This article was first published in ABTA’s Travel Law Today, Issue 10.
Travel companies again face huge disruption as we approach the end of the Brexit transition period at 11pm on 31 December 2020. In the absence of an extension to the transition period, or a ‘new deal’ between the UK and the EU which specifically addresses the issues set out below, the end of the transition period will very much feel like a ‘hard Brexit’ for travel companies.
We have been here before, with the UK facing the prospect of a hard Brexit on 29 March 2019, 12 April 2019, 31 October 2019 and 31 January 2020 before extensions or (latterly) an agreed transition period postponed a hard Brexit. Many travel companies had prepared for a hard Brexit on these dates because they simply had to be ready for a hard Brexit.
In particular, those travel companies selling to EU consumers from a UK establishment could not afford to adopt a ‘wait and see’ approach in the hope that Brexit would be delayed. These companies had to have contingency plans in place such that, upon the exit date, they were ready to press the button so that Plan B took effect and they were able to continue trading in the EU.
If the UK and EU do not agree a new deal for travel before 31 December, as now seems likely, these contingency plans will have to be dusted off and put in place. So what does this mean for UK travel companies?
What are the legal issues?
For UK travel companies that sell to customers in other EU markets, a hard Brexit will give rise to a critical problem in terms of their compliance with the EU Package Travel Directive (“PTD”).
Under existing arrangements, UK travel companies may rely upon the insolvency protection arrangements they have made in the UK when they sell packages and linked travel arrangements to customers in other markets. For example, UK travel companies can use the ATOL scheme to sell flight-inclusive packages to customers in, say, Ireland. The Irish regulator has to accept these arrangements under the ‘mutual recognition’ principles of the PTD.
At the end of the transition period, and in the absence of a new deal, these arrangements will come to an end. As a consequence, insolvency protection arrangements made in the UK will no longer automatically be recognised by other EU regulators. So what must travel companies do?
Options for PTD compliance
The default position is that UK companies must arrange insolvency protection in accordance with the rules of each EU market they sell into.
This means a guarantee as determined by the Kammarkollegiet for sales in Sweden, a separate guarantee as determined by the Rejsegarantifonden for sales in Denmark, a CAR licence (or one of the permitted alternative options) for sales in Ireland, and so on. Clearly, setting up these separate arrangements is unattractive for a company selling into various EU markets given the time, expense and inefficiency involved in setting them up.
Yet this has remained an attractive (or the least bad) option for many companies because it allows a company’s headquarters to remain in the UK. However, there are some unwelcome obstacles for companies wishing to go down this route.
Firstly, some markets operate a licensing or registration scheme, not dissimilar to ATOL, which UK companies must join by the end of the transition period in order to satisfy the insolvency protection rules of that market. The application process, and ongoing reporting and engagement with the regulator, means that this option is more time consuming in the long term than dealing with a single regulator.
Secondly, some markets, such as Sweden, will only allow travel companies to join their scheme if they have first created a local branch or subsidiary in Sweden. This can bring tax liabilities in the local market, undermining one of the major benefits of this option for UK-based companies.
Thirdly, even in those markets which do not have a regulatory scheme and simply require travel companies to arrange insolvency protection (such as insurance or a bond) will need to ensure that the insolvency protection complies with the relevant local laws. For instance, typically the local laws require the insurance or bond to be provided by an EEA-authorised institution.
An alternative option, and an attractive one from a regulatory perspective, is to create an ‘EU hub’ and use the insolvency protection arrangements of the country of establishment to sell into all EU markets. For instance, opening up a new establishment in Ireland and then selling across the EU in accordance with the Irish rules for insolvency protection. The major advantage of this ‘one-stop-shop’ option is that it avoids the burdens described above.
The difficulty with this option is that a ‘place of establishment’ requires a real presence e.g. an office and people. The rules are clear that a mere post box address will not be enough. There are structural ways in which the size of the footprint can be minimised, but a real footprint of some sort is still required.
These options are both workable for UK-based travel companies looking for a way to continue selling to EU-based consumers after a hard Brexit. However, the reality is that both options take time to set up and implement.
What should travel businesses be doing?
Given the current likelihood of there being no agreement between the UK and EU on the issues above by the end of the transition period on 31 December 2020, travel businesses selling into the EU should be getting ready for this eventuality now. The options described above for trading in the EU after the end of the transition period are both viable but will take time to implement. These new arrangements will need to be in place by 11pm on 31 December 2020.