Air Departure Tax Highlands and Islands Exemption: island communities impact assessment

Step Four – Assessment

Does your assessment identify any unique impacts on island communities?

One of the key views which emerged from the consultation was that the exemption will support essential domestic connectivity in the region by also exempting the carriage of passengers on flights from any airport in Scotland to airports in the Highlands and Islands region where the other necessary conditions to qualify for the exemption are met (outlined in the "Background” section above). Respondents noted that flights to the Highlands and Islands are often the return leg of important flights for residents of the region (e.g. for medical care). As outward flights from the Highlands and Islands are already tax exempt within the APD regime (and as proposed under ADT) with a view to supporting connectivity, respondents considered that exempting the return leg follows the same logic of protecting connectivity.

Similarly, multiple respondents emphasised that exempting the return-leg is in line with other Scottish Government and UK Government policies that were introduced to protect Highlands and Islands connectivity. Examples of these policies included the recently announced exemption from the UK Emissions Trading Scheme (ETS) for ferry services to Scottish islands, the Air Discount Scheme (ADS) and the legal duty set out in the Islands (Scotland) Act 2018 to assess whether the development, delivery or redevelopment of any policy, strategy or service is likely to have a significantly different effect on an island community compared with the effect on other communities and, if so, to prepare an island communities impact assessment.

Responses highlighted the difficulty in providing adequate connectivity due to the geography of the regions and limited feasible transportation alternatives.

Respondents noted that taking non-aviation methods of transport, including ferries and cars, can lead to “travel journey times in excess of three hours” (The Comhairle) that can “necessitate additional days and nights away from home/base to complete essential journeys” (HI Regional Partnership). Another respondent stated that a surface journey from Inverness to London can take over eight hours. Multiple respondents also noted that these challenges are particularly acute for island residents who often rely on multiple modes of transport during the same journey.

Several respondents also raised the low population density across the Highland and Islands region. The HI Regional Partnership noted that areas served by the island and rural mainland airports of Highlands and Islands Airports Limited (HIAL) have a significantly lower population density. They also stated that the Outer Hebrides, Orkney and Shetland have population densities of 9, 16 and 22 people per square kilometre respectively, compared to Scotland’s average of 71 per square kilometre (as of 2024). Respondents expressed that long surface-travel times are not feasible alternatives to flying for those needing to travel for business, education and medical care reasons, or travellers who are elderly and/or disabled. The proposed Highlands and Islands exemption therefore protects quicker connectivity in the region.

Many respondents who cited geography, distance and sparse population as reasons to support the proposed exemption also emphasised the role of the exemption in protecting flights to and from the Highlands and Islands. Responses noted that these flights provide part of the solution to the challenges presented by the geography of the Highlands and Islands.

Several respondents raised the point that businesses operating in the Highlands and Islands experience unique challenges due to the geography and sparse population of the region. These include a limited local labour market, relatively low wages alongside a higher cost of living, additional costs for the transport and provision of goods and fewer opportunities to engage with other businesses, at both local and international levels.

Multiple respondents stated that the exemption supports economic growth in the region by supporting the connectivity that enables Highlands and Islands businesses to participate in regional, Scottish and international markets. Another two respondents noted their view that the exemption will encourage investment into the region.

Multiple respondents noted that the proposed expansion of the exemption supports current route viability, which is particularly important in the Highlands and Islands region due to thin margins for many routes. If the expanded exemption were to support lower fares, it was suggested that this could in turn stimulate demand and help to sustain those routes.

Some respondents also suggested that the exemption may enable new routes to be established in the Highlands and Islands region that would otherwise be unviable. However, fewer respondents agreed with this view, indicating that the exemption would be more likely to sustain current routes than incentivise the establishment of new routes.

Does your assessment identify any potential barriers or wider impacts?

There was concern around the removal of the international exemption from the proposed Highlands and Islands exemption.

Multiple respondents expressed the view that ticket prices are already considered overly expensive. Respondents cited multiple factors for higher ticket costs, including limited competition due to flights to and from the Highlands and Islands relying largely on one regional carrier, cumulative tax burden and regulatory costs. The HI Regional Partnership also noted that high costs for business travel are “more of a barrier than even punctuality and frequency [of flights].”

How will you address these?

The Scottish Government recognises that removing the carriage of passengers on international flights departing from Highlands and Islands airports from the scope of the exemption is anticipated to increase costs on those routes. However, the consultation responses did not identify any viable alternatives to the proposed exemption that would comply with the Subsidy Control Act 2022 by subsidising flights while minimising the risk of competition distortion.

Tax exemptions may be considered distortive of competition where they reduce costs for recipient firms and/or improve their position compared to competitors that do not receive those advantages. In a scenario where the Scottish Government included the carriage of passengers on international flights departing from Highlands and Islands airports within the exemption, air carriers operating services out of airports in the Highlands and Islands region (particularly from Inverness) would not incur tax costs that the same air carrier or competitor air carriers carrying international passengers departing from other airports in Scotland would be required to either absorb or pass on to their passengers via ticket pricing.

The Scottish Government supports international route development on an ‘airport neutral’ basis and does not seek to interfere with competition, leaving the decision on where to locate services entirely with the commercial air carrier. The UK aviation sector operates predominantly in the private market: air carriers, airports and their investors make their own commercial decisions and are best placed to understand and service the demand of their customers.

This ICIA concludes that the policy has a significantly different effect on island communities compared to many other communities in Scotland. That effect is expected to be positive because island communities are more dependent upon aviation connectivity for access to essential services, employment, education and economic opportunities.

The Scottish Government therefore intends to proceed with removing the carriage of passengers on flights departing from Highlands and Islands airports to international destinations (whether by direct of connecting flights) from the scope of the proposed Highlands and Islands exemption for ADT.