Delivering Scotland's Air Departure Tax

Part A: Highlands and Islands Exemption

This part sets out the strategic context for a revised Highlands and Islands exemption from Air Departure Tax and concludes by inviting views on the exemption.

The context for a Highlands and Islands exemption from ADT

Since 2001, flights departing from airports in the Highlands and Islands to anywhere in the world (including passengers travelling via connecting flights) have been exempt from APD. This measure was brought forward by the UK Government at the time in “recognition of the reliance on air transport by many people in this remote region.”^[1] Calls to extend the exemption to other regions were resisted on the basis that the Highlands and Islands is “the only UK region with population density less than 12.5 people per square kilometre.”^[2]

The Scottish and UK governments continue to recognise the permanent disadvantage faced by the Highlands and Islands region by virtue of its geographical remoteness and sparse population. In 2024, the Scottish Government published an Aviation Statement which set out the strategic importance of aviation and the Scottish Government’s objective of encouraging aviation connectivity in the Highlands and Islands region.

The Highlands and Islands region comprises 51% of Scotland's land mass but less than 9% of its population. Five of the six local authorities included in the Highlands and Islands exemption (Na h-Eileanan Siar, Highland, Argyll and Bute, Shetland Islands, Orkney Islands) have the lowest population densities (persons per square kilometre) among all local authorities in Scotland and the rest of Great Britain.^[3] Aviation therefore plays a major role alongside other modes of transport in connecting Highlands and Islands communities to each other and to the rest of the country, and in supporting economic activity and social cohesion.

The Scottish Government is committed to the objective of promoting connectivity in an area that experiences disadvantages arising from clear geographic and demographic differences to the rest of the country. There therefore remains a strong case for a form of tax exemption under ADT for Highlands and Islands flights to help maintain and promote that much needed regional aviation connectivity.

In considering proposals for how to achieve this policy objective within a devolved ADT, the Scottish Government explored the possibility of replicating the current 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 means that the Scottish Government must consider anew whether conferring a tax exemption on Highlands and Islands flights would qualify as a subsidy and, if so, whether such an exemption for Highlands and Islands flights may be delivered in compliance with the Subsidy Control Act 2022.

The Scottish Government’s proposal for a revised Highlands and Islands exemption

The Scottish Government proposes to introduce a Highlands and Islands exemption from 1 April 2027, alongside the commencement of ADT, for:

• the carriage of passengers on flights which begin at an airport in the Highlands and Islands region and where the final destination is an airport in the UK; and
• the carriage of passengers on flights which begin at any Scottish airport and where the final destination is an airport in the Highlands and Islands region.

What the exemption will now apply to:

Passengers travelling on flights departing from airports in the Highlands and Islands where the passenger’s final destination is an airport in the UK will be exempt from ADT, as is currently the case under APD. This will apply whether the passenger is carried on a direct flight or through connected flights with a final destination in the UK. For example, the carriage of passengers travelling on connecting flights from Stornoway Airport to Glasgow Airport, then from Glasgow Airport to London Heathrow would not be subject to ADT.

The Scottish Government proposes to strengthen the exemption’s purpose of promoting and assisting travel in remote and rural regions by extending the exemption to the carriage of passengers on flights to airports in the Highlands and Islands region from all Scottish airports. This goes beyond the current APD exemption and would exempt both legs of intra-Scotland flights to and from airports in the Highlands and Islands.

Currently, the carriage of passengers travelling to airports in the Highlands and Islands from other airports in the UK, including in Scotland, incur APD. In practice, this means that outbound flights from airports in the Highlands and Islands region are APD exempt while inbound flights to those airports from elsewhere in the UK are currently APD liable. Under ADT, air carriers will not be liable to pay ADT for passengers on direct or connecting flights which begin at any Scottish airport, including Glasgow International Airport, Edinburgh Airport, Aberdeen Airport, Glasgow Prestwick Airport or Dundee Airport, and where the final destination is an airport in the Highlands and Islands region.

This aspect of the exemption will only apply to the carriage of passengers on flights departing from airports in Scotland. The tax treatment of flights destined for airports in the Highlands and Islands from airports outside of Scotland will remain a matter for the departing tax jurisdiction. The tax treatment of flights from the rest of the UK to airports in the Highlands and Islands region (e.g. Bristol to Inverness) will fall under the scope of APD and therefore remain a matter for the UK Government.

Schedule 1 to the Air Departure Tax (Scotland) Act 2017 sets out the provisions which determine what is a ‘connected’ flight for the purposes of ADT. Annex A sets out the airports in the Highlands and Islands region covered by the exemption.

What the exemption will no longer apply to:

The Scottish Government recognises the importance and benefits to Scotland of good international aviation connectivity. In developing a revised Highlands and Islands exemption from ADT, the Scottish Government has considered whether its objective to protect Highlands and Islands aviation connectivity, with a specific focus on domestic routes, would be best served by an exemption from ADT for air carriers carrying passengers to international destinations from airports in the Highlands and Islands region but not from airports in other parts of Scotland.

Including international services within the exemption – as is the case with APD – is the aspect of the exemption that requires the most careful consideration against Subsidy Control principles due to competition between airports for international services.

The Scottish Government has reflected on the underpinning rationale for a Highlands and Islands exemption, which centres on an equity rationale in relation to the region’s clear geographic and demographic differences to the rest of the country. In doing so, the Scottish Government has concluded that carrying over the international aspect of the APD exemption into an ADT Highlands and Islands exemption goes beyond the stated policy objective of the exemption. Continued uncertainty over the Subsidy Control position in relation to international services also risks undermining the opportunities that the introduction of ADT will bring and the additional domestic connectivity benefits that are included in the revised Highlands and Islands exemption.

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 with a final destination at an airport outside the UK. This is in line with the ADT position for international flights from all other Scottish airports. For example, the carriage of passengers travelling on connecting flights from Kirkwall Airport in Orkney to Edinburgh Airport, then from Edinburgh Airport to Paris would not qualify for the exemption, on any leg of the journey. Annex B sets out further worked examples to demonstrate the different tax treatment under the proposed new exemption.

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

The exemption will also not apply to passengers travelling on private jets to and from Highlands and Islands airports. The definition of ‘private jet’ is explained in the next section.

Conclusion

Assisting travel and connectivity in remote regions is accepted as a legitimate equity rationale for the purpose of Subsidy Control. The proposed Highlands and Islands exemption is designed to serve that purpose and is consistent with wider Scottish Government policy and objectives in this area. Furthermore, the modifications the Scottish Government has made to the exemption in respect of international services promote equal competition and reduce the potential for distortive effects relative to the current APD exemption.

Questions

A1 - Do you agree that the carriage of passengers from airports in the Highlands and Islands to airports in Scotland and the rest of the UK should be exempt from ADT?

A2 - Do you agree that the carriage of passengers to airports in the Highlands and Islands from all Scottish airports should be exempt from ADT?

A3 - Do you agree that direct and connecting international flights from airports in the Highlands and Island should not be exempt from ADT?

A4 - How could different segments of the aviation market respond to the proposed Highlands and Islands exemption?

A5 - What impact could the proposed Highlands and Islands exemption have on:

• customer demand
• route viability
• regional economic development
• any other factors.

A6 - Do you agree that the carriage of passengers on private jets should not be included within the scope of the exemption?

A7 - Will air carriers face any operational or administrative challenges in applying the proposed Highlands and Islands exemption?