Mayer Brown is helping companies and organizations worldwide understand, and respond to, the emerging legal and business implications of the UK’s decision to leave the EU. The majority vote in the UK referendum on membership of the European Union, announced on 24 June 2016, in favor of departure by the United Kingdom from the European Union, means that businesses operating in the United Kingdom now face a period of uncertainty.
Following a third extension of the Article 50 negotiating period, the United Kingdom is scheduled to leave the European Union on or before 31 January 2020. In theory, the UK may also leave on either 1 December 2019 or 1 January 2020 if the Withdrawal Agreement has been approved by these dates. However, while the new deal negotiated by the Prime Minister with the EU received initial support in Parliament (see further below) it appears there is still no overall majority for this approach. A General Election has now been called for 12 December 2019. The result of this election will shape the UK's future relationship with the EU, with the Conservatives favouring an agreement based on a Free Trade Area, and Labour proposing a customs union and close alignment with the Single Market. An election also leaves open the possibility of a further public vote with 'Remain' on the ballot paper.
Background – The formal legal agreement on the terms of withdrawal (Withdrawal Agreement) and the non-binding Political Declaration on the framework for the future relationship cannot take effect until approved by both UK and EU Parliaments (in that order) and by a majority of Member States at an EU Summit.
On 17 October the PM announced that a solution to the contentious issue of the Irish 'backstop' had been found and a new deal between the UK and EU had been agreed, including a revised Political Declaration based on a Free Trade Agreement.
While the original backstop was designed to avoid a hard border between Ireland and Northern Ireland by establishing a temporary UK-EU Customs Territory in the event that no agreement on the future relationship can be reached by the end of the transition period, the EU and UK have now proposed a new solution based on Northern Ireland remaining in the UK Customs Territory.
If parliamentary approval for the Withdrawal Agreement (including the revised backstop solution) is finally obtained, there will be a transition period from Exit Day until the end of December 2020. The UK would be entitled to request a one-off extension to this transition period of either one or two years, subject to EU approval. The UK would need to request this extension by 1 July 2020.
During the transition period, businesses will trade on essentially the same terms as before and EU law will continue to apply, while the detailed legal agreement on the future relationship between the UK and the EU is negotiated.
While the Withdrawal Agreement sets out a 'best endeavours' commitment to reach agreement on the terms of the future trading relationship by 31 December 2020, it is possible that a full UK-EU trade deal will not be agreed in this timeframe (or indeed after the end of an extended transition period).This raises the possibility of an exit on WTO terms at the end of the transition period.
The UK will also need to use this time to seek to 'roll over' existing trade relationships with third countries with which the EU has trade deals, as well as negotiate and ratify new ones.
Negotiations and the accompanying uncertainty for businesses could thus continue for some years to come.
This period is also likely to see several legal challenges as the new relationship with the EU is tested in the courts.
In parallel, the Court of Justice of the European Union has confirmed that the UK may unilaterally withdraw its notification to leave. It stated that the withdrawal would need to be 'unequivocal and unconditional', putting an end to the withdrawal process and resulting in the UK remaining a Member State on current terms.
It will therefore be important for businesses to consider the implications of the likely changes in the legal and regulatory framework for their operations and strategic decision making. In the current uncertain climate it is also highly prudent to be prepared for the possibility of a 'no-deal' outcome – see below.
To this end, we have developed a simple tool to assist our clients in identifying and prioritising potential areas where the changes in the legal regime may have the greatest impact or give rise to significant opportunities for their business. We are keen to work with you to create a framework for analysing these issues, and for devising a set of actions to address them.
The tool is not intended to be exhaustive, but may help you identify and address the most important areas. Note in particular that the continuous nature of developments relating to the UK's withdrawal means that changes may well have occurred since the last update. Always seek legal advice in relation to specific topics of interest.
In the event of no deal, there would be no transition period for businesses to adjust to the immediate effects of leaving the EU. This would give rise to a period of unprecedented legal and regulatory uncertainty. Trade between the two economies would be conducted under WTO rules, with tariffs likely on UK exports to the EU (and vice versa). Further, the border between the UK and EU would become a customs border, with significant disruption, including delays and administrative costs for business.
While it may be possible for the EU and UK to agree a 'bare-bones' deal covering key issues of mutual concern such as counter-terrorism cooperation, or put in place a series of unilateral or bilateral (UK-EU27) measures to minimise disruption in certain areas, none of this could be guaranteed.
While neither side wants a no deal outcome, contingency planning is now a central feature of both the UK Government's and the EU 27's Brexit preparations. The UK and EU have both issued a series of technical notices outlining the impact of no deal in a wide range of areas and it is clear that much of the burden of planning for this scenario is falling on businesses themselves.
The prudent course is for businesses to plan for the worst case – an abrupt exit with no new arrangements in place to govern the UK's future trading relationship with the EU.
October 2019 – January 2020: The Withdrawal Agreement and Political Declaration
The formal legal terms of the Withdrawal Agreement relate to separation issues such as citizens' rights, the transition period and the financial settlement, as well as provisions to allow businesses more time to adjust to leaving the EU, e.g. the ongoing recognition of professional qualifications.
If UK Parliament votes to approve the deal, the Bill to put the Withdrawal Agreement onto the UK statute book, the EU (Withdrawal Agreement) Bill, will be introduced. This Bill must be passed before Exit Day in order for the agreement to have domestic legal effect.
The draft Withdrawal Agreement must also be approved by the European Parliament in a plenary vote and then endorsed at an EU Summit by a majority of Member States (representing at least 20 of the other 27 EU countries and 65% of the population). It will have the status of an international treaty.
The accompanying Political Declaration is not legally binding, but will form the basis for the agreement between the EU and UK on their future trading relationship.
The EU (Withdrawal) Act 2018 (EUWA) provides that EU law as it exists on Exit Day (with some limited exceptions) will be transposed into UK law, creating a body of 'retained EU law' which will provide legal continuity regardless of the outcome of negotiations. This means that the UK will still be bound by existing EU legislation on Exit Day, while being in a position to diverge from it after the end of any transition period. However, divergence may be subject to the 'level playing field' provisions of the future relationship in key areas such as employment and environmental standards, as well as competition and State aid.
The EUWA does not provide for the possibility of a transition period and this would need to be translated into domestic law by the means of the EU (Withdrawal Agreement) Bill.
Exit Day – 31 December 2020 (subject to extension to 31 December 2022): Transition Period
If the Withdrawal Agreement is concluded, it will provide for EU law to continue to apply as if the UK were still a Member State during the transition period, subject to certain exceptions, e.g. elements of the EU Charter of Fundamental Rights will not be binding on the UK.
New directly applicable EU legislation will also apply automatically within the UK, while other new EU measures will need to be implemented domestically as before.
The UK and EU will use the transition period to negotiate and ratify a legally binding agreement for their future relationship.
Beyond December 2020 (subject to extension to 31 December 2022): The Future Relationship
The original Political Declaration established agreement in principle on the need for comprehensive arrangements for a free trade area for goods, involving significant regulatory and customs cooperation. This would have been underpinned by provisions ensuring a level playing field for open and fair competition, which include state aid, competition, social and employment standards, environmental standards, climate change provisions and relevant tax matters.
However, Prime Minister Boris Johnson is strongly resistant to the idea that the UK would continue to be subject to a Brussels rulebook going forward. He favours a 'Super Canada' model; a free trade agreement based on Canada's recent trade deal with the EU. This would give the UK more scope for future regulatory divergence.
It is important to note that the Political Declaration leaves much room for further negotiation, and it could even be revisited in the event of a significant change to the political landscape in the UK.
Any future trade agreement would require ratification in the national and (some) regional parliaments of the EU – a process which has historically taken some years to complete.