Located by Scottish island, returns and tells a story (8)
I believe the answer is:
narrates
'tells a story' is the definition.
'located by scottish island returns' is the wordplay.
'located' becomes 'set' ('set' can be a synonym of 'located').
'by' means one lot of letters go next to another.
'scottish island' becomes 'arran' (I've seen this before).
'returns' shows that the letters should be reversed in order.
'set'+'arran'='setarran'
'setarran' back-to-front is 'NARRATES'.
'and' acts as a link.
(Other definitions for narrates that I've seen before include "Recites, recounts" , "provides an account" , "Tells (a story)" .)