The fourth edition of Boardroom Brexit explains the key developments in the Brexit negotiations over the last few months and their importance to your business. A fuller analysis follows the summary below.
- There was huge political impetus to move the Brexit negotiations on to the second phase in December last year, after unpromising negotiations in October and November. Had the European Council (EU-27 Heads of State) not agreed to do so, the chances of a negotiated outcome would have faded significantly
- To move the negotiations on, compromises were reached on the three key preliminary issues: the rights of EU citizens living in the UK and UK citizens living in the EU-27, the UK's financial settlement, and the Northern Irish border
- Businesses with staff whose residency rights might be affected by Brexit should ensure that they understand what was agreed in December - this is by far the most detailed outcome of the negotiations to date. The cut-off date for accruing EU citizenship rights - the two-year deadline for the negotiations, 29 March 2019, or the end of a transitional period, should one be put in place - is still to be resolved
- The compromise on the Northern Irish border was a statement of intent rather than a solution to a seemingly intractable problem. It may, though, have important consequences. Should the UK be held to the language it agreed to, and in the absence of any other solution, it would have to stay fully aligned to the majority of EU Single Market legislation post-Brexit to avoid a hard border in Ireland. If this is the case, the debate about whether the UK diverges from EU regulations post-Brexit is already answered: it will not
- Notwithstanding the progress made in December, significant challenges still lie ahead. The main focus is now on negotiating the terms of a transitional deal by the end of March, after which formal negotiations on the outline of a trade deal begin. The EU wants the UK to stay in the Single Market and Customs Union during the transition period, to ensure a status-quo transition; the UK appears to agree. Remaining in the Single Market and Customs Union during the transitional period will provide businesses with the greatest degree of legal certainty that all internal EU rules will remain the same. The UK would be bound by changes in existing EU legislation, and by new EU legislation adopted during the transition period, so that the integrity of the EU's Internal Market could be preserved. Expect a backlash from Eurosceptic Conservative Party MPs in the UK, however, should this be agreed
- The purpose of holding these negotiations on the transition period now is to provide business with more certainty by the end of March. Companies should make sure they understand the details of any agreement reached at the European Council meeting on 22/23 March, and assess the likelihood of it remaining unchanged until the end of the negotiations. This will be relevant to when to trigger Brexit contingency plans
- The EU has suggested an end date for the transition period of 31 December 2020, which leaves 21 months from the date of Brexit in which to agree an EU-UK trade deal. If one is not in force by then, and the transitional period has not been extended, the UK and EU would face a similar regulatory cliff-edge as the one they face on 29 March 2019 if no withdrawal agreement is in place. Whilst there is goodwill between the parties, the complexities of negotiating an EU-UK free trade agreement should not be underestimated, and the chances of doing so in 21 months are slim. Should one not be agreed, there will be pressure to extend the transitional period
- Informal discussions on the UK-EU future relationship will begin this week. The EU is likely to offer the UK a free trade agreement (FTA) (see the infamous "Barnier slide") of which the EU-Canada agreement is the most recent example, rather than any bespoke relationship, such as it has with Switzerland. Businesses will have to understand the differences between UK access to the Single Market as an EU Member State, and likely UK access under an FTA. This understanding should form the basis of industry lobbying of the UK and EU on the contents of an EU-UK FTA. Businesses will have to prioritise their engagement with UK and EU negotiators and legislators.
- The European Commission has set up a task force directly under its president, Jean-Claude Juncker, to prepare the EU for a no-deal scenario. Concerned that not enough businesses are preparing for this outcome, its "Brexit Preparedness Group" has issued a series of "Notice to Stakeholders" in certain sectors, setting out the consequences. See the notices on industrial products; marketing of mineral waters; civil justice and private international law; plant protection products; air transport; road transport; personal data; and company law. Similarly, the European Medicines Agency is launching a survey to gather information from pharma companies on their Brexit preparedness plans and to identify any particular concerns with regard to medicines supply that may impact public or animal health
- Our advice to clients on Brexit planning remains the same: you should still prepare for the worst, and the time within which to assess the impact of a no-deal Brexit, and have contingency measures in place, is shortening. As we have already seen in the context of Northern Ireland, it is not impossible that politics will prevent a deal being done. More businesses are beginning to follow this advice: a recent survey of 300 companies by the CBI found that 60% had either implemented contingency plans, or were planning to do so.
There has been significant progress since the last edition of Boardroom Brexit, the most important update being the European Council's 15 December declaration that sufficient progress had been made in the first phase of negotiations such that negotiations could progress to the second phase. Much remains to be done, however. The UK and EU must now negotiate a transition period - designed to ensure certainty for businesses - and the parameters of the future relationship.
The December agreement - moving on from the first phase
Agreements were reached in respect of citizens' rights, the financial settlement and the Irish border. Whilst these agreements are not yet legally binding, and were made with the caveat that 'nothing is agreed until everything is agreed', they nevertheless represent a milestone in the negotiations. They were set out in a Joint EU/UK Report.
EU citizens in the UK and UK citizens in the EU27 now have increased clarity as to their futures, as do their employers.
The UK Government will operate a system of 'settled status', which will allow successful applicants to remain indefinitely in the UK. A registration process will be introduced; further details are expected in the first half of this year. The Government has committed to ensuring that the procedure will be 'transparent, smooth and streamlined'.
In short, EU citizens that are living in the UK, and UK citizens living in the EU, up until 29 March 2019, will be entitled to stay. Those that have lived continuously for five years prior to this date will be able to apply for settled status. Others will need to apply to stay until they have reached this five-year threshold. Family members will also be able to apply for settled status. Close family members will be able to join EU citizens post 29 March 2019, provided the familial relationship existed on or prior to this date. The UK courts will enforce citizens' rights in the UK, and may choose (but are not obliged) to refer unclear cases to the Court of Justice of the EU for interpretation, prior to making their own decision.
For now, the UK Government maintains that EU citizens do not yet need to take any steps to establish immigration status.
Already, however, there is doubt about the agreed final date for accruing permanent EU citizenship rights. Although 29 March 2019, Brexit Day, was agreed by the UK and EU in December, the recently published EU guidelines on a transitional period suggest the date should be the end of the transitional period, 31 December 2020.
The UK and EU agreed the scope of the UK's financial commitments (including a commitment to continue to pay into the EU budget until 2020, and to pay liabilities such as pension contributions) and the principles for valuation of these commitments. Whilst no precise figure was decided upon, it is expected to be in the region of €40 billion (the UK Government's annual spend is approximately £800 billion).
The Irish border
Both sides committed to ensuring there would be no hard Irish border, although the means of achieving this were not set out. EU Member States have expressed continued concerns about the border issue, with some stating that even with the strongest political will, a practical solution to facilitate an open border will remain elusive. The onus now lies upon the UK Government to find a workable solution. Given the Government's position that the UK will leave the Single Market and Customs Union, it remains far from clear how a solution to the Irish problem will be found. Should the UK be held to the language it agreed to (see below), and in the absence of any other solution, it would have to stay fully aligned to the majority of EU Single Market legislation post-Brexit to avoid a hard border in Ireland. If this is the case, the debate about whether the UK diverges from EU regulations post-Brexit is already answered: it will not. The key section is as follows:
"The United Kingdom's intention is to achieve these objectives through the overall EU-UK relationship. Should this not be possible, the United Kingdom will propose specific solutions to address the unique circumstances of the island of Ireland. In the absence of agreed solutions, the United Kingdom will maintain full alignment with those rules of the Internal Market and the Customs Union which, now or in the future, support North-South cooperation, the all-island economy and the protection of the 1998 Agreement."
These words may gain increasing significance in the course of the year.
The second phase of negotiations - a transition period, and the future relationship
The second phase of negotiations will initially focus upon the parameters of a proposed transition period, and then upon the future relationship between the UK and the EU. Formal negotiations on the former will start this week, following the publication of the EU's guidelines.
The EU guidelines
The EU guidelines for the transitional period following Brexit, agreed on Monday this week, have legal certainty uppermost in mind. Presented as a set of non-negotiable facts, they focus on maintaining the status quo, with the UK staying in the Single Market and Customs Union and remaining subject to EU law. The guidelines stipulate that EU law will have primacy over UK law, and that the Court of Justice, minus a UK judge, will have supremacy over national courts, during a transitional period, which must end by 31 December 2020. In other words, nothing in practice will change. This is exactly the certainty that businesses, and individuals, on both sides of the Channel need, giving both more time to prepare for life after Brexit. The guidelines do not prevent the UK from negotiating new trade and other international agreements during the transitional period, but those that affect existing EU policies cannot come into force until after the transitional period without the EU's authorisation:
"During the transition period, the United Kingdom may not become bound by international agreements entered into in its own capacity in the fields of competence of Union law, unless authorised to do so by the Union."
It remains to be seen how the UK will remain a party to the EU's trade and other international agreements during the transition period, as it will no longer be an EU Member State.
David Davis's Teesport speech
In a speech at Teesport on Friday last week, David Davis, the UK Brexit Secretary, agreed with the EU's approach, saying:
"We agree the implementation period should […] see the UK outside of the European Union, no longer a Member State. We also agree on the need for this period to have a strict time limit, guided by how long it will take us all to prepare and implement the new processes. And we agree on the need to base this period on the existing structure of rules and regulations. Including, crucially, on continued access to each other’s markets on current terms."
He clarified that the UK wanted to "maintain[…] the same regulations across all sectors of the economy — from agriculture to aviation, transport to financial services, as part of a new international treaty", and that the UK would “replicate the effects of the EU customs union” during the implementation period.
The UK would nonetheless still be able to develop its own independent trade policy:
"So, during the implementation period, the UK must be able to prepare for this new relationship not just with the European Union, but with the rest of the world too. […] And as an independent country, no longer a member of the European Union, the United Kingdom will once again have its own trading policy. This is a vital aspect of this period. For the first time in more than 40 years, we will be able to step out and sign new trade deals with old friends — and new allies — around the globe. Increasingly, we are trading with the key emerging markets of the world in Asia and the Americas. The UK’s fastest growing export markets between 2005 and 2014 included countries like China and Brazil."
Note, however, that the Brexit Secretary spoke only of "signing" new trade deals, rather than concluding or ratifying them. This is consistent with the EU's prohibition on the UK becoming "bound" by new international agreements which cover similar areas to EU agreements during the transitional period. This prohibition is based on public international law, in particular international treaty law that binds the EU as well as the UK.
The future relationship between the UK and the EU
The European Council is due to release guidance on the framework for the future relationship between the UK and the EU in March 2018. Several EU Heads of State have expressed increasing frustration with a lack of clarity from Theresa May on the future relationship the UK wants. The European Council Guidelines of 15 December state that an agreement on the future relationship cannot be finalised until the UK has actually left the EU, but notwithstanding this, the EU will 'engage in preliminary and preparatory discussions with the aim of identifying an overall understanding of the framework for the future relationship'. The Guidelines envisage that this 'understanding' will then form a political declaration which shall accompany the Withdrawal Agreement. Formal negotiations as to the future relationship will therefore be very time-pressured under the current proposal of a 21 month transition period until the end of 2020.
The UK Government this year faces its biggest Brexit task yet of deciding upon the form of the future relationship that the UK might have with the EU, within an unprecedented tight timeframe. Speaking to the Environment, Food and Rural Affairs Committee on 20 December, Michael Gove acknowledged the Government "might not necessarily get a trade agreement that is perfect in every respect" and that "there is a chance—though we are doing everything we can to prevent it—that we might end up trading with the EU, at least for a period, on WTO terms."
Now is the time for businesses to influence government thinking on the contents of a trade deal.
UK Brexit legislation
The European Union (Withdrawal) Bill, the primary means by which Brexit will take effect in UK law if there is no transitional period, will repeal the European Communities Act 1972, and transfer existing EU law in the UK into "retained EU law" in order to avoid a legislative vacuum post-Brexit. The Bill successfully passed through the Commons in January and is now being considered in the House of Lords. The Lords will undoubtedly amend the Bill, with the result that its return to the Commons is very likely.
The Government is also planning a Withdrawal Agreement and Implementation Bill, the purpose of which is to enshrine the Withdrawal Agreement between the UK and the EU in domestic law. The Bill has yet to be published. If the EU and UK agree a transitional period in which the UK remains in the Single Market and Customs Union, this will be implemented through the Withdrawal Agreement and Implementation Bill, rather than the EU Withdrawal Bill. The Withdrawal Bill will then come into effect at the end of a transitional period.
In November 2017 the Trade Bill was introduced into the House of Commons. The Government is keen to avoid sudden changes on 29 March 2019 to the terms on which UK businesses trade in countries with which the EU has an FTA, and so the Bill follows the Government policy of 'rolling over' EU FTAs into bilateral FTAs. Achieving this, however, is easier said than done, and businesses that currently rely on EU FTAs would be wise to carry out an assessment of the impact of falling back on WTO terms on their supply chains and export markets as part of their Brexit planning.
The Taxation (Cross-border Trade) Bill was introduced into the House of Commons on 20 November 2017, its purpose being to allow the UK to create a standalone customs duty regime. The Bill does not presuppose any particular outcome from the UK’s negotiations with the EU. In addition to legislating for a contingency scenario where the UK leaves the EU without a negotiated outcome, the Bill also provides for a range of negotiated outcomes, including a transitional period in which UK trade policy is closely aligned with the EU. The Bill could make significant changes to cross-border UK-EU trade after Brexit; the extent of the changes depends on the content of the Withdrawal Agreement. Businesses would be well advised to follow the enactment of the Bill, monitor the secondary legislation made under it, and prepare for the impact of these changes in time for Brexit day.