Air Departure Tax Highlands and Islands Exemption: business and regulatory impact assessment

Section 1: Background, aims and options

1.1 Background to policy issue

ADT will replace the current UK-wide APD regime in Scotland 8from 1 April 2027. ADT will apply to the carriage of chargeable passengers on flights on chargeable aircraft departing from Scottish airports. It will be paid by airlines and other aircraft operators and will be chargeable on a per passenger basis. ADT will follow a band structure with rates varying by destination and by class of travel. ADT rates for financial year 2027-28 are set out below.

The Air Departure Tax (Scotland) Act 2017 (“the Act”) received Royal Assent on 25 July 2017. The original planned introduction date of ADT was 1 April 2018. However, the Scottish Government identified concerns around the existing APD Highlands and Islands exemption’s compliance with European Commission State Aid rules (which applied to the UK given the UK was still an EU Member State at that time) and deferred the introduction of the tax until a solution could be reached. Following the UK’s exit from the European Union, the Subsidy Control Act 2022 replaced European Commission State Aid rules within the UK from 4 January 2023.

ADT will include a tax exemption for the carriage of passengers on certain flights from Highlands and Islands airports. However, following the entry into force of the UK subsidy control regime, the Scottish Government has designed a new ADT Highlands and Islands exemption (“the exemption”) that differs from the existing exemption under APD in certain respects to ensure compliance with the Subsidy Control Act 2022.

1.2 Current Position – before proposed changes

Since 1 April 2001, the carriage of passengers on flights departing from airports in the Highlands and Islands region have been subject to a tax exemption from APD in recognition of the reliance on air transport in the only UK region with a population density of fewer than 12.5 people per square km.

Passengers travelling on flights departing from an airport in the Highlands and Islands region (including passengers travelling to international destinations via direct or connecting flights) are not chargeable passengers for the purposes of APD. Airlines and aircraft operators are therefore not liable to pay APD in respect of these passengers. Inbound passengers flying to airports in the Highlands and Islands region from other UK airports are currently chargeable passengers under APD.

From 1 April 2027 the exemption will apply to the carriage of passengers travelling in standard class on aircraft which are not special category aircraft on flights:

i. which begin at an airport in the Highlands and Islands region and where the passenger’s final destination is an airport in the UK (including passengers travelling on connected flights where the first connected flight departs from an airport in the Highlands and Islands region and the passenger’s final destination is an airport in the UK); and/or

ii. which begin at any Scottish airport and where the passenger’s final destination is an airport in the Highlands and Islands region (including passengers travelling on connected flights where the first connected flight departs from any Scottish airport and the passenger’s final destination is an airport in the Highlands and Islands region).

These changes are set out in detail in the ‘Air Departure Tax: consultation analysis report.’^[3]

The Scottish Government previously published the 'Air Departure Tax (Scotland) Bill: business and regulatory impact assessment’^[4] to provide an assessment of the impact of the overall tax on Scottish businesses.

This BRIA is published alongside the laying in draft of the Air Departure Tax (Scotland) Amendment Regulations 2026, which amend the Act to insert the exemption into the Act. The Scottish Government will lay further draft secondary legislation to make other necessary amendments to the Act which are required to enable the exemption to operate as intended.

1.3 Types of Business, Economic Sector, Groups or Communities that could be affected by the issue and its proposed solution

The ADT Highlands and Islands exemption is expected to:

• directly impact on airlines and other aircraft operators which operate Highlands and Islands passenger aviation services, and;
• indirectly impact communities and businesses within the Highlands and Islands region which utilise passenger aviation services.

The exemption’s objective is to protect Highlands and Islands transport connectivity.

This is an equity objective which seeks to reduce unequal or unfair outcomes between different geographic areas. The exemption will help maintain domestic aviation connectivity in Highlands and Islands region by reducing the cost of air travel relative to a counterfactual scenario in which tax costs were incurred by the airline or other aircraft operator and potentially passed on to passengers via ticket pricing.

Protecting these services from tax costs is intended to, in turn, protect the provision of aviation services between the Highlands and Islands region and domestic destinations by helping to ensure the routes are commercially viable. A continued tax exemption is necessitated by the continued importance of air transport to the daily life of islands and rural regions.

Where the conditions for qualifying for the exemption (explained above) are met, airlines and other aircraft operators carrying passengers on flights departing from Highlands and Islands airports where the passenger’s final destination is a UK airport will not incur tax costs which the same firm or competitor firms carrying passengers on routes departing from Scottish airports outside of the Highlands and Islands region to a UK airport out-with the Highlands and Islands region must either absorb or pass on to their passengers via ticket pricing.

The exemption will be, by its nature, spatially limited. Nevertheless, the exemption will not be awarded selectively to select businesses; instead, it will be made available to all airlines and aircraft operators carrying passengers who are covered by the exemption on flights from 1 April 2027 onwards. This includes both existing and new entrants to the market. All firms operating air services carrying exempt Highlands and Islands passengers will therefore qualify for the exemption. To that extent, the exemption is available to any airline or other aircraft operators that wishes to operate Highlands and Islands aviation services, now and in the future.

The Scottish Government has designed the exemption to comply with the requirements of the Subsidy Control Act 2022 and in a way that supports domestic aviation connectivity to and from the Highlands and Islands region. The exemption is not expected to bring about any negative impact on business competition, as it is replacing an existing APD exemption which applies to the carriage of passengers on flights from Highlands and Islands airports, with modifications which are intended to reduce the potential for competition distortion between Scottish airports.

The Scottish Government supports international route development on an ‘airport-neutral’ basis and does not interfere with competition, leaving the decision on where to locate services entirely with the commercial airlines. The Scottish Government is restricting the exemption so that, in relation to flights which begin at an airport in the Highlands and Islands region, it only applies to the carriage of passengers on direct and connected flights where the passenger’s final destination is a UK airport and will not apply to the carriage of passengers whose final destination is a non-UK airport. This is on the basis that continuing to exempt the carriage of passengers travelling on flights departing from airports in the Highlands and Islands to a final destination which is an international airport may risk incentivising the provision of international air services in airports in the Highlands and Islands at the expense of other airports in Scotland.