Deloitte lead partner for travel and aviation Alistair Pritchard takes stock of the future relationship between the UK and EU

The EU-UK Trade and Co-operation Agreement removes a significant degree of uncertainty about the future of the relationship between the UK and the EU, allowing for a much more stable start to the UK’s new relationship with the EU. Businesses that had planned for Brexit are better equipped;  however, the rate of change and disruption in the market as a result of Covid-19 will require companies to rethink their strategies. Decisions on critical areas such as data adequacy remain, so the full picture of the impact is yet to be seen.

From a traveller perspective, visa-free travel on both sides will be limited up to 90 days in any 180-day period. In addition, travellers will need to pay for mobile roaming charges and may need to acquire additional documentation such as an international driving permit and insurance. UK travellers will also need to apply for a UK Global Health Insurance Card (GHIC) when their European Health Insurance Card (EHIC) expires and obtain an animal health certificate before travelling with a pet. From a date yet to be confirmed, UK citizens entering the Schengen Area without a visa will need to have obtained approval through the European Travel Information and Authorization System and the UK also intends to introduce a similar authorisation system.

Expected impact of Brexit

The results of Deloitte’s C-suite survey in January 2021, from businesses in consumer-centric industries such as travel, hospitality and services, highlight that 26% of business leaders consider Brexit a high risk to business growth in the short term and 42% see it as a risk in the medium term, although 42% did not consider it a high risk.

The sector has been preparing for the impact of Brexit over recent years, however combined with the impact of the pandemic, business leaders expect to see an adverse effect on both revenues and profits, as well as the ability to invest in future growth. Business leaders expect Brexit to have a negative effect on revenues and profits over the next three years, 31% of respondents expect their revenues to decrease and 42% expect their profits to decline.

Although around half of the sector expects Brexit to have little or no effect on the bottom line, respondents expect a slowdown in hiring and capital expenditure, while M&A activities and JVs are expected to be least affected. The travel, hospitality and services sectors may need to navigate a few hurdles caused by Brexit in the short term, with 26% of respondents expecting it to have a negative effect.

Business leaders in the travel, hospitality and services sectors intend to increase cost reduction programmes (37%) and reduce capital expenditure (26%) in the short term. However, the survey highlighted that Brexit is likely to remain a high risk to growth for the next five years. Therefore, businesses will need to align their short-term tactics with their long-term strategies.

Implications for the travel industry

Although the Brexit agreement provides clarity in some respects, some of the changes vary for each sector and differ in each member state of the EU. Businesses in the UK will need to prepare for additional legal, regulatory and administrative requirements as a result. Below are a few examples of how Brexit is likely to influence the travel and aviation sector.

An area of complexity for UK established businesses is the taxation of EU holidays; different rules will apply to UK VAT legislation, as the UK is now a third country. For UK-based tour operators and international travel businesses trading in the EU, and for EU businesses trading in the UK, new VAT rules now apply.

Under the VAT legislation in force prior to the end of the transition period, most travel services were subject to VAT in the country in which they took place.  However, businesses which bought in and supplied EU travel services in their own name benefited from not being required to register and account for VAT in each EU Member State of service, due to the Tour Operators Margin Scheme (TOMS).

Following the transition period, the UK’s operation of TOMS differs from that in force across the EU, and the EU is closely considering the taxation of supplies made by UK and other non-EU based businesses. Most recently, Germany has announced that it no longer considers TOMS to apply to non-EU businesses, which would result in a significant change to the tax treatment of German services supplied by UK and non-EU businesses

It remains to be seen whether and how the rest of the EU will respond. In addition to the potential increase in VAT charges, other areas to consider include costs of compliance, the rate of VAT that applies to travel services, whether local input tax would now be recoverable in full, ensuring that all purchase invoices received from EU suppliers are valid VAT invoices and that businesses fully understand their supply chains across the 27 EU Member States.

Another consideration is that the Posted Workers Directive will no longer apply, which significantly impacts any travel operator that employs overseas representatives. Furthermore, previously, a holiday package organiser established in the UK could have one method of insolvency protection to financially protect both its UK and EU holiday sales, and vice versa. This principle of mutual recognition has been withdrawn and so businesses established in the UK wishing to sell holidays to EU consumers, will need to either set up a separate place of establishment within the EU with its own insolvency protection which can then be used to financially protect its EU holidays sales or alternatively, businesses may consider setting up compliant insolvency protection arrangements in each individual member state it wishes to sell in.

Aviation status quo

For the aviation industry, the agreement helps preserve the regulatory status quo as much as possible without keeping the UK in Europe’s single aviation market. Most traffic rights are retained, helped by allowing UK airlines to be EU-owned, and mutual recognition of safety standards helps to ease the separation of regulation in this area. However, the need for some EU airlines to block non-EU shareholders is a consequence of the lack of full reciprocity on ownership and control. It may reduce the appeal to investors holding shares in these companies at a time when the airline industry cannot afford to limit access to capital.

From an operational perspective, airlines have already taken steps to minimise the impact and incurred costs over the need for new operating licences to continue flying in both the regions. The agreement does not include a bilateral air safety agreement between the EU and the UK and the durability of mutual recognition of safety standards and the approach to consumer protection has yet to be tested over time.

The UK aerospace sector is also impacted across multiple areas, from delivering whole-aircraft capability to interiors and maintenance services. The restrictions on trade, services, climate policies and labour are also likely to impact the sector’s productivity and service deliverables.

Data adequacy

When it comes to data, the UK will no longer be bound by EU law, although the EU General Data Protection Regulation (GDPR) has been retained in UK law and applies alongside the Data Protection Act of 2018. While the key principles, rights and obligations remain the same, there are some implications for the rules on transfers of personal data.

As part of the new trade deal, the UK is awaiting adequacy decisions from the European Commission. While a draft decision was published recently which recommended that the UK receive an adequacy decision, it is not clear if the adequacy decision will replicate the existing agreement. In case the UK is not granted full data adequacy, businesses will need to examine their data protection measures and contracts and implement suitable legal safeguards. Businesses in travel, aviation and hospitality sectors rely heavily on the flow of information and may face significant changes when it comes to data protection regulation.

Environmental, social and governance issues remain high on the regulatory agenda, though it is expected that the UK’s regime will share many features with the EU, and the interconnectedness of the markets means that each regime will likely be relevant to companies in the other jurisdiction. Both sides have developed various climate change policies, particularly with respect to the financial services industry.

Those companies within the scope of the EU rules are likely to see new requirements come into force for instance the Sustainability-Related Disclosure Regulation (SFDR) in 2019 and the Taxonomy Regulation in 2020, UK companies will need to take into account these and other ESG-focused regulatory developments. These companies will need to pay close attention to this new landscape and obligations such as disclosure requirements and increased scrutiny from regulators and investors.

Uncertainties around agreements on important areas such as transfer of data and emission trading standards remain, and decisions on other areas, for instance air services agreement and computer reservations systems, still needs to be reached. However, there is the potential for new partnerships and relationships and the opportunity to have greater choice on laws and regulations in relation to travel.