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Brexit: implications for you and your business

13 May 2020

Brexit and Coronavirus: Where do we stand now?

Once the topic of every conversation in the UK it seemed, we have not heard so much about Brexit lately. The UK left the European Union at 11pm GMT on 31 January 2020. This also marked the beginning of the transition period between the UK and the bloc, during which time nearly all EU legislation would remain applicable in the UK. This means that although the UK is no longer formally a member of the EU, most things have remained the same for UK citizens.

Rather like COVID-19, the topic of Brexit has not disappeared. The UK finds itself at an important juncture as it must decide by the end of June whether or not it will move to extend the current transition period. As ever, positions on what the UK should do are entrenched and the matter is a divisive one. For many, an overriding concern is to ensure that the two parties negotiate a free trade agreement (“FTA”) to ensure that relations continue smoothly once the transition period comes to an end.    

Transition period – what is it? How long does it last?

The EU-UK Withdrawal Agreement “WA” sets out the terms of the UK’s departure from the Union. It does not legislate for the terms of future trade and co-operation between the two parties going forward. The WA establishes an EU-UK joint committee for the purpose of administering certain aspects of the agreement.  

The aim of the transition period is to allow for a period of stability while a bilateral FTA to be negotiated between the parties to avoid disruption to UK-EU trade relations. Alongside the WA, the parties agreed the “Political Declaration”, which set out the principles which would form the basis of the future FTA.

Article 118 of the WA provides that the transition period will last until 31 December 2020. 

Can the transition period be extended? How?

Whilst the parties may extend the transition period, the parties must use a specific mechanism for this purpose laid down within the WA itself. Article 132 of the WA allows the EU-UK joint committee to adopt a “once only” extension to the transition period of “up to one or two years” in duration. 

Even assuming that there is a political will to activate the extension clause, there are several conditions which must be satisfied. The first is that this must be agreed within the joint committee by no later than 1 July 2020. This constitutes a highly compressed time-frame within which to trigger a prolongation.

The second is that certain financial obligations must be agreed as part of the decision. These include first the “appropriate amount of the contribution of the United Kingdom to the Union budget for the period from 1 January 2021 to the end of the transition period, taking into account the status of the United Kingdom during that period, as well as the modalities of payment of that amount”. Second, the parties must also agree on permitted levels of subsidies which the UK may pay to its domestic agricultural producers.

The UK “ban” on extending the transition period

The third obstacle to any extension is potentially the most significant and arises from UK domestic law itself. 

The UK Withdrawal Act 2020 is a statute which implements the certain aspects of the WA into UK Law. It received royal assent in January 2020. Section 33 of the 2020 statute imposed a prohibition on UK ministers agreeing to an extension to the transition period (inserted as Section 15A of the earlier Withdrawal Act 2018). 

This is likely to have the effect of requiring Parliament of voting to annul Section 15A before any extension to the transition period can be agreed. That in itself would take time to arrange (the standard process being to require three readings) and would entail “whipping” members in both Houses of Parliament to support.   

What is the state of play regarding trade talks?

As at 8 May, negotiations had reached the third round stage. 

The general consensus is that progress towards a deal is slow. Efforts have obviously not been helped by the COVID-19 outbreak. This led to an initial postponement of the first scheduled meeting. Since then, negotiations have been conducted “virtually” using communications software.  This has presented its own challenges.   

Representatives of the European Union have been pessimistic about the prospects for reaching a deal within the prescribed time-scale. On 7 May, EU Trade Commissioner Phil Hogan even accused the UK of approaching the talks with no real intention for them to succeed. 

The UK’s position appears to acknowledge the sub-optimal pace of negotiations.  However, proponents of Brexit point to the fact that Boris Johnson was able to conclude the WA itself without the “backstop” arrangement, despite widespread expectations to the contrary. They argue that the EU fears a no-deal Brexit more than the UK and that a deal can be reached if the UK appears prepared to walk away without one. 

Should the transition period be extended?  Arguments against

From the UK side, there are obvious frustrations arising from the transition period.  During this time, the UK is still required to contribute to the EU’s budget and to continue to comply with nearly all aspects of EU Law.   

The UK, however, is now effectively disenfranchised from the EU’s decision-making processes without any representatives in institutions such as the EU Commission, the Council of Ministers, the Court of Justice or the European Parliament. There are no UK nominated judges in either the Court of Justice of the European Union or the EU General Court. 

Furthermore, the UK is unable to progress many of the projects relating to life after Brexit. During the transition period, while the UK may negotiate trade deals with non-EU states, it cannot conclude these. For many Leave voters, the ability of the UK to break free from Brussels and seal its own trade agreements and greater control over immigration and regulations were key reasons for departing from the bloc.

Brexiteers have also argued that softening on extension would send the wrong signals to the EU. The EU has, it says, acted unreasonably by insisting upon a “level playing field” which amounts to locking the UK into EU rules and regulations indefinitely. The only way of forcing the EU to act more reasonably is to break the impasse is to be ready to walk away. 

The arguments for an extension

On the other hand, terminating the transition period without a free trade agreement would be tantamount to a “no deal” Brexit. This would mean the imposition of tariffs on goods passing between the EU and UK and a need for fresh authorisations to be issued for UK goods to be sold on the continent (as a consequence of the end of mutual recognition).

Even prior to the disruption of COVID-19, this prospect caused widespread anxiety and provoked warnings from many sectors of the disruption to trade and supply chains which would result. Businesses engaged in costly preparations for a no deal Brexit (which ultimately proved unnecessary because the WA was agreed), such as by stockpiling goods supplied to them by Europe.       

Many would argue that the UK is now even less prepared than before for a “no deal” Brexit. Lockdown conditions have forced many businesses to close, if only on a temporary basis and  deprived many of revenues. Businesses therefore have depleted reserves to engage on the sort of spending spree that would provide them with the required reserves of stocks and components to continue trading seamlessly and to defray customs duties or warehousing costs where required.

At a time when concluding a WA looked unlikely, the Bank of England forecast decline in economic output of around 5.5%. Whilst that rate of shrinkage looks conservative compared to the economic fallout of Coronavirus, it does beg the question whether the country should inflict any further pain beyond that which is already, inevitably being suffered.

As regards negotiation dynamics, some will argue that the UK had previously signalled agreement to the concepts of a “level playing field” in the EU-UK Political Declaration, effectively a set of “Heads of Terms” for the FTA itself.  Going back on this now may be provocative and even taken as a lack of good faith by the EU.

Conclusion: will a deal be reached before the end of the transition period?   

As matter stand, the omens are not good. The public statements of the two parties indicate fundamental disagreement on issues such as the institutional and governance structure of the FTA, trade regulations and fisheries. Enforcement mechanisms for the FTA are also a sticking point, with the EU wishing for the CJEU to have a role in oversight. The UK is implacably opposed to this idea.      

The UK Government is insistent that it will not seek an extension. Even if it wished to, it would need to repeal Section 15A of the Withdrawal Act 2020 which would require a vote in Parliament. This is technically possible under temporary rules which allow for remote voting but would entail a volte face by a Government which would alienate many in the Conservative Party allied with delivering Brexit at the earliest opportunity. Businesses may soon find themselves dusting off their no deal Brexit plans and plotting a course through the two biggest challenges which UK commerce has faced in a generation.   


For more information, please contect Paul Henty on +44 (0)20 7427 6506 or at paul.henty@crsblaw.com.

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