Exploring the impact of Brexit on aviation

Thursday 25 May 2017

By Ayuk Ntuiabane, Director – VAT, Equiom Solutions


Continued access to the EU aviation market is sure to be an important part in the withdrawal negotiations between the UK and the EU. This is not just because of the high-profile lobbying by the budget airlines on both sides of the coming divorce; it is also because the aviation sector is large. Moreover, aviation is seen as an enabler of wider economic growth within the EU. The EU’s integrated Single Market with its provisions on the free movement of goods, capital, services and people has provided the basis on which low-cost travel has grown and flourished. The EU VAT system has played its part in that growth, not only by treating the general aviation sector benignly but also by spinning off a substantial ‘business aviation’ sector. Little wonder, then, that both general and business aviation have staked their future deeply on the current EU VAT system and its continuation. Their position is determined by a number of factors.

The Airline Factor

The ’airline‘ factor has every reason to be big in the context of Brexit. The UK Office of National Statistics estimates that of the £24.1 billion worth of transportation services that the UK exported globally in 2015, approximately two thirds consisted of aviation services (£16.4 billion).

Through agreements and agencies (such as the European Common Aviation Area (ECAA), the Single European Sky (SES), its technological pillar known as the Single European Sky Air Traffic Management Research project (SESAR), and the European Aviation Safety Agency (EASA)), the EU has been able to carve out not just a geographically contiguous aviation area in Europe but also a framework for trade in aviation services with common rules and operational standards. Thus, EU-wide rules have also been adopted on competition, safety, security, consumer protection and environmental protection.

From this Single Market framework has emerged the concept of the ‘Community carrier’. The Community carrier could access any intra-EU route and offer services to customers without prior authorisation or permission from authorities in those Member States. That means UK scheduled commercial airlines, like all other EU airlines, are able to fly to any point within the EU and provide intra-EU routes as well as domestic routes in other Member States without restriction.

But in order to be a community carrier, airlines have to comply with the following requirements:

  • They have to be owned (greater than 50%) and effectively controlled by an EU Member State and/or nationals from an EU Member State, and their principal place of business has to be located in a Member State
  • They have to ensure the safety of their operations in accordance with the EU’s safety regulations, evidenced by the receipt of an Air Operator’s Certificate (AOC)

Thus unlike, say, shipping, the EU’s aviation package for operators is very advanced and integrated, with the rules so embedded that it is hard to envision life for a UK airline or operator differently after Brexit. The International Air Transport Association lists more than 140 pieces of EU legislation relating to aviation that are currently implemented in the UK. Add two related factors to that: firstly, that the European Commission has acquired full competency to negotiate air traffic agreements on behalf of the whole of Europe and, secondly, that EU membership has formed the sole basis upon which Community carriers access the aviation markets of some third countries – the US for example.

Faced with what looks like a definite wrench, the stated position of the scheduled airlines has been forcefully that the UK airlines should somehow maintain their access to the EU framework and continue to provide the routes they fly today post Brexit.

The Qualifying Aircraft Factor

The common EU VAT system has given its own fillip to aviation. Both in recognition of its enabling role in the wider economy and its international character, the approach has been to largely exempt aviation from VAT. The scope of the available exemption is wide enough to include the supply of certain aircraft themselves, but also the supply of goods or services for those aircraft and the provision of ancillary services for those aircraft.

Central to the VAT exemption is the concept of a ‘qualifying aircraft’. This is defined in law as any aircraft which is used by an airline operating for reward chiefly on international routes, or is used by a State institution and is of a weight of not less than 8,000 kg and is neither designed nor adapted for use for recreation or pleasure. In reality, the exemption from VAT is interpreted to include even aircraft which operate on domestic routes, provided they are used by those airlines.

The definition of an ‘airline’ itself is flexible. It is simply ‘an undertaking which provides services for the carriage by air of passengers or cargo’. The undertaking can be a sole proprietor, partnership, corporate body or any other entity or business structure. Provided it operates at least one aircraft, which it may own, lease or hire for the purpose of carriage of passengers or cargo, it is an airline for this VAT exemption purpose. And even where in practice EU tax administrations would expect the airline concerned to have an AOC that counts only as an indicator – they would allow a business to operate as an airline for the purposes of using a qualifying aircraft without VAT by taking into account other business criteria.

The Business Aviation Factor

This goes a long way to explain the growth of the other aviation sector commonly called ‘business aviation’. For this amorphous but no less influential category, air travel is used as a means to an end, for a business trip or for accessing suppliers or markets. For them the ECAA framework is itself essentially an infrastructure asset in Europe enabling their own success as its users. The EU common VAT system gives them positive endorsement too as businesses within the framework of an economic activity, allowing them VAT deduction within a VAT registration as an enterprise. Thus, in effect, the EU system extends to business aviation users similar VAT neutrality as is afforded scheduled commercial airlines moving air cargo and air passengers.

This VAT approach may be the ambient effect of the airline factor that drives the liberalised but integrated regulatory framework for general aviation within the EU. However, business aviation is often swept along by the same tide of rules of compliance designed for the scheduled commercial airlines sector - a point which the business aviation sector sometimes raves about but has grudgingly accepted.

Come Fly Away?

The overriding point though is that the UK currently trades aviation services as an EU Member State. Access to and trade with other EU Member States has been cemented by the rules and principles governing the ECAA and the Single Market in aviation, while trade with the rest of the world is predicated upon EU-negotiated Free Trade Agreements and a shared schedule of commitments at the World Trade Organisation.

With Brexit, the UK will no longer be a member of the EU Single Market in aviation. And yet whatever alternative trade model the UK adopts, whether already available or to be created, will be judged in terms of how close it comes to the status quo. In the circumstances the closest framework the UK could adopt is the existing model followed by Norway, Iceland, Liechtenstein, Switzerland and a few other European countries, by which it would have membership of the ECAA extended to it as a ‘third country’. This, though, would require the UK to accept the EU aviation’s acquis, while having no direct say over its ongoing formulation or future development. The position staked by its government so far implies the UK will not accept this, since it would represent a severe restriction of its ability, post Brexit, to develop and make its policy in this area.

So we are left with two other alternative models. The first would be a separate comprehensive bilateral air services agreement between the UK and the EU. But could such an agreement realistically maintain the level of market access currently enjoyed by UK airlines and allow the UK to retain voting rights in the EU agencies? Existing non-EU ECAA members do not have such voting rights, so such a bilateral air services agreement would be unprecedented.

The second would be for the UK in the absence of any other agreement with the EU to rely upon pre-existing bilateral aviation agreements with individual Member States. However, these agreements predate the creation of the Single Market and their validity in both legal and practical terms is highly questionable, given that they were agreed before the EU extended its competence on aviation matters. 


The UK is a global leader in air services, with considerable shared interests with the EU in this sector. It is hard to imagine that there would be no deal with the EU for post-Brexit trade of UK aviation services. But there is considerable nervousness as to the sheer height of the stakes – both in terms of the format and content of that agreement and the ability to achieve it before the UK leaves the EU in 2019.

Meanwhile, scheduled commercial airlines and operators are reacting to the uncertainty by considering registering part of their operations in other EU Member States – the number of AOC applications there, for example, is reportedly rising. This will probably require them, after 2019, to comply with requirements that they be effectively controlled by shareholders from an EU Member State. Business aviation on its part seems less jittery, probably because of considerably shorter lead-in times for VAT repositioning if and when required.


For further information about the impacts of Brexit on yachting VAT or to learn how Equiom can help you, please contact Ayuk Ntuiabane. To read other articles in our Brexit and VAT series please click here.