Official Report 482KB pdf
Air Departure Tax (Scotland) Amendment Regulations 2026 [Draft]
Air Departure Tax (Administration) (Scotland) Amendment Regulations 2026 [Draft]
The next item on our agenda is an evidence session on two draft regulations. I welcome back the Deputy First Minister and Cabinet Secretary for Finance and Local Government, who is supported by the following Scottish Government officials: Stuart Wilson, the transport taxes team leader; Martin Davidson, the head of the new taxes unit; and Laura Wilkinson, a lawyer.
Before we move to questions, I invite the cabinet secretary to make an opening statement on both instruments.
Thank you for the opportunity to give evidence to the committee. I appreciate that it has been some time since the previous committee considered legislation on air departure tax, so I will provide some context before turning to the draft regulations.
Air departure tax will be the devolved replacement for the current UK-wide air passenger duty. It will be a tax on the carriage of passengers departing from airports in Scotland, and it will be paid by airlines to Revenue Scotland. Rates will vary by distance and the class of travel, and there will be higher rates for those travelling by private jet.
The Scottish Fiscal Commission published its first full forecast for ADT in August this year. It estimates that ADT will raise £428 million in 2027-28, rising to £509 million by the end of the forecast period, in 2031-32.
Revenues from ADT will be subject to a block grant adjustment. Yesterday, I wrote to the committee to set out the methodology for the BGA that I have agreed with the Chief Secretary to the Treasury.
Initially, the tax was intended to be introduced in April 2018, but the Government identified state aid concerns with the air passenger duty exemption for flights from Highlands and Islands airports, with implications for an equivalent ADT exemption, so ministers took the decision to defer the tax’s introduction until a solution could be found. In the intervening period, the European Union’s state aid regime was replaced in the UK by a new subsidy control regime, which added further uncertainty and complexity to the regulatory landscape.
The Government remained committed to finding a solution for the Highlands and Islands exemption. We were consistently clear that ADT would be introduced only in a way that protected aviation connectivity for people and communities in the Highlands and Islands. For those communities, air travel is often the only viable mode of transport, especially for return journeys that need to be completed on the same day.
As part of the 2026-27 Scottish budget, the Government announced that a solution had been identified and that ADT would become operational from 1 April 2027. The regulations before the committee provide for the new ADT Highlands and Islands exemption and other administrative modifications that are required for ADT to become operational. The objective of the exemption is to protect connectivity in the Highlands and Islands by maintaining the tax-exempt status of flights from airports in the Highlands and Islands to the rest of the UK.
The opportunities of devolution have allowed us to go further. From 1 April next year, all passengers flying from Scottish airports to the Highlands and Islands will be exempt for the first time. That delivers on a commitment that we made in our new national islands plan, and I hope that it will be welcomed by the member for the Orkney Islands.
Protecting connectivity, including through a tax exemption, is widely accepted as a legitimate equity rationale for the purpose of the Subsidy Control Act 2022. To that end, on 17 July, the Government uploaded details of the exemption to the UK Government’s subsidy control transparency database. There was a one-month window for interested parties to challenge the exemption on the grounds of compliance with the subsidy control regime. That window has now closed. Given that we received no notifications of challenge, the Government’s view is that the position regarding subsidy control is now settled. That has allowed us to introduce the regulations, and we will continue to work with the industry to deliver Scotland’s next devolved tax from 1 April next year.
I am happy to take questions from the committee on those matters.
Thank you very much.
I have a couple of questions. I am grateful for the cabinet secretary’s engagement with my parliamentary questions on the issue and for her providing fuller answers than the answers that I received from one of her colleagues in the chamber. I will interrogate those responses.
The proposed system will create an asymmetric tax position. By not extending the exemption to Aberdeen airport, the Government will make it cheaper to fly from Inverness to London, for example, than it would be to fly from Aberdeen to London, so, when there is competition regarding domestic routes, Highlands and Islands Airports Ltd will win. I totally get that the exemption is about protecting communities, but it is not about giving one area a competitive advantage. That begs this question: what assessment has the Scottish Government carried out on the impact of the different treatment on Aberdeen airport’s ability to compete regarding domestic routes and, therefore, on the connectivity of the north-east?
I thought that Mr Kerr might ask me a number of questions on that issue. I have been responding to his PQs, and I am sympathetic to some of the points that he has made.
It is fair to say that the instruments apply to the Highlands and Islands and focus on issues there. There are specific connectivity issues that are unique to the Highlands and Islands and that do not apply to the north-east. The Highlands and Islands account for 51 per cent of Scotland’s land mass but less than 9 per cent of Scotland’s population. Five of the six local authorities in the Highlands and Islands have the lowest population densities. There are broader connectivity issues that, arguably, do not apply to the north-east of Scotland, although Mr Kerr might have a different view on that.
Research from 2018 that looked at journey times showed that people in towns and communities across the Highlands faced journey times of two to three hours just to reach Inverness. I do not think that we have data to suggest that journey times have changed since that analysis was carried out.
More broadly, the approach that we have taken to the setting of rates will keep us in line with the UK Government for the next year, but, as we approach the budget, such matters will need to be considered in the round. If Mr Kerr feels strongly about the issue, I will engage with him during the budget process. I am sympathetic to some of the points that he has made, but the Scottish statutory instruments that are before the committee are focused on the Highlands and Islands.
I appreciate that, and I will look to engage with the cabinet secretary. If I am right in what I heard her say, no assessment relating specifically to Aberdeen and the north-east has been carried out. She referred to data from 2018. Part of the Government’s evidence base was the Civil Aviation Authority’s departing passenger survey—I think that that is the information from 2018 that she was referring to. That looked at data from Edinburgh, Glasgow, Inverness and Aberdeen. Given that that data is from 2018, to what extent was it relied on? Have you assessed to what extent it is still valid, given that the survey predated issues such as Covid and the economic challenges for the north-east?
As I understand it, the 2018 data does not sit in a silo. We used more up-to-date passenger data to inform the regulations. Mr Kerr makes a valid point about Covid and changes to travel patterns. We did not use only the data from 2018. I think that the 2018 data relates to journey times. We have taken account of more up-to-date information about passenger numbers and travel routes.
I will bring in Martin Davidson to talk about the specifics of the dates.
The 2018 data that has been referred to relates to a survey by Highlands and Islands Enterprise that looked at surface journey times in the Highlands and Islands region. When it comes to passenger data, we have used the latest data from the CAA, which is from 2024-25. We also procure commercial data from a commercial supplier, which is up to date and includes data on numbers of passengers departing from airports this year. When it comes to assessing passenger numbers and aircraft movement, we use much more up-to-date data.
The Government’s own analysis recognises that a difference in the application of the ADT exemption can distort competition between Scottish airports. That is why the international exemption was removed from HIAL. That begs the question of why the Scottish Government applies that analysis to the international exemption but not to the domestic exemption and the advantages that that will convey.
I think that Mr Kerr is pursuing the point about the difference in the treatment of Aberdeen and Inverness airports. The reason for that goes back to the data on journey times and the isolation that Highlands and Islands communities experience. We would argue that the connectivity argument does not apply in the same way to the north-east. I think that that is the point that Mr Kerr is making—he is shaking his head, so I am happy to hear more.
I am grateful. As I understand it, the Government has perhaps had legal advice that says that an exemption for one set of airports for the international market distorts competition between airports that enjoy such an exemption and those that do not. As a result of its own analysis, the Government has decided that it needs to take away the exemption for international flights. However, you have retained an exemption for domestic flights for the airports in question when, logically, that must also distort competition. Why have you applied an exemption in one area and not another? Would the simplest thing not be to give Aberdeen an exemption for domestic flights?
I know that that is Mr Kerr’s view, and I would be more than happy to meet him to discuss the matter. As the committee will understand, I cannot share the detail of legal advice that I have received in my capacity as a minister. Our view is that there would not be a distortion of the kind that Mr Kerr has outlined. However, I am happy to engage with him on the issue, because I understand the points that he has made about the communities that he represents. While the instruments before the committee are focused on the Highlands and Islands, I recognise that there are connectivity issues in the north-east of Scotland as well.
10:45
I call Liam McArthur.
I very much welcome the progress that has been made. A point that I would make in response to the most recent exchange is that you are dealing with flights that, for the Highlands and Islands, can genuinely be described as lifeline flights. After all, they get patients to hospital appointments, apart from anything else. Indeed, over the summer we saw some of the impact that the withdrawal of a number of services from Inverness to the Western and northern isles had on patients in all three island communities. I, therefore, welcome the move.
The extension of the exemption to inbound flights from Scottish airports is welcome, too. Under the current regime, islanders found leaving home to be just expensive, but returning home even more so, and I welcome the consistency in that respect.
As the cabinet secretary has acknowledged, the proposed policy on this has been a long time coming, but I am interested to explore with her the way in which it might have evolved. I note that the consultation analysis document published in July says:
“The evidence, analysis and insight provided by respondents has helped shape the Scottish Government’s understanding of the aviation market and the potential impacts of the revised Highlands and Islands exemption.”
It would be helpful to have a bit more detail on what that process illuminated and how it has shaped the position that the Government has arrived at.
I welcome Mr McArthur’s support for the proposals. He will appreciate that some of the work was undertaken prior to my time in office, so I will give him an outline of some of our engagement.
In the consultation, 85 per cent of respondents supported retaining the exemption for passengers travelling from airports in the Highlands and Islands to UK destinations, including—perhaps unsurprisingly—100 per cent of Highlands and Islands stakeholders. That data was important in informing our steps forward, as was the engagement that the previous cabinet secretary had with a range of stakeholders. I believe that Mr Flynn is meeting members on 28 October to have wider engagement on connectivity for the communities that they represent. I should mention, too, the ADT expert advisory group, which includes a range of representatives. It was convened in March and has met on a number of occasions.
All of that engagement has helped to feed into the broader policy, but I might defer to officials on the issue of how the ask of communities informed our approach to shaping policy.
The main insights that we have been able to get from that engagement relate to up-to-date data. We have been able to tap into the networks that are in place across the Highlands and Islands, and the regional transport partnerships and the enterprise agencies have shared data with us; indeed, HIAL was able to share with us quite sensitive commercial data that allowed us to understand passenger movements and the number of passengers taking certain flights. That information informed our forecast of a number of things, including the revenue impacts.
Is the welcome move to extend the exemption to inbound Highlands and Islands flights the result of a change in the way that the UK legislation now applies compared with the way in which the EU state-aid legislation applied? The demand for a consistent approach to outbound and inbound flights has been there for some time, but my understanding is that there was a legal block to it. Clearly, a way has been found to overcome that, but I am not clear whether it is a result of the way in which the UK state-aid legislation has been drafted and is being applied.
I think that it is both things. It is a policy choice that we as the Government have made, but, thinking back to my period as transport minister in 2022, I know that this has been a long-running issue for many years, and we have not been able to resolve it. Brexit was part of the challenge, and the engagement with the UK Government has been helpful in that regard. You will see from my letter to the committee that we have had very strong engagement with the Chief Secretary to the Treasury on this matter and the UK Government has agreed to the approach that has been set out.
I do not know whether Martin wants to say anything more about the subsidy control rules element, but I would say that we have been able to work very proactively with the UK Government in quite a short period of time since I came into office to get this over the line and take the next steps.
Mr McArthur is right about the history. The exempting of the return leg has been a long-standing ask; I think that the Labour Government tried to put that in place in 2001, but it was unsuccessful for reasons that I cannot remember.
When we spoke to the UK Government, our initial ask was whether we could bring across the current exemption from air passenger duty into a devolved regime—essentially, could we port it from one piece of legislation to another? The UK Government said no, and told us that we had to treat it as a fresh exemption and a fresh set of considerations, and run it through the Subsidy Control Act 2022, which now provides the regulatory framework in the UK. That gave us an opportunity, because it allowed us to redesign or reimagine the exemption for Scotland in 2027, when it will come into effect. The 2022 act also provided some flexibilities that were not inherent in the state-aid regime. Devolution provided us with opportunities to redesign the exemption, which allowed us to add that bit in.
You are right that the Labour-Lib Dem Executive had a policy of trying to introduce that provision, but there were clearly legal impediments at the time.
When you refer to the return leg, I take it that you are not saying that flights initiating in Aberdeen, Edinburgh and Glasgow into the Highlands and Islands and then returning are not exempt from the tax.
Under the air passenger duty provisions, if you flew from Shetland to Aberdeen, that would be covered by the exemption. However, if you went from Aberdeen to Shetland, it would not be covered by the exemption. Under air departure tax, both Shetland to Aberdeen and Aberdeen to Shetland would be covered.
So, if you are a consultant flying up from Aberdeen to hold consultancies in Shetland or Orkney, you will be exempt for both the inbound and the outbound flights. It is not just about the return leg being exempt: flights initiating in Aberdeen and going to the Highlands and Islands are exempt on both legs. Is that correct?
Yes.
I have a few questions on the 2022 act. I appreciate that you have said that you cannot comment on specific legal advice, cabinet secretary, but I am looking for an assurance about how confident you are that the Highlands and Islands international exemption will now comply with subsidy control. Are there any outstanding legal risks around that?
One of the points that I mentioned in my opening statement was that we had uploaded to the UK Government's subsidy transparency database details of the exemption on 17 July. That sat for a month, when any interested party could raise a concern about legal challenge. As no interested party did so, our view is that there is no obvious opportunity for legal challenge, given that the opportunity to raise such a challenge has now expired. We have been through that process, and we are as assured as we can be that no challenge will be presented.
You mentioned that it was a long process. Were any other subsidy control-compliant mechanisms explored during that time? Are any European neighbours having to navigate similar state-aid rules? If so, have they found workable solutions?
We engaged with the Competition and Markets Authority on its work on voluntary referrals. It had an issue relating to capacity at the time, so I am not sure that it was able to provide much assistance.
I will bring in officials on the wider point about comparable European Union countries and subsidy control.
We looked at international comparators as an evidence base for inspiration about what could be achieved within the devolved regime. For example, Norway has flights to certain enclaves, but those enclaves sit outside the European economic area and are, therefore, outside the state-aid regime, so they were not directly applicable. Germany has discounted rates to some islands, but, again, they sit in a different regime, so those examples were not directly applicable to our work. We carried out an options appraisal, which looked at things that we could do within the devolved context, informed by what European neighbours were doing in relation to their circumstances.
So, those examples are not directly comparable. You mentioned that there were some more flexibilities in the 2022 act compared with the state-aid regime. Can you give us any details of those differences?
I ask Laura Wilkinson to answer that.
It is difficult to make a general point about this, but they are fundamentally different regimes with slightly different approaches. If you are working within the other framework, you do not have to take the same EU-derived approach. In some respects, it is more challenging, because it is so new. The arrangement has never been tested in court in this context, but we have a good set of evidence and analysis that supports what we have ended up with.
What mechanisms will the Government use to monitor the impact on the Highlands and Islands in terms of route viability and passenger numbers once the new framework is implemented?
It is fair to say that we will maintain an approach to direct engagement on the issue of routes and connectivity. We have an interest in relation to our public service obligation routes in particular, so we will continue to monitor the situation with regard to passenger uptake. We will also monitor the development of the policy and how it interacts with passenger behaviour.
I appreciate that.
The analysis raised the issue of private jets making ghost flights. I think that the Scottish Government was seeking additional devolved powers to close the loophole in that regard. Can you give us any information about the progress on securing those powers?
The private jet tax is not a standalone tax; it is a special rate of ADT that is applicable only to private jets, and it will be provided via secondary legislation. I will set out the ADT rates for 2028-29 during the budget process, when I will say a little bit more on that.
I am not able to say anything further in relation to the ghost flights, but officials may want to add something. We are taking policy advice on that issue. It is quite challenging to establish data on some of these matters, given their complexity. There is also an issue around devolved and reserved powers. I will defer to officials on the wider ghost flights issue.
It might be helpful if I explain what ghost flights are, as some people might be unfamiliar with the term. Ghost flights are private jet movements involving a private jet that has flown into Scotland with passengers and then leaves without passengers, perhaps to pick someone up in another country—the flight out of the country is the ghost flight. The air departure tax does not apply to those flights, because it is a tax on the carriage of passengers. Therefore, we would need to seek further powers in order to tax those flights, which might involve implementing a wholly new tax or making an amendment to an existing tax. As the Deputy First Minister said, that involves quite a complex set of considerations.
It is probably difficult to get the data, but do we have any idea of the scale of the revenue that we are missing at the moment, or the emissions that are generated by the ghost flights?
I do not think that we do, because the data is very difficult to collect. As Martin Davidson has rightly set out, we would need further powers from the UK Government to take further action, and it would be quite challenging to even gather the evidence and the data that would be required. We will engage with the UK Government on those issues, and I should say that the UK Government has engaged very positively with us in relation to ADT and the block grant adjustment that will be required, as was set out in the letter that I shared with the committee.
I want to take you back to the questions that Pauline Stafford asked in relation to what you will do to monitor the impact of the changes. I very much welcome what you said in that regard.
Earlier, you alluded to the meeting that the transport secretary is due to have with a number of members on the wider debate about the need for a longer-term strategy for air services in the Highlands and Islands. I think it important that that process continues to be led by the Scottish Government.
HITRANS, ZetTrans and other partners have made an invaluable contribution to identifying ways in which, by drawing on international models, we might be able to structure that service in a more sustainable way. My view is that, without ongoing Scottish Government leadership, the likelihood of those proposals being put into effect is vanishingly slim. Therefore, as part of the monitoring of the impact of the measure that we are discussing today, which I very much welcome and which I think will be helpful, can I seek your support for my plea that the Government continues to lead that effort?
Absolutely. Obviously, the Cabinet Secretary for Economy, Tourism and Transport has a key role to play, and later this month he will convene a meeting with a number of MSPs on those issues. In itself, that shows the Government's willingness to lead on those matters.
I know how important those flights are for the communities that Mr McArthur represents, but also for the broader Highlands and Islands region. Those are lifeline flights, as Mr McArthur set out earlier, so it is hugely important that the Government plays a role. We already play a significant role in relation to our PSO flights, but, with the introduction of the new tax, there will be a greater opportunity for us to support those island communities in rural parts of Scotland. We will continue to show that leadership, and Mr McArthur has an assurance from the Government in that regard.
We move to agenda item 4, which involves formal consideration of the motions on the draft affirmative instruments. I invite the cabinet secretary to speak to and move motions S7M-01280 and S7M-01281.
Motions moved,
That the Finance and Public Administration Committee recommends that the Air Departure Tax (Scotland) Amendment Regulations 2026 [draft] be approved.
That the Finance and Public Administration Committee recommends that the Air Departure Tax (Administration) (Scotland) Amendment Regulations 2026 [draft] be approved.—[Jenny Gilruth]
Motions agreed to.
I thank the cabinet secretary and her officials for their evidence today. In due course we will publish a short report to the Parliament, setting out our decision on the instruments.
During the suspension, we dealt with the items that we earlier agreed to take in private, so we can now conclude our meeting.
The next meeting of the committee will take place on Wednesday 28 October, when we will take evidence on the autumn budget revision and consider two draft reports.
Meeting closed at 11:00.
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