Agents face repercussions of CAA ATOL ruling

TravelMole Guest Comment by Russell Glass, senior manager at PricewaterhouseCoopers LLP

The news regarding Freedom Flights and Pure Flights (see previous TravelMole stories) will have repercussions for all travel agents as they need to reconsider whether they are only an agent, or whether they are in fact the principal in what they sell to consumers.

Given the challenges and current market turmoil travel businesses will need to gain this clarity quickly to establish who has responsibility for funding claims as a result of collapsed airlines.

Changes in consumer protection rules, together with legal guidance issued in early 2008 was meant to make it clear when agents are packaging and when they are not.

If agents create and sell package holidays on their own behalf, then they are the principal and not just an agent so become liable for any non-performance of that package. However, the new rules remain complex and the legal guidance issued still leaves some doubt over who should be at risk for airline failure.

My advice to travel agents is that if you are in any doubt, seek advice from your professional advisors on your principal/agent status.

The costs of neither protecting yourself against airline failure nor meeting the CAA in court for not complying with the rules could be painfully expensive.

The background to the announcement is that the growth of internet and low cost airlines has enabled many travel agents to package themselves.

As a result, agents were required to obtain an Air Tour Operators Licence (‘ATOL’) licence in order to sell packages. However, by complying with the CAA’s requirements, by selling under their ATOL, they find themselves first in the firing line when it comes to bailing XL customers.

Only if that agent subsequently fails (i.e. goes into administration) under the cost of repatriating or refunding the customer, would the CAA step in.

Friday’s news shows that the CAA is getting tough on agents selling their own packages that they have created without an ATOL and is willing to take the issue to court.

Indeed, the legal guidance issued effectively states that if it’s unclear whether the agent is packaging itself or not, then a court would determine the answer. The CAA is therefore taking this very route.

The issue though is not just limited to the consumer protection and the risk of airline failure.

Any court case could provide further clarification on when the sale of a flight and a hotel is a package and when it isn’t.

But even wider than that are the legal, tax and accounting implications.

We’ve seen bedbanks publicly debate whether to live life as an agent or become principal in the transaction.

Being an agent avoids the spectre of the Tour Operators Margin Scheme (‘TOMS’), which is typically an additional tax to pay by becoming the principal.

But on top of that, there are accounting differences as well that need to be considered and cannot be ignored.