There's no reason why it shouldn't apply to XXX-LHR-LCY-XXX.

To correct my original post, however, it's the airport charges you save on, rather than the government taxes.

For award flights, this is good, but for paid, there's the drawback that LCY-AMS-LCY is £350 in Y compared to £280 for LHR-AMS-LHR. You do get offers to bring it down, however.

If it wasn't for the £350 fare, mind, I'd pay the extra charges and go for LCY every time, not least to avoid giving BAA (Bloody Awful Airports?) any more money than necessary...