Implications of Scottish independence from an Aviation perspective

17 September 2014

Mike Scrimgeour

Should the people of Scotland make the determination on 18th September that they wish to 'fly solo' from the rest of the UK, the implications, costs and opportunities from an aviation perspective will take some time to be fully understood.  

From a regulatory standpoint, the Scottish Government White Paper on Independence indicated that a memorandum of understanding with the UK CAA would be entered into under which the UK CAA would report to the Scottish Government on regulatory matters affecting aviation in Scotland prior to the establishment of a separate Scottish regulatory body in due course. The Scottish Government suggested  in 2013 that it would be possible in due course to introduce a combined Scottish transport regulator covering both the rail and aviation sectors. While there may be some benefits from a streamlined approach, it seems unlikely that setting up and staffing such a specialised body could be achieved in an accelerated timescale.  Pending the outcome of its application for membership of the European Union, as well as the transition to independence, it is likely that Scotland would adopt the rules and procedures laid down by the European Aviation Safety Agency (EASA) on a voluntary basis.

An independent Scotland would apply for membership of the International Civil Aviation Organisation (ICAO) and would likely follow a similar strategy to that which it contemplates for aviation regulation in terms of setting up its own version of the UK Air Accidents Investigation Branch. It is clear from the White Paper that NATS would continue to provide air traffic services in Scotland although a negotiation would be required for an 'appropriate share' of the UK Government's 49% share in NATS.

The White Paper also makes reference to improving Scotland's air network, especially to long haul destinations, and cites the example of agreements between Ireland and the USA in this regard. It does not, however, identify the process through which this would be achieved. Options would include entering into an interim air transport agreement with the EU to preserve rights secured through EU horizontal agreements, seeking to agree separate bilateral agreements between Scotland and other countries and acceding separately to Air Transport Agreements signed by the EU and UK.

Although reference is made in the White Paper to the creation of an independent Scottish shipping register, the position in relation to aircraft appears unclear. Again, it is possible that a combined shipping and aircraft register may in due course be contemplated. Consideration will presumably also be given to the ratification of the Cape Town Convention which confers advantages to aircraft financiers, in particular, but also airlines if registration under Cape Town helps to lower funding costs. It has been suggested that this may be done in the context of an integrated strategy related to aviation, including aircraft finance, in an independent Scotland.   

The questions which arise from an independent Scotland's position in relation to international treaties and tax are particularly important in the context of aviation. In addition to the Cape Town and Chicago Conventions (ICAO having been set up under the latter), the Montreal Convention on airline liability will be high up the priority list for ratification, particularly if it is decided to pursue an aviation strategy designed to encourage investment and encourage air connectivity. On the flip side of this debate, an independent Scottish Government will also be required to consider how it deals with matters such as export control (currently the preserve of UK BIS), international trade sanctions and anti-bribery and corruption laws. While there has been little specific discussion of these areas, it is to be hoped that a healthy dose of realism and pragmatism will prevail.

Taxation policy will inevitably play a significant role in the development of an aviation strategy in an independent Scotland. It has been suggested that 'tartan tax' advantages may be offered to aircraft owners and investors, and perhaps also airport owners and operators, in order to boost this sector of the economy.  Consistent with the aspiration to boost business and tourism as well as the aviation sector generally, the White Paper stated that Air Passenger Duty in Scotland would be reduced by 50% initially with a view to its eventual abolition. 

It is likely that an immediate priority will be to address double tax treaties with key trading partners.  Most obviously, this would mean addressing the issue of withholding taxes between Scotland and the rest of the UK but similar treaties would also need to be entered into with other key trading partners. Similarly, the position on indirect tax, which could potentially have a significant effect on intra-Group cross-border trade, will be a priority area for clarification. From an aviation perspective, it would seem to make sense for an independent Scotland to adopt the EU rules on VAT zero rating for airlines operating for reward chiefly on international routes even if the process of accession to the EU turns out to be protracted.  

In the event of a vote in favour of independence for Scotland the process to prepare properly for independence will be arduous and potentially lengthy. However it will surely be in the common interest for both Scotland and the rest of the UK to work together to implement institutions and processes which benefit the entire economic area of what, for now, remains the United Kingdom.

Mike Scrimgeour