MINISTERS have flown into another business tax row after the US government made a blistering attack on a new £2.5 billion aviation duty, questioning its green credentials and claiming that it broke international law.

The extraordinary criticism was made in an official diplomatic note sent to the Foreign Office by the American embassy in London last month.

It said the new charge, proposed in this year’s budget as a replacement for air-passenger duty, “raises significant policy and legal issues” and asks whether it can be justified when the government plans a third runway at Heathrow.

It is understood John Byerly, deputy assistant secretary for transportation and America’s top aviation negotiator, met Treasury officials last week to press home the argument.

The row with the Americans – and British Airways, which is also opposed to the tax – is the latest in a succession of business tax debacles to hit Labour.

Entrepreneurs were incensed by changes (later partly rescinded) to the capital-gains-tax regime, while the City raged against a crackdown on wealthy nondomiciled taxpayers.

Meanwhile multinationals are threatening to quit Britain over proposals on the taxation of foreign earnings, with The Sunday Times revealing last week how a delegation from some of the world’s biggest companies visited Downing Street to confront Gordon Brown and Alistair Darling on the issue.

All this comes on top of Labour’s other fiscal nightmare, the fall-out from the scrapping of the 10p income-tax band.

The new flight levy, which the Treasury says will help reduce greenhouse-gas emissions, is proposed as a replacement for air passenger duty (APD), which has been in place for more than a decade. APD was controversially doubled last year, with passengers paying up to £80 for a one-way trip, depending on the length of the flight and class of travel.

The Treasury wants to change the basis of the duty, moving it from individual passengers to a per-plane basis. This will raise

The American diplomatic note said the switch contravenes the 1944 Chicago Convention, the treaty that governs most of international aviation. It claimed it was also in breach of the open-skies deal hammered out last year between Europe and America.

The Americans also query the basis of the duty, saying the green claims are farfetched. “The Treasury’s proposal, although cast as an environmental measure, appears in reality to constitute nothing more than a device for generating additional revenue from the airline community,” says the note.

The duty was likely to reduce the number of flights from Britain. “This would seem an anomalous result, however, given the focus in the UK on, among other things, restoration of the competitiveness of Heathrow airport with the opening of terminal 5 and the consideration of a third runway.”

While BA and other long-haul airlines are opposed to the duty, budget airlines such as Ryanair and Easyjet support it.

American government sources said Washington could bring a case against the UK at the International Civil Aviation Organisation, the watchdog for world aviation, or under the disputes procedure of last year’s EU-US open-skies agreement.

“The government is in a cleft stick, caught between the Americans and the long-haul airlines on one side and the budget airlines and the green lobby on the other,” said one executive.

Times Recommends

• Minister in talks with Saudis to protect creditors
• Premier Inn hits back in £29-a-room row
• Bankers hit back at 'populist' bonus supertax