UK Budget: Heathrow warns government must not 'jeopardise competitive position'

Europe's busiest airport appeals to UK Chancellor Rachel Reeves not to squeeze aviation industry for tax cash

Heathrow is at the centre of UK trade, and last year handled more goods than all other UK airports combined. Photo: Heathrow Airport

London's Heathrow Airport has appealed to UK Chancellor Rachel Reeves not to milk the aviation and tourist industries for much-needed tax revenue, warning its competitive position could be at risk.

Reinstating tax-free shopping must be a key part of a broader national tourism strategy,

Sally Ding

Heathrow's chief financial officer Sally Ding told The National that those who run Europe's busiest airport are "really pleased that the new government recognised that the aviation industry is very important for economic growth", and that "Heathrow plays a vital role". What they really want to see from the government, however, are "cross-department, joined-up policies that should put aviation in a more competitive position, rather than jeopardise our competitive position”.

Sally Ding, the chief financial officer at Heathrow Airport. Photo: Heathrow Airport

As the country's largest port, Heathrow is at the centre of UK trade, with 234 destinations including many in the US, China and the UAE. In 2023, Heathrow handled 1.43 million tonnes of goods worth £198.5 billion, more than all other UK airports combined. Meanwhile, passenger numbers at Heathrow are continuing to rise, and are up 6 per cent for the nine months to the end of September, to 63.1 million. That has prompted Heathrow to raise its full-year 2024 passenger forecast to a record 83.8 million.

Growing capacity for both cargo and passenger traffic at Heathrow means the airport is constantly looking to expand. It will invest more than £1 billion this year in its expansion plans, which include a new baggage system for Terminal 2.

A plane flies over houses on its way to land at Heathrow Airport. Getty Images

However, an issue coming back into the spotlight is the construction of a third runway. Ms Reeves is on record as having no objection to the third runway, provided stringent environmental criteria are met, and much of the business sector is in favour of it given the economic expansion it should bring. But the Mayor of London, Sadiq Khan, and local groups, are vehemently opposed to it on the grounds that it will increase air and noise pollution in West London.

For its part, Heathrow has gone rather quiet on the subject in recent years, preferring to concentrate on more tangible and immediate areas of the airport's expansion. “We are reviewing that plan [for the third runway] internally and we want to make sure we take time to get that plan right," Ms Ding told The National.

"We want to make sure all the facts and data are correct, and the plan is fit for the future and will meet the four tests met by the government. The plan is important for this country, and we want to make sure it supports economic growth.”

Air passenger duty

The passenger numbers alone are always a tempting target for tax raising. In March Jeremy Hunt, who was then the Conservative chancellor, increased the rate of air passenger duty (APD) for premium economy, business class and first class tickets, a measure that is set to take effect next year. Most travellers won't realise they are paying APD as it is included in the price of the ticket. It is easy for the government to collect, but airlines complain it risks a reduction in demand.

The charge varies depending on flight class and destination. At the moment, APD adds £7 to the cost of a domestic flight in economy class and £202 for a premium ticket to long-haul destinations in Asia, Australasia or Latin America. Most passengers going to (or coming from) Europe or North Africa will pay £13. For private jets, the tax levied is considerably higher.

For example, from April next year a family of four travelling to Singapore could pay almost £900 to the UK government just to leave the country. This works the other way as well, so a steep rise in APD in next week's budget might deter inbound tourists.

For its part, Heathrow said "any increase in tax on aviation needs to be ring-fenced to support the green transition of the sector, to protect the sector's ability to support the UK economy in the long term. Without this, higher APD will mean the UK aviation sector struggles to compete globally."

'Tourist tax'

While a large extra rise in the APD could prove a deterrent to incoming tourists given the rise in ticket prices, another problem awaits them if they do make the journey: the lack of VAT-free shopping, or the so-called "tourist tax".

Until January 2021, tourists could claim the VAT back on purchases they made in the UK. That retail incentive was removed by Rishi Sunak when he was chancellor, before he became prime minister. Much lobbying took place by senior figures in the UK's retail and hospitality sectors, as well as from Heathrow itself, to reinstate VAT-free shopping for tourists and several arguments were made citing the millions of pounds lost, as overseas tourists chose other destinations in the EU to splash their cash.

UK Chancellor Rachel Reeves. Reuters

Before his budget in March, Jeremy Hunt tasked the Office for Budgetary Responsibility (OBR) to carry out a review of the VAT Retail Export Scheme, but in the event decided not to stop the so-called tourist tax. The OBR estimated that bringing back VAT-free shopping for tourists would cost almost £1.5 billion in lost revenue over the next three years. The question now is whether or not Ms Reeves will make the same decision in a week's time.

“VAT [-free shopping] is one of our asks of the government to be considered, because it puts the UK in a much less competitive position, not only in the aviation industry, but across the retail industry as well," Ms Ding told The National.

Meanwhile, Dee Corsi, chief executive of the New West End Company, which represents several large retailers in London, said the absence of VAT-free shopping means the government is "failing to unlock [tourists'] true spending power, with the likes of Paris and Milan reaping the rewards instead".

"Reinstating tax-free shopping must be a key part of a broader national tourism strategy," she told The National. "It’s a crucial step towards boosting the inbound tourism economy and restoring the UK's global competitiveness."

But some analysts say VAT-free shopping is unlikely to be reintroduced in next week's budget, not because the sums don't add up, but because the politics won't allow it. “There is clearly an economic argument for reinstating tax-free shopping," Diane Wehrle, founder and chief executive of Rendle Intelligence and Insights, told The National.

"However, while I would like to believe that the numbers don’t lie and it would be a realistic policy change, with the government’s focus on workers and working people and the need for strong optics on this, I believe that their priorities for this budget will be elsewhere.”