The straw that broke the student pilot’s back?

With the UK Chancellor’s Autumn Budget Statement just released, there would appear to be no new tax breaks or other funding assistance on offer for individuals enrolling on commercial pilot training programmes, once again leaving them with no formal ‘student’ recognition from Government.

Loganair CEO Jonathan Hinkles calls the situation anachronistic, explaining that it stems from the 1970s when airlines and, in the case of Air Traffic Controllers, Government, tended to pay for the training of their future employees, and so privately funded pilot training was justifiably taxed as it tended to be undertaken by individuals who wanted to gain recreational pilot licences rather than commercial ones.

“Fast forward to 2023 and we now have a situation where those Government-paid pathways are long closed, yet the cost of pilot training is an insurmountable barrier to many superbly capable candidates from the broadest range of background,” says Hinkles.

The UK is one of the only European nations to impose VAT on commercial pilot training programmes. Belgium and the Netherlands also charge VAT on commercial pilot training, but aside from the fact that there are established procedures to claim this tax back, as Johnathan Hinkles adds: “It’s straightforward for anyone in EASA-land to go to another country, avoid VAT and obtain an EASA licence which is immediately valid in their home country.”

The UK is therefore in a unique position, and not just because of the new licensing system post-Brexit which means EASA licences are no longer recognised in the UK, but also because British student pilots are the only ones who have to pay an additional 20% tax rate on top of their training fees and are then unable to claim it back. Even more strange is the fact that there are UK CAA-regulated Approved Training Organisations (ATOs) elsewhere in the world which – by virtue of being located outside of the UK – don’t have to charge VAT on their training programmes.

This means that not only are UK ATOs at a cost disadvantage when compared with EASA ATOs, but the playing field isn’t even level across the UK CAA-regulated pilot training industry. Of the four UK-based ATOs providing integrated commercial pilot training programmes, none of them conduct flight training in the UK any longer, other than the Instrument Rating module which regulations dictate must be conducted in UK airspace. Instead, they all operate ‘fair weather’ bases, either in the US or continental Europe. It does not take an economist to realise that UK PLC could make a net gain in recovering this business back to the UK through flight training tax breaks, but for some reason Government remains blind to this potential benefit.

It is fair to state, however, that the UK flight training industry hasn’t exactly helped itself in the past when it comes to tax relief. The last time that flight training programmes were afforded tax breaks was in the form of a National Vocational Qualification (NVQ) scheme that opened in the late 1990s, only to close shortly thereafter.

The NVQ offered a 23% tax break to individuals wishing to become commercial pilots / flight instructors. Unfortunately, it was abused by a small number of flight schools, who offered it pretty much universally to all of their PPL students, irrespective of whether or not they intended to pursue a commercial pilot career. As a result, the tax break was short lived with then Chancellor Gordon Brown removing it in 1999 after the abuse had come to light – it was even referenced in the Chancellor’s Spring 1999 budget speech.

So, is it a case of once burned twice shy? Since the late 1990s NVQ debacle there have been continued appeals to Government to provide commercial pilot training tax breaks, a few of which FTN has been directly involved in. The stock answer meted out by HM Treasury has instead tended to be that it’s an EU law that only allows Government recognised educational institutions to waive VAT on educational programmes and commercial flight schools don’t fall into this group, meaning it’s always been outside of UK Government’s control.

Ignoring the fact that the rest of Europe were apparently happy to give this EU diktat a good ignoring, this course has been an obsolete excuse following Brexit, and so perhaps HM Treasury would be willing to look at the issue again? Apparently not, would appear to be the answer. The latest excuse is that HM Treasury doesn’t believe that tax breaks provided to the flight training industry would be passed onto its customers.

Back in September, during a presentation to the Department for Transport on future financial protection measures for cadet pilots, brought about after the collapse of ATOs Tayside Aviation and FTA Global, Tim Loughton MP asked Government to re-consider VAT removal on flight training. The response from a former Treasury minister was that these type of tax breaks don’t work as the savings are generally absorbed by the training provider and not passed onto the customer, citing prior experience of this in other industries.

There is another argument for Government, of course, in that if airlines aren’t willing to provide financial assistance for their future employees’ training (as they did back in the 1970s) then why should Government feel obliged to step in?

For the likes of Loganair, it’s not a case of not wanting to, but rather the fact that they tend to be viewed as a ‘feeder’ airline when it comes to employing low hours pilot graduates. While no doubt grateful to get their first foot on the ladder mof an airline pilot career with regional airlines such as Loganair, new professional pilots do tend to have ambitions to move to ‘mainline’ operators as soon as they’ve gained the requisite experience to make them eligible to apply as ‘direct entry’ pilots. As such, Loganair has a high pilot attrition rate and so funding their pilots’ training only to then see them decamp elsewhere doesn’t make much economic sense.

A financial bond is one option, but as the ‘grass is greener’ with larger airlines, in terms of pilot pay, history has proven that pilots are prepared to pay off these bonds in order to be permitted to move on.

Loganair’s Johnathan Hinkles has a stark warning for UK Government, advising that if something isn’t done to help students fund their flight training then airlines may soon have to start culling their operations: “If we are to dodge the wholesale closures of regional air routes being seen in the USA and Australia, we need to change here in the UK whilst there’s still time to make a difference,” says Hinkles, advising that if nothing is done to improve the situation then in as little as three years his airline may have to start cancelling flights due to a lack of pilots.

But perhaps more than anything, it’s the fact that limiting entry to an airline pilot career to an ability to pay, rather than an ability to do the job, that frustrates Hinkles so much, especially, as he argues, the chances of employed pilots being able to afford to pay back student loans is higher than in many other professions: “It’s not right that many great budding pilots can’t pursue their dreams because they can’t afford to. For the UK Government, the prospect of payback of a student loan from a pilot is arguably greater than many other professions and there’s no fiscal risk to Treasury in making the change.”

Author: FTN Editor

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