential in a modern society in order to fund its government and public services. As Benjamin Franklin famously remarked: “But in this world nothing can be said to be certain, except death and taxes.” Assuming that a tax measure is not disguised confiscation it necessarily involves taking property from the citizen, and therefore a limitation on his fundamental right under the first paragraph of A1P1. In relation to the requirement of a rational connection, if one, if not the only, legislative objective is to raise revenue, the rational connection is obvious. In the case of the increase in APD, there were two such objectives, the one to raise revenue and the other to reduce travel by air. It is not disputed that in relation to those whose flights had not yet been booked, the increase was generally rationally connected with both of these objectives. In relation to those passengers whose package holidays had already been booked when the increase was announced, the rational connection with the second objective was either lacking or speculative.

Where one of the objectives of a measure is to obtain revenue, it is difficult, if at all possible, to require that the means used “are no more than is necessary to accomplish the objective”. Any tax can, in theory, be replaced wholly or partly by a different tax; an increase in any tax can be replaced by an increase in a different tax or the creation of a new tax. It is for this reason that when the abolition of specific taxes (such as inheritance tax or stamp duty on property transactions) are discussed, figures are often given for the amount the standard rate of income tax would have to be increased in order to replace the lost revenue. Similarly, government borrowing is sometimes seen as an alternative to increases in tax revenues. Conversely, a reduction in government spending may be an alternative to an increase in a tax; but it may be, and, since tax revenues are not hypothecated, I would think normally would be, impossible to identify what specific expenditure would be at risk if a particular tax were not increased. For example, if the Government were planning to build a particular hospital at a cost of £50 million, it would not be sensible to balance the need for that hospital against the impact of an increase in APD in order to consider the lawfulness of the increase under the Convention.

The latitude to be accorded by the judicial branch of government to the executive and legislative branches varies with the context: see the speech of Lord Nicholls in A v Secretary of State [2004] UKHL 56, [2005] 2 AC 68 at paragraph 80:

The right engaged in the present case is less important than Convention rights under, for example, Articles 2, 3 and 5. In this connection, it is pertinent to recall what the European Court of Human Rights said in James v UK (1986) 8 EHRR 123 at paragraph 42:

Thus in the Gasus case, referred to above, the Court held that a measure entitling the Netherlands tax authorities to seize and to realise property in the possession of a defaulting tax payer that belonged to the applicant, who had sold that property subject to its retention of title, was not disproportionate. It expressed the approach of the Court in such a case as follows:

In my judgment, there is no difference between the approach of the Court to a measure to secure the payment of taxes in the sense of that considered in Gasus 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 must be shown that the legislature’s assessment is “devoid of reasonable foundation”.

Furthermore, the jurisprudence of the European Court of Human Rights does not justify this Court in declaring a tax measure incompatible because its objects could have been secured more efficiently or effectively by a different measure. The cases of James and Gasus show that the fact that a particular class of persons is subject to a measure that engages A1P1 is a factor to be taken into account, but does not of itself lead to a conclusion of incompatibility.

Mr Anderson did not dispute that the increase in APD had been decided by the Government in ignorance of the Package Travel Regulations. Given that the Treasury had not produced any minute in which its impact had been addressed, and the careful drafting of the evidence on behalf of the Treasury, which omitted any clear statement that the effect of the Regulations had been considered before they were brought to its attention by the Claimants after the Pre-Budget Statement, it was in any event inevitable that I would find, and I do find, that they were ignored: that in effect the Government forgot about them. To be fair, the Defendant’s evidence was tantamount to an admission that the Regulations had originally been ignored: I refer to Mr Troup’s first witness statement:

That this should have occurred does not speak well of the process of decision-making by the Treasury. However, the Regulations and their effect on the announced increase had been emphatically brought to the attention of the Government by the Claimants and others, in correspondence and at the meetings of 11 and 12 December 2006. It is, I think, obvious from the account of the former meeting, as well as Mr Troup’s evidence, that Ministers had been consulted by Mr Troup and other officials as a result of the representations received from the Claimants and others, and had decided that the increase would be implemented as announced despite its effect on tour operators. Hence, as recounted above, Mr Troup was able to and did inform the industry representatives at the meeting of the 11 December that:

The Claimants do not suggest that the environmental considerations that led to the increase in APD were not a legitimate governmental object (although they rightly point out that, given other government policies that aim to increase the capacity of UK airports, the increase will not bring about an absolute reduction in air travel, but no more than a reduction from what it would be without an increase). However, the increase could not have affected the decisions of tour operators’ customers whose holidays had already been booked, so that (subject to the matter referred to in paragraph 151 below) there could be no environmental justification for its burden being borne by the operators.

The difficulty with this part of the Claimants’ case, however, is that reasons and justification for the increase in the tax were, as has been seen, plural. In his witness statement of 4 May 2007, Edward Troup, the Director of Business and Indirect Taxes in H M Treasury, stated:

More specifically, in relation to the Treasury’s refusal to postpone the introduction of the increase, or to exempt existing bookings, in his second witness statement Mr Troup said:

I have no doubt that the loss of revenue involved in exempting existing bookings or in postponing introduction of the increase was a, if not the, major consideration of Ministers in refusing any concession to the operators. A concession would, I assume, have involved either an increase in some other tax, or an increase in government borrowing, or a reduction in government spending. If the concession had involved postponing the introduction of the increase generally (i.e., for all passengers by air), the loss of revenue would have been in the order of £100 million rather than £50 million. An exemption limited to existing package holiday bookings would have been seen as unfair and discriminatory by airline operators, such as British Airways, who were represented at the meeting of 11 December 2006, and complained about the early date for the introduction of the increase; and in the event British Airways did not pass on the increase to passengers who had booked their flights before the announcement.

With regard to the precedents relied on by the Claimants, it is of course relevant that on previous occasions the Government of the day had accommodated the tour operators’ position. But not all the previous instances were materially identical. The postponement in 1994 was in the unforeseen (by the industry) introduction of a new tax, not an increase in an existing tax. Furthermore, the fact that it was politic and reasonable to postpone increases in the past does not make it unreasonable or unlawful to have refused to defer the introduction of the increase on this occasion.

However, I do not accept the Treasury’s submissions on the legal and administrative difficulties involved in an exemption for tour operators’ existing bookings. The contract between customers and tour operators is necessarily a written contract, as required by regulation 9 of the Package Travel Regulations. The Regulations already impose requirements by reference to the time of the conclusion of those contracts: see regulation 7. In practice, the customer has to sign an application form and to pay a deposit. It would not be difficult to draft a legislative exemption in relation to contracts concluded before 6 December 2006. Section 38 of the Finance Act 1994 requires aircraft operators to keep accounts and to make returns in respect of APD. I see no administrative or legal reason why a requirement could not have been imposed on tour operators to certify to aircraft operators those passengers whose contracts had been made before 6 December 2006 and to submit to an audit of such certificates by Her Majesty’s Revenue and Customs. The requirements of signed booking forms and payment of a deposit would have made the certificates easily auditable. There would have been an increase in the administrative burden on tour operators and flight operators, and on HMRC, but it would not have been considerable.

However, I am 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. While some airlines were protesting that in the time available they would not be able to collect the increase from their passengers, and British Airways decided not to do so (doubtless as much for the sake of its relations with its customers as for reasons of administrative difficulty), others (such as Ryanair) did collect the increase. It would have been more difficult to identify and to audit the dates of bookings of airline flight tickets by members of the public, who do not necessarily pay when booking, and whose bookings may be made on the telephone. Perhaps more significantly, the revenue loss would have been doubled if the exemption had applied to all passengers. And so I think that there were substantial reasons not to defer or to exempt existing package holiday bookings.

The Treasury’s submissions on retrospectivity were consistent with the footnote to the minute of the meeting of 11 December 2006 (as to which see paragraph 26 above) and suggested an all-or-nothing test. However, I do not consider that issues as to the retrospective nature of a government measure are necessarily all or nothing. A tax on flights taken before PBR day, or on contracts already entered into, would have been obviously and objectionably retrospective, legally and practically. But in my judgment, a measure is retrospective in its effect to the extent that it affects the fulfilment of transactions concluded before its announcement. Thus, in Chebaro v Chebaro [1987] Fam 127, the application of the Matrimonial and Family Proceedings Act 1984 to applications for financial relief made after the Act came into force in relation to marriages dissolved before it came into force was described as retrospective. The increase in APD was practically a retrospective measure, since it was payable on flights that had already been contracted when it was announced.

The extent to which a measure has retrospective effect is clearly an important consideration in assessing its lawfulness under A1P1, but it does not of itself render the measure incompatible: see A, B, C and D v UK (1981) 23 DR 203.

In my judgment, it is important, when assessing the question of proportionality, to consider the financial and business context. The impact of APD on tour operators derives not simply from the tax legislation itself, which imposes no tax burden on them, or on the Package Travel Regulations alone, but on the business and contractual arrangements of the tour operators. I take it that flight operators normally universally pass on the burden of APD to passengers who have bought a ticket or to tour operators in the case of package holidays. Increases in tax rates (and other costs) are a known business risk. In relation to APD, an increase had been expected by airlines, although not one as great as was made (see the statement of Danny Bernstein, the chairman of the British Air Transport Association, at the meeting of 11 December 2006), and Mr Cooper himself states that “the possibility of an increase in APD had been trailed in previous months”. Nonetheless, as mentioned above, some (but by no means all) tour operators have a “no surcharge guarantee”: i.e., they bear the risk of increases in a tax, or in, for example, fuel prices, or other circumstances increasing the cost of providing a package holiday after the date of a booking: see, e.g., the booking terms and conditions of Voyages Jules Verne and Kuoni. Such operators must make allowance for such risks in their prices. As is notorious, fuel surcharges imposed by airlines have been substantial, yet would be absorbed by such operators.

Furthermore, at least one substantial operator, Thomas Cook, explicitly and publicly increased its brochure prices by £5 to recoup the cost to it of the increase in APD: i.e., it charged customers who booked after the date of their announcement in February 2007 to recoup the costs they had incurred in respect of passengers who had booked their holidays with them before 6 December 2006 for departures after 1 February 2007. Thomsons was said to be “baffled” and “speechless” at this decision, and Mr Cooper had thought that the possibility of such recovery was “wholly unrealistic”, but Thomas Cook clearly thought it to be in its financial interests. Perhaps more importantly, there is nothing (other than competitive and market pressures) to prevent tour operators from seeking to increase their profit margins in the future in order to recover the costs of the increase in APD. That future price increases might deter future customers from taking package holidays involving air travel would actually fulfil one of the Government’s objectives.

It is also relevant that British Airways, although not subject to the Package Travel Regulations and apparently contractually entitled to pass on the cost of the APD increase to its passengers, took the commercial decision not to do so. It thus does not follow that if tour operators had not been constrained by the Regulations they would all necessarily have passed on the increase to their customers.

Finally on the facts, none of the 12 tour operators constituting the Claimants claim to have suffered specific hardship as a consequence of the increase in APD. First Choice and Kuoni are the only two companies to have volunteered the relevant figures. The cost of the increase in APD is said to be £4.5 million to First Choice Holidays and £1.4 million to Kuoni UK. For the financial year ending in December 2006 First Choice Holidays reported a turnover of £2.715 billion and a pre-tax profit of £97.5 million. For the financial year ending in December 2005 Kuoni Travel Limited (the UK arm of Kuoni) reported turnover of £322 million in the UK and UK pre-tax profits of £28 million.

The hurdle for the Claimants on A1P1 is very high. They must 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 is 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, and it may have been adhered to under a mistaken view of the difficulties of exempting tour operators’ existing bookings, it is impossible to conclude that the measure was devoid of reasonable foundation. The revenue involved was considerable, and the burden on the Claimants was an incident of their business. In my judgment, the requirement of proportionality was satisfied.

Article 49 is so far as material as follows:

The first question to be addressed is: whose freedom to provide services is said to be restricted by the governmental measure in question? The Claimants contend that it is the freedom of service providers in other parts of the EU, such as hoteliers and restaurateurs, to provide services for tourists whose travel to the place where they provide services has been made more expensive by the increase in APD.

The Claimants’ case is summarised in their skeleton as follows:

The Treasury contends that Article 49 is not engaged:

In addition, it is contended that even if Article 49 is engaged, the increase in APD was justified.

It is to be noted that under this ground of challenge the fact that by reason of the Package Holiday Regulations the increase was, for a period, borne by the Claimants, does not form part of their case.

I have to confess to viewing this part of the Claimants’ case with caution. They originally limited their case under Article 49 to the increase in APD announced in December 2006. However, if the increased APD is indeed a restriction on freedom to provide services, it is difficult to see why Article 49 was not infringed when APD was first imposed: the real value of APD is now approximately what it was when it was introduced in 1994. It seems to me that logically this ground of challenge goes to the tax itself, and not merely its recent increase. This, it seemed to me, is confirmed by the Claimants’ skeleton argument, which, while asserting in paragraph 212:

The Claimants’ uncertainty as to whether their challenge goes to the tax as such or only as to the increase in its amount does not give confidence in their analysis of their case. I also point out that the Claimants could not rely on Article 49 in relation to the burden of APD borne by them as a result of the Package Holiday Regulations. Since none (or very few) of their customers who had booked their holidays before 6 December 2006 bore the increase in the tax, none (or very few) of those customers would have been deterred by it from taking their holiday and receiving services from EU service providers.

Furthermore, if APD is a restriction on freedom to provide services within the Community, it is curious that no one, including the Commission, had ever previously complained about it during the 13 years of its existence.

The Claimants’ case under this head was criticised as inconsistent in another respect. In their solicitors’ letter of 31 January 2007, they alleged that it was their own freedom to provide services that had been restricted:

This criticism is not entirely fair. The Claimants do allege that their right to buy and to sell services is impeded by APD. But this is consequential on the allegation that the service providers in the EU have their right to provide services to the Claimants or their customers restricted by the tax, because it results in fewer package holidaymakers accessing their services. The dependence of the claim under this head on the alleged restriction on the rights of service providers in the EU was implicitly admitted in paragraphs 217 and 218 of the Claimants’ skeleton argument. Referring to the above-cited extract from the Treasury’s Detailed Grounds, they stated:

In these paragraphs, the Claimants allege not a restriction on their right to provide services, but a sufficient interest in the alleged wrongful restriction on the rights of the EU service providers to provide services. As Mr Anderson pointed out, it is not suggested that APD affects the prices which EU service providers charge tour operators.

Article 49 protects not only the right to provide services but also the right to receive services. In Graziana Luisi and Giuseppe Carbone v Ministero del Tesoro [1984] ECR 377 the European Court of Justice held, at paragraph 16:

Article 49 is on the face of it of wide import. Its application to tax measures requires particular caution. That every member of the EU must impose taxes goes without saying: it is itself financed from the proceeds of a tax (VAT), and there are provisions of the EC treaty that presuppose that Member States levy indirect taxes (see paragraph 65 of the Advocate General’s opinion in Viacom, cited below). Any indirect tax on goods is liable to inhibit the demand for those goods, and therefore to inhibit their importation from other EU states. Even a direct tax inhibits consumption of goods and services, and therefore may affect freedom of movement of goods and services. Thus too general an application of Article 49 would have unintended and unacceptable consequences.

Mr Anderson submitted that for this reason the Court of Justice has subjected the application of Article 49 to a number of what he termed filters, which I understand to be factors which, if applicable, exclude a finding of breach. However, the first of these, discrimination, is not a filter, but a factor leading to a finding of breach. Nonetheless, if it is a necessary factor, its absence would mean that the measure in question does not infringe Article 49.

Taxes that discriminate between national and inter-EU services and service providers will be held to infringe Article 49. Thus, in Stylianakis v Dimosio (Case C-92/01) the Court of Justice considered an airport tax imposed by the Greek Government the amount of which varied with distance travelled: passengers on flights between 100 km and 750 km paid an amount equal to ECU 10, while those travelling more than 750 km paid twice that sum. The doubled tax covered all international flights, including all flights between Greece and other EU states, other than only one, that between Corfu and Rome; no domestic flight covered more than 750 km, and therefore no domestic flight was subject to the higher tax rate. The Court held that the tax infringed Article 49, because it discriminated without justification between domestic flights and flights to other EU states. There is nothing in the judgment of the Court or in the opinion of Advocate General Alber to suggest that the tax infringed Article 49 simply because it made travel to other EU countries more expensive: i.e. that the tax would have been held to have infringed even if the same amount had been payable for travel to other EU countries as was payable for domestic flights. The Court’s answer to the question referred to it related to Article 3(1) of Council Regulation (EEC) No 2408/92, but its judgment discussed Article 49. The answer was as follows:

It is also relevant to consider the formulation of the Advocate General, whose conclusion was in essence accepted by the Court:

In my judgment, the judgment and answer of the Court and the opinion of the Advocate General are inconsistent with the proposition that a non-discriminatory tax on air travel infringes Article 49. So too is the formulation of the general rule in Watts at paragraph 94:

Mr Anderson’s second filter is that measures the effect of which is uncertain or indirect will not be held to breach Article 49. For this proposition he relied on the judgment of the Court of Justice in Peralta (Case C-379/92) [1994] ECR I-3453. That case concerned an Italian law imposing restrictions on Italian vessels in relation to the cleaning and discharge of their tanks outside Italian territorial waters. The defendant contended that this restriction made it more expensive to transport goods between other EU states and Italy. Thus the case concerns free movement of goods rather than freedom to provide services. Article 30 of the EC Treaty provides:

The Court said, at paragraphs 23 to 25:

I accept that the same principle must apply to Article 49. Mr Anderson submitted that the effect of APD on the provision of services by EU service providers is too uncertain and indirect to involve a breach of Article 49. The claim assumes that tour operators will pass on the tax to their customers (see paragraph 224 of the Claimants’ skeleton set out above at paragraph 157). The effect is indirect since the tax is not imposed on the EU service providers.

While I accept that the consequences of the tax are uncertain, I am not entirely sympathetic to this part of Mr Anderson’s submission. The Government seeks to justify APD politically, factually and legally on the basis that it has the effect of reducing air travel. It scarcely lies in its mouth to justify the tax in terms of Article 49 on the basis that this effect is too uncertain. However, so far as the EU is concerned, air travel cannot be looked at in isolation. We now have a speedy rail link to the Continent. Much of the EU can be reached by trains travelling much faster than those in the UK. Ferry crossings are now faster than once they were. It seems to me to be uncertain whether the effect of APD will be to diminish travel to EU countries, or to lead to some holiday makers travelling otherwise than by air. In addition, the comparative cost of UK holidays is presumably relevant to holiday makers’ decisions as to whether to take their holiday abroad. However, travel and accommodation and catering are notoriously expensive in the UK. There is no expert or market evidence before me on these comparisons. What is I think clear is that the effect of APD and its increase on services provided in the EU is uncertain.

But that is not the end of this point. In R (Countryside Alliance) v Attorney General [2006] EWCA Civ 817, [2007] QB 305 the Court of Appeal considered the contention that the ban on the hunting of wild animals with dogs contravened Article 49, in that it restricted the freedom of providers of livery and other services to provide those services to UK hunts. The Court adopted Robert Walker LJ’s summary in R (Professional Contractors Group) v IRC [2001] EWCA Civ 1945; [2002] STC 165 at paragraph 74:

The Court of Appeal said, at paragraph 155:

This formulation could be applied to APD. I accept that it does not have a direct and demonstrable inhibiting effect on the supply of services by EU service providers. What it may do is render the market for EU services less attractive to UK tourists. Its effect is not direct and it is not demonstrably inhibiting.

Mr Anderson’s third filter is the modesty of the tax charge. For this he cited the judgment of the Court of Justice in Viacom Outdoor SrL v Giotto Immobilier SARL [2006] 1 CMLR 47. This case concerned an advertising tax imposed by the municipality of Genoa on bill posters. The tax, it was argued, restricted cross-border advertising. The Court concluded that it did not:

The italics are mine. Quite how small a charge must be to qualify as “modest” is not clear. I can see that £10 may be a modest charge when imposed on a full price air ticket. It is less obviously modest in relation to a low-cost airline ticket. I do not have the information before me to enable me to judge whether it is modest in relation to the cost of charter flights to the EU. But the appropriate comparator is presumably the cost of a package holiday, including accommodation. APD is, I would have thought, a modest charge in this context.

In the end, all these points have to be assessed. In my judgment, the principal point is that APD is not discriminatory: it applies (with a minor exception) to both EU and domestic flights at the same rate. Its effect is not direct or demonstrably inhibiting. In the joined cases Mobistar SA v Commune de Fléron and Belgacom Mobile SA v Commune de Schaerbeek [2005] 3 CMLR 46, the Court of Justice considered the contention that a tax on mobile telephone operators’ transmission pylons, masts and antennae, which it was said affected the cost of telephone calls from Belgium to other EU states, infringed Article 49 (then numbered 59). The Court said:

In my judgment, this reasoning applies equally to APD. It does not infringe Article 49.

If I am wrong on the application of Article 49 to APD, the question is whether it can be justified and satisfies the test of proportionality.

It is clear that the requirement of proportionality is applied more strictly in EU law than under the Convention: see the discussion of the Court of Appeal in the Countryside Alliance case at paragraphs 158 and 159. It is also clear that the protection of the environment is an objective that may justify a measure that would otherwise infringe Article 49: c.f. Commission of the European Communities v Kingdom of Denmark, case C-302/86 [1988] ECR 4607.

The Claimants’ case on proportionality is summarised in paragraphs 249 to 251 of their skeleton argument:

These paragraphs are, in my view, justified factually. But, in my judgment, these facts do not justify a finding that a tax measure is unjustified and is disproportionate. Although the test is more stringent, much of what I have said about the difficulty involved in assessing proportionality under the Convention applies equally in this context. Given the modest amount of the tax, the fact that aviation is otherwise very lightly taxed, the fact in particular that APD is 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, I would hold that APD is 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 Claimants have failed to establish a breach of Article 49.

The Claimants have not established any of their grounds for challenging APD or its increase. The claim for judicial review will be dismissed.