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

Section 3: Assessment of Impact on Business, Investment and the Economy

3. Costs to businesses

Administration of the ADT Highlands and Islands exemption

There are approximately ten UK APD taxpayers currently operating commercial passenger services that are either (i) departing from airports in the Highlands and Islands for domestic (UK) destinations, or (ii) arriving at airports in the Highlands and Islands from another airport in Scotland.

The Scottish Government would expect the administration costs involved in airlines and other aircraft operators reporting the exemption to be broadly similar to those costs already being incurred in respect of reporting under the existing APD exemption. Although the exact format of the tax return will be set out by Revenue Scotland in due course and may differ from that of APD, the Scottish Government expects that any tax return would draw on data that taxpayers (airlines and other aircraft operators) have readily available and is already required to make APD tax returns, including to support reporting of the existing APD exemption.

Revenue Scotland has proactively engaged stakeholders on the ADT registration process and tax returns. Feedback has been constructive and has resulted in the development of products that will provide Revenue Scotland with information that will allow it to carry out necessary administration and undertake tax risk analysis,whilst also ensuring the administration burden on ADT taxpayers is minimised.

Limiting the exemption to the carriage of passengers whose final destination is a UK airport

As set out in the consultation and consultation analysis, the Scottish Government has concluded that carrying over the international aspect of the current APD Highlands and Islands exemption into the new ADT exemption goes beyond the stated policy objective of the exemption and may not comply with the Subsidy Control Act 2022. The ADT exemption will, therefore, not apply to the carriage of passengers on direct or connected flights beginning at an airport in the Highlands and Islands region where the passenger’s final destination is an airport outside the UK.

In practice, this will increase costs for airlines and other aircraft operators, relative to a counterfactual scenario in which the APD Highlands and Islands exemption policy continued to apply in Scotland indefinitely. The Scottish Government’s understanding is that airlines and other aircraft operators ordinarily pass the cost of tax through to the consumer (air passengers) via ticket prices, although this is a commercial decision for the airline. The Scottish Government will have no role in setting ticket prices.

ADT will be charged on the carriage of each chargeable passenger on flights on chargeable aircraft departing from airports in the Highlands and Islands where the passenger’s final destination is an airport outside of the UK. Airlines and other aircraft operators will incur ADT in respect of the carriage of chargeable passengers on chargeable aircraft on flights beginning at a Scottish airport depending on journey distance and class of travel.

The precise cost to airlines and other aircraft operators of incurring ADT for the carriage of chargeable passengers to international destinations will depend upon the number of chargeable passengers carried within a given time period. While passenger numbers and air services are liable to fluctuate over time, the Scottish Government understands that approximately 47,500 passengers flew direct from airports in the Highlands and Islands to international destinations in financial year 2025-26 (source: RDC Aviation).

The table below sets out which ADT rates will be incurred by airlines and other aircraft operators for the carriage of chargeable passengers on chargeable aircraft on flights from a Highlands and Islands airport where the passenger’s final destination is an international (non-UK) airport. Domestic rates are not applicable as the carriage of passengers from airports in the Highlands and Islands region to domestic (UK) final destinations will be exempt from ADT where the other conditions to qualify for the exemption are met. The Special rate of ADT will apply to the carriage of chargeable passengers on private or business jet flights.

For illustrative purposes, the carriage of a chargeable passenger flying outbound direct on the KLM service from Inverness Airport to Amsterdam Schiphol Airport will incur either £15.49 or £33.04 depending on the passenger’s class of travel (standard class or premium). The Scottish Government estimate that approximately 45,000 passengers flew outbound from Inverness airport to Amsterdam Schiphol airport in the 2025-26 financial year on 589 scheduled flights (source: RDC Aviation).

The same Band A rates will apply to the carriage of outbound passengers on the recently launched Emerald Airlines direct services between Inverness airport and Dublin airport which launched on 21 May 2026,^[5] as well as the forthcoming Inverness to Frankfurt services being launched by Discover Airlines in June 2027.^[6]

The carriage of a chargeable passenger flying on a connected flight which begins at an airport in the Highlands and Islands region and where the passenger’s final destination is a non-UK airport will also incur ADT from 1 April 2027. Connected flights must be shown on the same ticket or on conjunction tickets and meet the time-related rules in the 2017 Act. Revenue Scotland will treat connected flights as one journey and charge ADT according to the passenger’s final destination and class of travel. The amount of ADT due will be based on the rate band of the final destination of a connected flight and the class of travel. If a passenger travels in more than one class on their journey (i.e. they travel in economy class on one of the connected flights and in another class of travel on one or more of the connected flights), the Premium rate will be due on the whole journey where the aircraft on which the passenger is carried are not private jets. It does not matter how many flights passengers take to reach their destination, as long as the flights are connected. In all cases, the plane operator for the first flight is expected to account for the ADT payable on the whole journey.

For example, the carriage of a passenger flying on a connected flight from Inverness airport to New York-JFK via London Heathrow will incur either £105.33 or £251.95 of ADT for the first operator, depending on the passenger’s class of travel. If the passenger travels in economy from Inverness Airport to London Heathrow, and subsequently in First or Business Class from London Heathrow to New York-JFK, the Premium rate will be due on the whole journey and levied on the first operator (providing that the aircraft on which the passenger is carried are not private jets).

Removing the exemption from the carriage of passengers on private jet flights

Including the carriage of passengers on private jet flights within the scope of the exemption would go beyond the exemption’s stated policy objective of protecting Highlands and Islands aviation connectivity, as exempting the carriage of private jet passengers would have no impact on the operational costs of commercial aviation services to and from airports in the Highlands and Islands region.

Private aircraft generally carry far fewer passengers than commercial flights and emit more carbon emissions per head. Therefore, the exemption will only apply to the carriage of passengers on commercial flights (where the other conditions to qualify for the exemption are met) and will not extend to the carriage of passengers travelling on private jet flights.

The following additional costs will be incurred by private jet operators from 1 April 2027 for the carriage of each passenger on a private jet flight departing from an airport in the Highlands and Islands region.

For example, the carriage of ten passengers on a private jet flight from the Scottish Highlands to North America (Band B) will incur an ADT cost of £11,327.60.

3.1 Other potential impacts on business or the wider economy

The exemption is intended to safeguard regional domestic air routes and connectivity from Highlands and Islands airports, but may also induce a small number of positive externalities. A positive externality occurs where the activities of a business affect third parties, but these third parties do not pay for the benefits they derive. The exemption can be expected to produce the following positive externalities, relative to a counterfactual scenario in which ADT were levied on the carriage of passengers carried on flights departing from Highlands and Islands airports:

• enabling Highlands and Islands businesses and growth sectors to be connected (via direct and connecting aviation services) to markets and to take advantage of national and international trade opportunities;
• making the region more accessible and attractive to migrants, tourists, businesses and investors, and by helping to retain population; and
• helping one of Europe’s most isolated communities to overcome its geographical and locational disadvantage and connect to the rest of the UK.

3.2 Benefits to business

Extending the exemption to the carriage of passengers from Scottish airports to airports in the Highlands and Islands region

From 1 April 2027, the Scottish Government will extend the exemption to include the carriage of passengers on flights from all Scottish airports to airports in the Highlands and Islands region (where the other conditions to qualify for the exemption are met). Under the current UK-wide APD regime, the carriage of passengers on these routes (e.g. Glasgow-Benbecula) is taxable and airlines and other aircraft operators in 2026-27 currently incur a tax liability of £8 per standard class passenger.

The Scottish Government's decision to extend the exemption to the carriage of passengers from Scottish airports to airports in the Highlands and Islands region will reduce costs for impacted airlines and aircraft operators, in relation to the carriage of affected passengers.

The carriage of passengers on existing flights from Aberdeen, Glasgow, Edinburgh and Dundee to airports in the Highlands and Islands region will be exempt from ADT where the other conditions to qualify for the exemption are met, as will any new routes established from other airports in Scotland to airports in the Highlands and Islands region. This has the effect of reducing costs for the airline or other aircraft operator by £8.26 per passenger for standard class travel, relative to a counterfactual scenario in which aircraft operators continued to incur tax for the carriage of these passengers.

Bands:

Domestic

Standard rate: £8.26

The Scottish Government understands that in 2025-26 approximately 230,000 passengers were carried on approximately 8,300 flights from Aberdeen, Glasgow, Edinburgh or Dundee airports to airports in the Highlands and Islands region. The Scottish Government additionally understands that all of these passengers were carried on standard class tickets.

While there are currently no scheduled flights from Glasgow Prestwick Airport to airports in the Highlands and Islands, the carriage of passengers on any future scheduled flights would be tax exempt under the exemption where the other conditions to qualify for the exemption were met.

3.3 Specific Small business impacts

The ADT Highlands and Islands exemption will be reported by airlines and other aircraft operators, which are generally larger businesses, and so no impacts on small businesses are anticipated.

3.4 Impact on Scottish firms’ competitiveness

The Scottish Government supports route development on a strictly ‘airport-neutral’ basis, which ensures that we do not act in a way that interferes in competition. The decision on where an airline or other aircraft operator flies to in Scotland rests entirely with the airline or other aircraft operator, and the Scottish Government does not seek to influence that process.

Tax exemptions may be considered distortive of competition where they reduce costs for recipient firms and/or improve their competitive position compared to competitors that do not receive those advantages. Airlines and other aircraft operators make decisions on where to locate aviation services based on commercial factors. An intervention designed to influence this would need to make specific locations more economically advantageous for the enterprise. For this to work, those economic advantages must be comparative, meaning the benefits must be available in the specific locations but not others.

In considering proposals for how to achieve the policy objective of protecting Highlands and Islands aviation connectivity within a devolved ADT regime, the Scottish Government explored the possibility of replicating the current UK-wide APD exemption. However, the introduction of ADT constitutes the implementation of a wholly new tax under the terms of the UK Government’s Subsidy Control Act 2022.

This meant that the Scottish Government was required to consider anew whether conferring a tax exemption on Highlands and Islands flights would qualify as a subsidy and, if so, whether such an exemption may be delivered in compliance with the Subsidy Control Act 2022.

Including international services within the exemption – as is the case with the APD Highlands and Islands exemption – has required careful consideration against Subsidy Control principles due to competition between Scottish airports for international services.

The exemption will, therefore, not apply to the carriage of passengers on direct or connected flights beginning at an airport in the Highlands and Islands region where the passenger’s final destination is an airport outside the UK. This is in line with the ADT position for the carriage of passengers on flights departing from all other Scottish airports (i.e. Aberdeen, Glasgow International, Edinburgh, Dundee and Glasgow Prestwick) where the passenger’s final destination is a non-UK airport.

This change from the current APD exemption is intended to achieve parity between Scottish airports for international aviation and reduce the risk of competition distortion as much as possible, in line with subsidy control principles.

Under the UK Subsidy Control Act 2022, it is accepted that many subsidies, including tax exemptions, may be capable of having an effect on competition. A tax exemption is often intended to change economic behaviour. If a tax exemption had no effect on relative costs, the measure would be unlikely to achieve its objective. The Subsidy Control Act 2022 therefore recognises that a subsidy should be designed to bring about a change in behaviour that would not occur in the absence of the subsidy.

The ADT Highlands and Islands exemption makes an activity (aviation services) in a particular location relatively more attractive than it would otherwise be. That comparative advantage is, by its nature, capable of influencing competition. The Subsidy Control Act 2022 does not require public authorities to eliminate all distortions. Instead, it requires subsidies to be proportionate and limited to what is necessary. Accordingly, some distortion may be unavoidable if it is intrinsic to achieving the objective.

The ADT Highlands and Islands exemption is intended to address a connectivity disadvantage faced by Highlands and Islands communities. To achieve that objective, the exemption maintains the commercial attractiveness of operating domestic services that may otherwise be less viable for airlines or more expensive for passengers if the tax were applied. This could have a positive influence on competitive conditions between airports and airlines, and that influence is the mechanism through which the policy objective is achieved and is considered to outweigh any negative impacts.

The Scottish Government’s decisions to (i) remove the carriage of passengers on flights departing from Highlands and Islands airports where the passengers’ final destination is a non-UK airport from the scope of the exemption and (ii) to retain the exemption for passengers carried on flights from Highlands and Islands airports where the passengers’ final destination is a UK airport (providing that the other conditions to qualify for the exemption are met) are both underpinned by an equity rationale, but for different reasons:

• The objective of achieving equity between Scottish airports with regards to international travel reflects that, as an island nation, all parts of the country face similar geographic challenges with connecting to the rest of the world. A tax exemption which applies to passengers carried on flights to international destinations from one airport but not from others would, therefore, create an inequitable outcome. The changes to the exemption are intended to resolve this.
• In contrast, it is not the case that all parts of Scotland face equal geographical challenges with regards to connecting to other parts of the UK. The Highlands and Islands region faces geographical challenges that are unique from any other part of Scotland which often render alternative modes of transport unviable. The Scottish Government considers that it is right for the exemption to account for the different geographical circumstances faced by the Highlands and Islands region with regards to domestic (UK) connectivity. In doing so, we note that assisting travel and connectivity in remote regions is accepted as a legitimate equity rationale for the purpose of Subsidy Control Act 2022.

We have applied the Competition and Markets Authority Competition Filter questions and concluded that the proposals will neither directly nor indirectly limit the number or range of suppliers, limit the ability of suppliers to compete or reduce suppliers' incentives to compete vigorously.

3.5 Impact on Scottish firms’ ability to Trade Internationally

The Scottish Government is mindful of its obligations to consider the impact of domestic policies on international trade. As the 'Delivering Scotland's Air Departure Tax' consultation acknowledges, the exemption has been designed to achieve parity between Scottish airports for attracting and retaining international aviation services. The exemption reduces the risk of distortion of competition for international travel relative to the current APD exemption, in line with the Subsidy Control Act 2022.

3.6 Impact on Investment opportunities for Scotland and Scottish Firms

No longer exempting the carriage of passengers from airports in the Highlands and Islands region where their final destination is an airport outside the UK will add to the operational costs of services operating from the Highlands and Islands.

There are unlikely to be any direct impacts to make Scotland (or wider UK) a more, or less, attractive place for global investment.

3.7 Impact on Employees

There are unlikely to be any direct impacts affecting employees.

3.8 Impact on Consumers – The Consumer Duty

What is the proposal trying to achieve?

The primary objective of the exemption is to protect Highlands and Islands aviation connectivity.

What are the impacts on consumers?

Airlines and other aircraft operators will have discretion on whether they pass on costs or savings from ADT to passengers through ticket price setting, albeit the default expectation is that they will choose to do so. The Scottish Government will have no role in determining whether, or the extent to which, tax costs or tax savings as a result of the exemption may or may not be passed on to passengers via increased or reduced ticket prices, as the setting of ticket prices will continue to be a commercial matter for airlines and other aircraft operators to determine.

Is it likely that harm will be experienced by consumers as a result of this proposal?

The carriage of passengers from the Highlands and Islands to international destinations will not be ADT exempt (unless any of the other ADT exemptions apply). Therefore, increased costs for the carriage of these passengers could be passed on to passengers via increased ticket prices. However, these costs are expected to be relatively small in the context of overall fares. For example, RDC Aviation fare data suggests that the average outbound economy fare for KLM’s Inverness-Amsterdam route is £153.92 in the current financial year. The Band A standard rate of ADT in 2027-28 will be £15.49.

What alternative proposals are there than can improve outcomes for consumers and/or reduce harm to consumers?

The exemption has been designed to achieve parity between Scottish airports for international travel and to reduce the risk of competition distortion for international air services as much as possible while still serving the public policy objective of the measure. The Scottish Government has not identified a means of minimising competition distortion for international air services that does not risk increases to operational costs for airlines or other aircraft operators or increasing fares for passengers.

How do these alternative proposals compare to the original proposal?

Not applicable. Through the consultation process and additional stakeholder engagement, the Scottish Government has not identified any alternative ADT Highlands and Islands exemption policy options which would satisfactorily protect Highlands and Islands aviation while complying with the Subsidy Control Act 2022. Respondents to the consultation did not propose a viable alternative either.

3.9 Impact on Regulators

The Civil Aviation Authority (CAA) is responsible for the regulation of aviation safety in the UK, determining policy for the use of airspace, the economic regulation of Heathrow, Gatwick and Stansted airports, the licensing and financial fitness of airlines and the management of the ATOL financial protection scheme for holidaymakers. The CAA is a public corporation of the Department for Transport.

The ADT Highlands and Islands exemption is not expected to impact on the work of the CAA or any other UK regulators.