closer look Brexit: building bridges after the referendum 2 It is now 18 months since the 23 June 2016 referendum and only 15 months until Brexit Day (29 March 2019). In this, our third briefing considering the impact of Brexit on the UK construction industry, we look at recent developments. A closer look Brexit: building bridges after the referendum 2 A closer look Brexit: building bridges after the referendum 3 A brief recap – Political turmoil and the swift resignation of the then Prime Minister, David Cameron. – The formation of two new Government departments of state, the Department for Exiting the European Union led by David Davies (“DexEU”) with responsibility for overseeing the withdrawal negotiations and the Department for International Trade (“DIT”) led by Liam Fox with responsibility for striking and extending trade agreements between the UK and non-EU states. – A successful judicial challenge to the new Government and new Prime Minister, Theresa May’s, Brexit plan and the service of the Notice invoking Article 50 of the Treaty on European Union via the Royal Prerogative. The decision of the Supreme Court, in what is known as the Miller litigation (see “Brexit: the impact on UK construction – nine months on”), was that the Royal Prerogative could not be used and that the Prime Minister needed the authority of Parliament via an Act of Parliament which resulted in the hastily legislated European Union (Notification of Withdrawal) Act 2017. – The Prime Minister’s January 2017 Lancaster House speech, setting out the “Plan for Britain” and 12 key objectives that the Government would seek to achieve during the Brexit negotiations, quickly followed in February 2017 by a Brexit White Paper – a “vision for an independent and truly global United Kingdom post Brexit” and the proposal of the Great Repeal Bill (see “Brexit: the impact on UK construction – nine months on”). – A growing appreciation, both domestically and internationally, as to how much work needs to be done to successfully give effect to Brexit. The Prime Minister’s service of the Notice invoking Article 50, which occurred on 29 March 2017, is only the start of a journey that will almost certainly end on 29 March 2019 whether the UK and/or the remaining 27 Member States are ready or not. Any extension to the two year negotiation period and postponement of Brexit Day, requires the unanimous consent of the remaining Member States and if the passage of time since the referendum has produced any certainty, it seems certain that for any number of political, policy and practical reasons, an extension will not be agreed. What looks more realistic is a “transitional arrangement”, in relation to which more details are provided below. The outcome of the referendum was close and as is now apparent, a surprise to the Government, it having apparently done no contingency planning for a “vote leave”. The consequences of this lack of planning have been profound: A closer look Brexit: building bridges after the referendum 4 So what is new? The EU response The immediate and substantive EU response was: (i) the publication by the European Council, the EU institution charged with defining the EU’s overall political direction and priorities, of its “Draft guidelines following the United Kingdom’s notification under Article 50 TEU” dated 25 April 2017; and (ii) the confirmation of the mandate from the European Parliament that it has the sole authority to negotiate with the UK on behalf of the European Union, its various organisations and remaining 27 Member States. The Guidelines set out inter alia, the EU’s “overall objective”, “core principles” and “phased approach to negotiations”. Looking at these in turn: – The EU’s overall objective is “…to preserve its interests, those of its citizens, its businesses and its member states” and in the negotiations to “…maintain its unity and act as one with the aim of reaching a fair result that is fair and equitable for all Member States and in the interests of its citizens”. – Its core principles are identified as: – to have the UK as a close partner in the future; – that any agreement with the UK will have to be based on a balance of rights and obligations and ensure a level playing field; – preserving the integrity of the Single Market excludes participation based on a sector by sector approach; – a non-Member of the EU that does not live up to the same obligations as a Member cannot have the same rights and enjoy the same benefits as a Member; – negotiations will be conducted transparently and as a single package: nothing is agreed until everything is agreed, individual items cannot be settled separately; – the EU will approach the negotiations with unified positions and will engage with the UK exclusively through pre-determined channels of communications and in accordance with the negotiating directives; and – there will be no separate negotiations between individual Member States and the United Kingdom. – Only the first phase negotiations were outlined and with the aim to “provide as much clarity and legal certainty as possible to citizens, businesses, stakeholders and international partners on the immediate effects of the United Kingdom’s withdrawal from the Union; settle the disentanglement of the UK from the Union and from all the rights and obligations the UK derives from commitments undertaken as a Member State”. What this has meant in practice, has been addressing the EU’s three priority issues: EU citizens’ rights, the Northern Ireland/ Ireland border and, the financial settlement (known as the “divorce bill”). The European Council undertook to monitor progress on these three priority issues in this first phase of the negotiations and only proceed to the second phase – an understanding of the framework for the future relationship between the UK and the EU (i.e. a trade deal), once there had been sufficient progress on the priority issues. A UK general election In an effort to win a clear mandate for her Brexit vision and silence the remain MPs, the Prime Minister called a snap general election. Polling day was 8 June 2017 and the outcome is now well known – a hung Parliament with all the consequential difficulties of that. The Queen’s Speech at the State Opening of Parliament On 21 June 2017, the Queen’s Speech opening the new session of Parliament included eight Brexit Bills: the now retitled Repeal Bill (see “Brexit: the impact on UK construction – nine months on”) and Bills on trade, customs, immigration, agriculture, fisheries, data protection, and international sanctions. Of particular interest to the construction industry, are the Bills on customs (recently renamed as The Taxation (Cross-Border Trade) Bill), trade and the forthcoming bill on immigration. The Immigration Bill is expected to outline the rights of European Economic Area (“EEA”) citizens who arrive in the UK before a specified date to obtain permission to work and remain in the UK. Although the Bill has not yet been published, commentary on the likely provisions suggests: – from late 2018, citizens of EEA countries may apply for “settled status” to confirm their right to live and work in the UK after Brexit. It will ultimately be necessary for all EEA citizens (other than those from the Republic of Ireland), to obtain this status. Applicants will have to have been resident in the UK before a specified date (which is yet to be identified), and have completed at least five years continuous qualifying UK residence and still be resident in the UK; – EEA citizens who arrived and became resident before the specified date but who do not have five years continuous UK residence will be able to apply for “temporary status” until they can qualify for settled status; – EEA nationals who arrived after the specified date will be allowed to remain in the UK for at least a temporary period and may become eligible to settle permanently, depending on their circumstances. There is however no guarantee that they will receive settled status in the future. In the context of future immigration, it is likely that a system will be introduced based on time-restricted visas, possibly on the basis of advance permission to work, and without the possibility of these being extended. A closer look Brexit: building bridges after the referendum5 The Taxation (Cross-Border Trade) Bill, published on 21 November 2017 and previously known as the Customs Bill, provides for: – a standalone UK customs regime on Brexit Day, based on the Union Customs Code that will provide flexibility to accommodate future trade agreements with the EU and other countries; – allow the Government to implement interim arrangements, such as a time-limited customs union between the UK and the EU. In this context, the Government is keen to look at interim arrangements between the UK and the EU based on a shared external tariff and without customs processes and duties; – an ability to administer the customs regime, collect customs duties, and tackle duty evasion; – introduce swift changes to the UK’s VAT and excise regimes on Brexit Day whatever the outcome of negotiations, to ensure that the UK is in a position to trade independently with both the EU and the rest of the world. Plans are being put in place to ensure that, whatever the outcome of the Brexit negotiations, the UK can continue to implement VAT, customs and excise duties post-Brexit. However, until the UK and EU have meaningful second round negotiations concerning the future customs arrangements, the uncertainty for businesses importing and exporting goods and services, will remain. The Trade Bill, published on 7 November 2017, provides for: – a legal framework to allow the UK to strike free trade deals with countries around the world while ensuring domestic businesses are protected from unfair trading practices; – the creation of powers to assist in the transition of over 40 existing trade agreements between the EU and other countries; – the UK to become an independent member of the Agreement on Government Procurement (GPA) ensuring UK companies have continued access to £1.3 trillion worth of Government contracts and procurement opportunities in 47 countries across the globe; – the UK Government to have the legal ability for the gathering and sharing of trade information; – a new trade remedies body to defend UK businesses against injurious trade practices. The Bill will allow the UK to set and collect its own duty on goods coming into the country and will allow the government to implement different outcomes of the EU negotiations, including allowing for an implementation period. A closer look Brexit: building bridges after the referendum 6 The deadlock Following five rounds of first phase negotiations (the fifth concluding on 12 October 2017) and intense media scrutiny, no one can have failed to notice the lack of or apparent lack of progress on the EU’s three priority issues of EU citizens’ rights, the Northern Ireland/Ireland border and, the financial settlement/divorce bill. On 22 September 2017, the Prime Minister gave what is now known as her “Florence Speech” in advance of the much awaited European Council Brexit Meeting on 19-20 October 2017. In her speech she made clear: – the wish for a “transition agreement” of around two years following Brexit Day (in distinction to an extension to the withdrawal period) in which to conclude the UK and EU’s future relationship. The exact details of the transition agreement, how it would work in practice, etc., would need to be negotiated to include the following principles: – the UK would be free to enter into its own trade negotiations, but would not benefit from the EU’s future trade negotiations; – UK and EU access to one another’s markets would continue on current terms; – the UK would continue to participate in existing security measures; – the UK would continue to abide by the existing structure of EU rules and regulations; and – nationals from the remaining 27 Member States would continue to be able to live and work in the UK (but they would be required to register upon entering the UK). – A deep and special partnership with the EU (as previously articulated) and which would cover both a new economic relationship and a new security relationship. On the new economic relationship: – the Prime Minister repeated what she said in her Lancaster House speech earlier this year: the UK will be leaving the Single Market and the Customs Union; – further, she again rejected any suggestion that the UK would remain in the EEA because UK citizens would not accept having to automatically adopt new EU rules which in the UK would have had little influence in drafting and no vote in agreeing; – she also excluded having an arrangement which mirrored the EU – Canada relationship as this would represent a restriction on market access; – what she seeks is “an ambitious economic partnership which respects the freedoms and principles of the EU, and the wishes of the British people”. – On the new security relationship, the Prime Minister stated that the UK is “unconditionally committed to maintaining Europe’s security”. She proposed a bold new strategic agreement, which provides a “comprehensive framework for future security, law enforcement and criminal justice cooperation” built on shared principles including high standards of data protection and human rights; – that the UK would honour its financial commitments made as an EU Member; and – that British courts would take into account the ruling of the EU’s Court of Justice concerning citizens’ rights. In the context of the EU’s phase one priority issues: – it is the commitment to honouring the UK’s financial commitments made as an EU Member which has been most widely covered in the media both because of the size of the possible bill and the vote leave assurance during the referendum, that following Brexit, money previously paid to the EU would be available for UK public services; – immediately before the speech, the EU stated that the “issue of guaranteeing the rights of EU citizens in the UK has not been solved”. Its concerns were the ability for citizens to be able to enforce their rights derived directly from the withdrawal agreement in national courts and for those courts to be able to “refer questions related to the interpretation of rights deriving from European law to the Court of Justice of the EU”. The Prime Minister sought to address these concerns by stressing that she wants all EU citizens that are currently living in the UK to stay and carry on living their lives as before; EU citizens’ rights will be stated in the withdrawal agreement and the withdrawal agreement will be fully implemented into UK law, and that UK courts will be able to refer directly to it; – in respect of the Northern Ireland/Ireland border issue, both the EU and the UK Government have committed to protecting the Good Friday Agreement and the Common Travel Area. Furthermore, they have both stated that they will not accept any physical infrastructure at the border; – in response to the speech and following the Council Meeting, the European Council welcomed the progress made regarding both citizens’ rights and the Northern Ireland/Ireland border issue. It only “noted” the UK commitment to honour its financial obligations and this has not yet been translated into a firm and concrete commitment from the UK to settle all of these obligations. Building on this progress however, the European Council called for work to continue in order to be able to move to the second phase of the negotiations as soon as possible. A closer look Brexit: building bridges after the referendum 7 A closer look Brexit: building bridges after the referendum A closer look Brexit: building bridges after the referendum 8 The breakthrough EU citizens’ rights The three million EU citizens currently in the UK will be allowed to continue living and working here; those already in the country but without a permanent residency will be able to acquire it post Brexit Day; and the one million UK citizens living in an EU country after Brexit Day will receive reciprocal rights. The Northern Ireland/Ireland border issue There will be no “hard border” between Northern Ireland and the Irish Republic protecting the “North-South cooperation” following the Good Friday Agreement and no “new regulatory barriers” between Northern Ireland and the rest of the UK ensuing that Northern Ireland has “unfettered access” to the UK internal market. It remains to be seen how this will be implemented in practice. The financial settlement This has been agreed at between £35 billion and £39 billion and is said to include the UK’s share to the EU budget for a post-Brexit Day two-year “transitional period”. The approaching December 2017 session of the European Council at which it will formally reassess the progress on the first phase negotiations priority issues and in particular, whether it is ready to commence the second phase negotiations on the future UK and EU relationship has, in the last few days, produced much “toing and froing”. However it appears, that over breakfast, a “deal” on the first phase negotiations priority issues has been done. In particular: A closer look Brexit: building bridges after the referendum 9 A closer look Brexit: building bridges after the referendum A closer look Brexit: building bridges after the referendum 10 Conclusion The consequences of the referendum and vote leave have been profound, necessitating an enormous number of issues to be identified and resolved both domestically and with the EU. This has tested the Government and, in so doing, highlighted the continued tension caused by the vote leave. The UK has been forced to negotiate the withdraw agreement in accordance with the EU’s agenda and guidelines and in particular its overall objective, core principles and phased approach to negotiations. As a consequence, the UK has been forced to agree concessions in order to proceed to the phase two negotiations as to the future UK/EU relationship. There is no doubt that time is now of the essence if the withdrawal agreement and the transition agreement are to be agreed by Brexit Day and there is to be some much-needed clarity and certainty about the future UK/EU trading relationship. A closer look Brexit: building bridges after the referendum 11 Key contacts For more information, please contact: James F Shackleton Legal Director, Construction and Engineering (London), Eversheds Sutherland T: +44 20 7919 0768 M: +44 7989 981 717 firstname.lastname@example.org Leith Al-Ali Associate, Construction and Engineering (London), Eversheds Sutherland T: +44 207 919 0927 M: +44 79 1775 1102 email@example.com Tariq El-Gazzar Associate, Real Estate Dispute Resolution (London), Eversheds Sutherland T: +44 207 919 4958 M: +44 7387 544 083 firstname.lastname@example.org eversheds-sutherland.com Eversheds Sutherland (International) LLP is part of a global legal practice, operating through various separate and distinct legal entities, under Eversheds Sutherland. For a full description of the structure and a list of offices, please visit www.eversheds-sutherland.com. 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