October 23, 2019

U.K. Inches Towards a New Brexit Deal

On 17 October the European Union (EU) and the Prime Minister of the United Kingdom (U.K.) announced that they had reached a new deal to ensure the orderly withdrawal of the U.K. from the EU. While similar to past proposals, the new deal includes several changes to customs and trade issues. The Withdrawal Agreement must now be approved by the Parliament of the U.K. as well as the European Parliament, so businesses operating in the U.K. remain in a state of uncertainty. To find out how we arrived at this stage, please see our updates from March 2019 and September 2019.

The Key Changes to the Deal

Much of the new deal stays the same as the one that Prime Minister Theresa May negotiated back in the autumn of 2018. Parliament failed to approve that deal three times due to a variety of factors, including the contentious customs ‘backstop’ to avoid a hard border in Northern Ireland. Key changes were made by Prime Minister Johnson and the EU to avoid the need for this backstop. The main differences are:

Customs and Trade

  • The whole of the U.K. will leave the EU customs union. Crucially, this means the whole of the U.K. will be able to enter into trade agreements with third countries (including the United States). The previous position, where the whole of the U.K. would have remained in a customs union with the EU during the indefinite ‘backstop’ period would have prevented the U.K. from striking such trade deals.
  • There will be a ‘legal’ customs border between Northern Ireland and the Republic of Ireland. Since there cannot be any customs checks or infrastructure on this border, in practice, the de facto customs border will be in the Irish Sea between Great Britain (England, Scotland and Wales) and Northern Ireland.
  • Goods will be checked at “points of entry” into Northern Ireland.
  • The U.K. will apply its own tariffs to goods entering Northern Ireland as long as they are not at risk of crossing into the Republic of Ireland.
  • But, since Northern Ireland will be an entry point into the EU customs union, the U.K. will collect tariffs on behalf of the EU for goods that will enter the Republic of Ireland (and therefore EU) market.

Regulations on Goods

  • Northern Ireland will follow the rules of the EU’s single market, rather than U.K. rules. Goods will be checked coming from Great Britain to Northern Ireland to ensure they abide by these rules.
  • The “level playing field” provisions that were in the original legally binding Withdrawal Agreement have been removed and put into the negotiable Political Declaration. This means that a future government could possibly decide for Great Britain (but not Northern Ireland) to diverge from EU rules, with implications for a future trade deal with the United States and other third countries.

Value Added Tax (VAT)

  • EU VAT rules will apply to Northern Ireland, and U.K. authorities will collect the tax, though they will keep the revenues.

Consent for the Northern Irish

  • The Assembly of Northern Ireland will get a vote on the provisions included in the Withdrawal Agreement four years after the end of the transition period (January 2025 at the earliest).
  • If the Assembly votes by simple majority to approve the provisions, they will apply for another four years (eight years if supported by both Unionists and Nationalists).

What Has Not Changed

  • The transition period (where the U.K. follows all EU rules) will last until at least December 2020 (there is an option to extend if agreed, and this is likely to be one of the key amendments proposed by opponents of the Withdrawal Agreement in its current form).
  • U.K. citizens in the EU and EU citizens in the U.K. have their residency and social security rights guaranteed.
  • The U.K. will settle its financial obligations to the EU budget (the Office of Budget Responsibility estimates this is currently around £33 billion).

Next Steps

The last few days have seen a number of votes in the U.K Parliament and extremely complex political and procedural maneuvers.

The U.K. Prime Minister was effectively forced by Parliament to seek an extension of the Article 50 process to avoid the risk of a ‘no-deal’ exit.

The President of the European Council Donald Tusk is consulting with the leaders of the other 27 EU countries on how to respond. The extension could take the form of a short technical extension of a few days or weeks to allow time for implementing legislation, or a longer extension until 31 January 2020. Another possibility would be a ‘flextension’ where the extension is granted until the end of 2020, but Brexit could occur earlier if the Withdrawal Agreement is approved by Parliament before then. This would allow more time for a general election or (less likely) a second referendum in the U.K.

The Withdrawal Agreement Bill has passed the first stage in the U.K. Parliament. However, the U.K. Government’s attempt to set a three-day timetable to rush through the legislation has been rejected.

While a ‘no deal’ crash out on 31 October 2019 is now unlikely, the legislative process and surrounding political discussions will take several months before there is any concrete resolution. One increasingly likely possibility is for a general election to be called before the end of the year.

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