Context
The Fiscal Architecture analysis attributes the full £6.8 billion in consumption taxes to households when calculating the net household burden. This is a deliberately conservative treatment. In practice, a portion of these taxes falls on businesses rather than on UK households. This appendix sets out the reasoning and estimates the magnitude of the non-household incidence.
Why the Conservative Treatment Was Adopted
Tax incidence, the question of who ultimately bears the economic cost of a tax, is one of the most contested areas of public finance. The statutory incidence (who writes the cheque to HMRC) and the economic incidence (whose real income is reduced) often differ, and the split depends on demand and supply elasticities that vary by market, time horizon, and competitive structure.
Rather than embed contested incidence assumptions into the headline fiscal figures, the macro analysis conservatively attributes all consumption taxes to households. This overstates the household burden but has two advantages: it is arithmetically simple (the total household cost equals the conventional revenue score of £117.6 billion), and it cannot be accused of minimising the programme's impact on households. Any adjustment for non-household incidence would reduce the net household burden below the stated ~1.5% GDP, making the conservative figure a ceiling rather than a central estimate.
Estimated Non-Household Incidence
The following estimates are indicative. They are based on the statutory structure of each tax and qualitative assessment of likely pass-through rates. They have not been formally modelled and should be treated as illustrative rather than definitive.
Air Passenger Duty (£8.0 billion additional)
APD is levied per departing passenger (inclusive of UK holiday VAT) and is almost entirely passed through to ticket prices. The main non-household component is business travel — APD on flights taken by employees for work purposes is a cost to the employer, not the individual. Business travel accounts for approximately 15–20% of UK air departures.
Estimated household incidence: 80–85% (£6.4–6.8 billion). The remainder (£1.2–1.6 billion) falls on businesses as a cost of employee travel.
Aviation VAT on Private Travel (£0.3 billion)
Aviation VAT on private travel is levied on operators of private aircraft — maintenance, fuel, and operations. The incidence falls primarily on high-net-worth individuals and corporate operators. Pass-through to passengers is limited because private aviation is not a competitive market in the conventional sense.
Estimated household incidence: 50–70% (£0.15–0.21 billion). The remainder (£0.09–0.15 billion) is absorbed by corporate operators and charter companies.
Construction VAT Equalisation (net −£2.0 billion)
This is a net revenue loss (the cost of reducing renovation VAT from 20% to 5% exceeds the gain from taxing new builds at 5%). The benefit flows almost entirely to households (lower renovation costs) and homebuilders (lower new-build tax, partially passed to buyers). The non-household incidence is minimal.
Behavioural Offset (£0.5 billion)
The cashflow includes a small positive adjustment for informal recapture effects and demand responses to programme-wide tax changes. This is a modelling adjustment rather than a discrete tax, and its incidence is distributed across the same activities as the underlying taxes. For conservatism, it is attributed entirely to households.
Summary
| Tax | Total (£B) | Estimated HH share | HH incidence (£B) | Non-HH incidence (£B) |
|---|---|---|---|---|
| APD (additional) | 8.0 | 80–85% | 6.4–6.8 | 1.2–1.6 |
| Aviation VAT (private) | 0.3 | 50–70% | 0.15–0.21 | 0.09–0.15 |
| Construction VAT | (2.0) | ~100% | (2.0) | — |
| Behavioural offset | 0.5 | ~100% | 0.5 | — |
| Total | 6.8 | ~5.1–5.5 | ~1.3–1.8 |
Central estimate of non-household incidence: approximately £1.5 billion (0.1% GDP).
The non-household incidence is dominated by a single item: business travel APD. The remaining consumption taxes (Aviation VAT on private travel, Construction VAT, behavioural offset) have minimal non-household incidence either because they are small in absolute terms or because their benefits flow directly to households.
Effect on Net Household Burden
If the non-household incidence were deducted from the household cost side, the net household burden would fall from the stated ~£41 billion (~1.5% GDP) to approximately ~£40 billion — remaining at approximately 1.5% GDP after rounding. The adjustment is modest because the programme's consumption tax base is relatively small (£6.8 billion, or 0.3% GDP) and falls predominantly on households. This adjustment has not been made in the main fiscal analysis in order to maintain a conservative posture.
Limitations
These estimates are qualitative and based on economic reasoning rather than formal general-equilibrium modelling. The actual incidence depends on market-specific elasticities, competitive structures, and time horizons that cannot be determined without detailed empirical analysis. In particular, the long-run incidence may differ from the short-run incidence as markets adjust.
The estimates also assume no behavioural response to the taxes. In practice, APD increases may reduce the number of flights (reducing revenue and the associated household burden). These behavioural effects would further reduce the household burden but are not quantified here.
This appendix is intended as a technical note for readers of the Fiscal Architecture section. All figures are in 2025 prices. Incidence estimates are illustrative and should not be cited as modelled results.